Fitch Rates Fairfax County, VA's GO Public Improvement Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Fairfax County, Virginia bonds:

-- $314.1 million public improvement bonds, series 2014.

Proceeds from the 2014 series will fund school and transportation improvements, as well as public safety, library and park projects. Additionally, a portion of the 2014 series are authorized to refund all or a portion of the outstanding series 2004A and B public improvement bonds for debt service savings.

The bonds are scheduled for competitive sale on Jan. 14, 2014.

In addition, Fitch affirms the following bonds issued by Fairfax County, VA:

-- Approximately $2.02 billion of outstanding general obligation (GO) bonds at 'AAA'.

Fitch also affirms the following bonds at 'AA+':

-- $41.2 million Fairfax County Economic Development Authority lease revenue refunding bonds series 2003 (Government Center Properties);

-- $1.6 million Fairfax County Redevelopment & Housing Authority lease revenue bonds, series 2005 (Herndon Senior Center Issue).

Further, Fitch affirms the following bonds at 'AA':

-- $64.8 million Fairfax County Economic Development Authority facility revenue bonds, series 2012A (Community Services Facilities Project);

-- $47.8 million Fairfax County Economic Development Authority facilities revenue refunding bonds, series 2012A (Laurel Hill Pub Facilities Issue);

-- $12.5 million Fairfax County Economic Development Authority parking revenue refunding bonds, series 2005 (Vienna II Metrorail Station Project);

-- $51.48 million Fairfax County Economic Development Authority facilities revenue bonds, series 2005A (School Board Central Admin Building Project Phase I).

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of Fairfax County, for which its full faith and credit and unlimited taxing power are irrevocably pledged.

The outstanding revenue bonds issued by the EDA and RHA are secured by the county's obligation to make lease payments equal to debt service or its obligation to replenish any reserve fund deficiency, each subject to annual appropriation. A two notch distinction is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Financial operations are characterized by a conservative approach to budget development, timely revenue and spending adjustments, and steady compliance with a reserve policy requirement of 5% of spending.

ROBUST ECONOMY & EXCEPTIONAL DEMOGRAPHIC INDICATORS: The rating further reflects the county's strong and diverse economic base, benefiting from its location near Washington D.C., with high wealth levels and low unemployment. Assessed value has begun to improve, reflecting a strong housing market.

FAVORABLE DEBT PROFILE: Fairfax County continues to adhere to good debt management guidelines, which have allowed overall debt levels to remain low. Future needs according to the capital improvement plan are affordable and should not impact debt ratios. Debt amortization is rapid.

APPROPRIATION RISK: The ratings on the revenue bonds issued by the EDA and the RHA are notched down from the county GO rating, reflecting risk to annual appropriation by the county for payments equal to debt service or in amounts sufficient to maintain the reserve fund. A rating of 'AA' is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The 'AAA' rating and Stable Outlook reflect Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Fairfax County is located in the northeastern corner of the Commonwealth and encompasses an area of 407 square miles. Its current estimated population exceeds 1.1 million. The county is part of the Washington, D.C. metropolitan area, which includes jurisdictions in Maryland, the District of Columbia and Northern Virginia.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVE LEVELS

Historical financial operations are characterized by maintenance of healthy reserves, adherence to internal reserve policies, a conservative approach to budget development, and timely revenue and spending adjustments.

Fiscal 2013 general fund revenues showed notable year-over-year growth (3.2%), reflecting both taxbase growth and a 4% increase in the tax levy. Property taxes are the county's largest source of revenues at over 70%. Sales taxes moderately increased by $7.6 million or 3% year-over-year.

Revenue gains were offset by 3.3% year-over-year growth in expenditures mainly attributable to increased education costs and a full year of compensation and benefit increases. As a result, the county experienced a modest operating deficit of $24.4 million, reducing the unrestricted fund balance to $328.5 million or a still healthy 9.3% of spending from 10.3% at the end of fiscal 2012. The committed balance is inclusive of a managed reserve equal to 2% of spending, and a revenue stabilization reserve equal to 3% of spending, which are in compliance with the county's longstanding fiscal policy.

ADOPTED FISCAL 2014 BUDGET: ADDITIONAL REVENUES & SPENDING CUTS

The adopted fiscal 2014 $3.6 billion general fund budget is a $48.6 million or 1.4% increase over the prior year. The increase is primarily attributable to $41.27 million in additional funding for Fairfax County public schools. The budget includes a tax levy increase of $20.7 million and spending reductions of about $20 million including the eliminations of 41 positions. The county has appropriated $17.5 million of fund balance, which is a $43.5 million year-over-year decline.

The county is projecting a $39.4 million (1.1% of spending) and $57.7 million ($1.6% of spending) shortfall for the fiscal 2015 and 2016 budgets respectively, though final adoption does not occur until late April. The county has identified a number of measures that should adequately address the gap, including but not limited to deferring employee compensation increases and reducing the increase of the transfer to the county schools. Fitch expects management will make the necessary adjustments to maintain a positive financial profile.

SIGNIFICANT FEDERAL GOVERNMENT EXPOSURE

While federal civilian employment makes up just 4% of total jobs in the county, the county is home to the headquarters of several large government contractors including Booz, Allen, Hamilton, Northrop Grumman, SAIC, and Lockheed Martin, each with 4,000 employees or more. Furthermore, within the broader Washington-Arlington-Alexandria metropolitan statistical area (MSA) the federal government and professional and business service sectors account for 23% each of total employment.

While historically this has been an important source of stability, the recent government shut down did impact the county's economy. County management has estimated a year-over-year 2.7% decline in sales tax due to the shut down for fiscal 2014. Year-to-date revenues are down 2.1%. The budget includes an $8 million reserve and carries forward $15 million from the prior year's budgetary surplus to offset potential declines in sales tax revenues.

ROBUST AND DYNAMIC REGIONAL ECONOMY

Fairfax County's economy continues to perform well, benefiting from an established business base of federal contractors and high-tech companies leverage Fairfax's highly educated labor pool, technology infrastructure, and an extensive transportation network anchored by Washington Dulles International Airport (Dulles).

The county's unemployment rate remains well below the state and nation, at 4.1% in August of 2013. Solid gains have been reported within the professional, scientific and technical business services and retail trade.

The strong local job market is complemented by one of the more highly educated labor forces in the nation, contributing to median household income two times the national average. The housing market has exhibited signs of stabilization, with median sold price up 3.5% as of November 2013 compared to a year prior.

An expansive multi-modal transportation system serves the region; however, there are significant infrastructure needs necessary to alleviate congestion and promote commerce and industry which management has identified as a long-term challenge but one that should be somewhat addressed with the completion of the Dulles Metrorail expansion project. The expected completion date for construction of Phase 1 is early 2014, which includes five new stations in Fairfax.

LOW DEBT LEVELS REFLECTIVE OF PRUDENT POLICIES

Overall debt remains very low (1.3% of market value) largely reflecting the affluence of the county's tax base and a conservative approach to debt management and long-term capital planning. Debt service accounted for an affordable 8.1% of total governmental spending (debt service may not exceed 10% of spending by policy).

Outstanding debt is repaid at an above average rate (62% within 10 years) helping to mitigate the impact of future bond sales. Fitch does not anticipate a material change in debt ratios in the near term.

Pension costs consume a reasonable share of the governmental spending (approximately 7.3%) and the county-administered pension plans are funded at 75% using a Fitch-adjusted discount rate of 7%. OPEB costs represent less than 1% of governmental spending and the ARC is essentially fully funded.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Real Estate Business Intelligence, Virginia Employment Commission.

Applicable Criteria and Related Research:

-- 'Tax-Supported Rating Criteria' (Aug. 14, 2012);

-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812763

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings, Inc.
Primary Analyst
Evette Caze, +1-212-908-0376
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, 1-212-908-1568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Evette Caze, +1-212-908-0376
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, 1-212-908-1568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com