NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following general obligation (GO) bonds of Chesapeake, Virginia (the city):
--$13.29 million GO public improvement refunding bonds, series 2014A 'AAA';
--$23.48 million GO water and sewer refunding bonds (taxable), series 2014B 'AAA'.
Bonds proceeds will be used to advance refund several series of bonds for debt service savings. The bonds are scheduled for a negotiated sale the week of March 17.
In addition, Fitch affirms the following rating:
--$220 million GO bonds outstanding at 'AAA'.
The Rating Outlook is Stable.
The bonds are GOs of the city for the payment of which its full faith and credit is irrevocably pledged. In addition, the city has also pledged, on a junior lien basis, net revenues of its water and sewer system to the payment of principal of and premium, if any, and interest on the series 2014B bonds.
KEY RATING DRIVERS
DIVERSE ECONOMY WITHIN HAMPTON ROADS REGION: Chesapeake's economy, though diverse and steadily expanding, retains its underpinnings from the stable military and port presence in the Hampton Roads region.
STRONG FINANCIAL PROFILE: Conservative financial management and policies have contributed to stable reserves, high liquidity levels, and ample financial flexibility.
STRONG DEBT PROFILE: The city's debt profile is supported by the extensive use of pay-as-you-go capital financing, adherence to prudent debt policies, and rapid amortization.
AFFORDABLE CARRYING COSTS: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are manageable.
MAINTENANCE OF STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
Chesapeake is the third-most populous city in the Commonwealth of Virginia, with an estimated 2012 population of 228,417.
SOUND RESERVE LEVELS
Financial reserves are healthy, and financial flexibility is ample, attributable to prudent management and adherence to conservative reserve policies. The general fund balance policies designate reserves equal to 6% of revenues for cash-flow emergencies and 5% of revenues for operating emergencies, both fully funded. In addition, the city's policy includes a commitment to preserve $20 million for emergency event response and recovery.
The city ended fiscal 2013 with a modest operating surplus after transfers of $8.7 million (1.8% of spending), increasing unrestricted fund balance to $110.7 million or an ample 22.4% of general fund spending. When including the city's reserve for cash flow emergencies of $30.9 million, the unrestricted fund balance increases to 28.7% of spending.
The adopted fiscal 2014 budget increases revenues by 3.7% over the prior year's budget, primarily from increased sales tax and business professional license tax collections. The budget includes a $6.6 million fund balance appropriation, although the city has a history of conservative budgeting practices. Year-to-date results show revenues trailing slightly below the budget; however, expenditure savings should offset any revenue declines and lead to a general fund operating surplus.
DIVERSE ECONOMY WITHIN HAMPTON ROADS REGION
Chesapeake is located in the Hampton Roads area of Virginia, and the city's diverse economy benefits from the regional economic underpinnings of the military and port operations. The largest employers represent varied industries, including military contractors. The city also has a substantial retail sector and an increasing number of international corporations.
The estimated population for 2010 was approximately 222,000, an increase of about 11% since the 2000 census, well below the rapid population gains of the 1970s through the 1990s that ranged from 28%-33% each decade. The city anticipates steady and manageable future growth, which Fitch believes will mitigate potential capital and service pressures. Per capita income levels hover around national averages and slightly below those of the commonwealth, although the city's above average median household income is positively augmented by military pensions. The unemployment rate, at 4.8% as of December 2013, trends below the U.S. average and is on par with the state.
The city's taxable assessed value (TAV) has declined consecutively over the past four years by 7.9% overall. Management is projecting modest growth in 2014 and 2015. However, Dominion Power, the city's largest taxpayer, will be closing their coal powered plant in Chesapeake within the next few years. The plant represents about half of Dominion's total TAV of $705 million. Fitch notes that the city has the ability to adjust its property tax rate to temper the financial impact of future TAV declines. Rates are competitive compared to neighboring counties.
Property taxes produced approximately 56% of fiscal 2013 general fund revenue. Due to TAV declines, property tax revenues have decreased by 4.8% since 2009.
MODEST DEBT PROFILE
Debt levels are modest with overall debt equaling 1.6% of market value and $1,713 on a per capita basis. Amortization is rapid at 71% repaid within 10 years. Debt levels are expected to remain fairly low with only limited debt issuance anticipated over the next few years. Future capital needs appear moderate, and Fitch expects the tax-supported portion of the debt burden to remain manageable given the use of self-supporting enterprise debt and the city's ongoing commitment to cash-fund many of its capital needs.
The fiscal 2014-2018 $183.5 million capital improvement plan includes $57.1 million in tax-supported debt, $13 million of cash financing, and $30.5 million in fund balance use. The use of fund balance for capital needs is consistent with the city's policy of designating fund balance for future pay-as-you-go capital funding or for debt service payments for the general government and schools.
LIMITED OTHER LONG-TERM LIABILITIES
All city employees participate in the Virginia Retirement System (VRS), an agent and cost sharing multiple employer defined benefit pension plan administered by the Commonwealth. The city portion of the VRS is moderately-funded at 72%. The city's unfunded actuarial accrued liability (UAAL) as a percentage of market value is a low 0.85%.
OPEB liabilities are manageable. The city prudently contributed the full OPEB ARC in fiscal 2013 and the total unfunded liability is less than 1% of market value. Notably, the city has established a trust to prefund its OPEB liability, which Fitch views favorably. Carrying costs for debt service, pension and OPEB totaled a moderate 16.6% of governmental spending in fiscal 2013.
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, and IHS Global Insight.
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
U.S. Local Government Tax-Supported Rating Criteria