Fitch Rates Norfolk, VA's GO Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following general obligation (GO) refunding series:

--$64 million GO refunding bonds, series 2014A.

The proceeds of the 2014A bonds will be used to refund certain outstanding GO bonds for debt service savings. The bonds will be sold via negotiation on March 18.

In addition, Fitch affirms the following ratings:

--$817 million of outstanding GOs, at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city, to which the city has pledged its full faith and credit and unlimited taxing power for payment.

KEY RATING DRIVERS

SIGNIFICANT MILITARY PRESENCE: Norfolk's maritime assets, including the world's largest naval stations and an active deepwater harbor, lend economic stability to the city and region.

ONGOING ECONOMIC DIVERSIFICATION: The city continues to focus its economic development efforts on downtown and neighborhood revitalization to diversify the economy and help offset the sizable proportion of tax-exempt property.

SOUND FINANCIAL PERFORMANCE: Timely expenditure reductions and realistic revenue forecasting have resulted in favorable operations and healthy reserve levels.

MODERATE LONG-TERM LIABILITY BURDEN: The city's overall tax-supported debt burden is expected to remain average due to manageable future capital needs. Amortization of outstanding principal is also average. Pension and other post-employment benefit (OPEB) contributions are moderate.

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong economy. Federal budget cuts could result in a softening of the regional economy given the preponderance of direct and indirect federally funded employment. However, Fitch does not currently expect the impact to be severe enough to alter the credit fundamentals.

CREDIT PROFILE

The city of Norfolk is located in the Hampton Roads region of Virginia, along the Atlantic Ocean. The city covers 66 square miles and has an estimated 2013 population of 245,782.

FINANCIAL RESERVES REMAIN SOUND

Financial operations are sound and benefit from well-conceived fiscal policies. Fiscal 2013 ended with a modest deficit (after transfers) of $1.2 million (0.21% of spending), which included pay-go spending of $4.8 million. The city was able to replenish the majority of the nearly $19.3 million general fund balance appropriated to balance the fiscal 2013 budget with expenditure reductions and controlled discretionary spending.

The unrestricted general fund balance totals $91 million, or a healthy 15.2% of spending. The city recently approved a resolution that establishes financial policies, including maintaining an unassigned fund balance at 5% of the annual general fund budget. The city remains compliant with its reserve requirement. Available risk management and economic downturn reserves provide additional financial flexibility.

FISCAL 2014 BUDGET BALANCED

The 2014 budget reflects a 1.5% increase ($11.7 million) in expenditures year-over-year. To fund the increase the city has adopted a 4-cent property tax increase (the first since 1996), which is projected to generate approximately $6.6 million in additional revenue. The budget includes a nominal $300,000 increase in appropriated fund balance and $12.2 million of pay-go spending. Higher budgeted spending compared to the fiscal 2013 budget mainly funds additional support to the public school system, a salary increase and higher healthcare costs. Year-to-date operations are tracking close to budget.

Property taxes represent approximately 41% of general fund revenue. After three consecutive years of declining taxable assessed value (TAV; 8% cumulative decline) through fiscal 2013, TAV increased 0.5% in fiscal 2014 and the city is projecting a modest 1% increase for fiscal 2015. The city's 2014 real estate tax rate of $1.15 per $100 of TAV is average relative to neighboring cities within the Hampton Roads region.

SIGNIFICANT MILITARY PRESENCE

Site of world's largest naval complexes, Norfolk's economy and employment are centered on defense-related activity. Hampton Roads has about 123,000 active-duty and civilian Navy military personnel, 56% of whom are assigned to Norfolk. Government sector employment within the Virginia Beach-Norfolk-Newport News, VA-NC metropolitan statistical area (MSA) stands at 21% (more than the commonwealth's high 19% and the nation's 16%). The heavy presence of military personnel contributes to lower income levels.

Despite the significant military presence within the city, the economy does not appear to have been impacted by sequestration or budget cuts. The unemployment rate as of December 2013 was 6.3%, a notable decline from 7.3% a year prior.

ENHANCED ECONOMIC DIVERSIFICATION BUT MODEST GROWTH FORECASTS

Recent retail, commercial, and tourism growth are viewed favorably by Fitch. The Granby Street district has been developed as an entertainment and retail destination in addition to offering residential and commercial office space. The city continues to redevelop its downtown. Four apartment buildings are currently under construction adding approximately 515 new units with a capital investment of approximately $76 million. The $18 million K&K shopping center at Wards Corners was completed in 2014 and added over 125 new jobs. Tenants of the shopping center include: Harris Teeter as anchor, Starbucks and Subway.

Other notable employment sectors include healthcare and education (18% of city employment), anchored by Sentara Healthcare and Old Dominion University. Employment growth for the MSA is forecast to be modest at 1.3% annually through 2015 according to Global Insight.

MANAGEABLE DEBT OBLIGATIONS

Overall net debt levels are affordable at $2,506 per capita and 3.05% of market value, within the city's 3.5% policy limit. These metrics exclude self-supporting GOs issued on behalf of the city's utility systems and other governmental funds. The city's exposure to variable-rate debt will be approximately 3% of total GO debt outstanding after this issuance, and the city has no swap exposure. Debt service equaled approximately $78.2 million (an affordable 10% of total governmental spending) in fiscal 2013.

Pension contributions consume a manageable share of total governmental spending (approximately 5.8%), and the city-administered pension plans are adequately funded at 82% as of June 30, 2013; the city uses a conservative 7% discount rate and has a practice of fully funding its actuarial contributions. OPEB costs are also reasonable, and the city funds costs on a pay-go basis.

The $230.7 million fiscal 2014 - 2018 capital improvement plan will be 81% debt funded, given that over $280 million will be amortized over this period debt ratios should not be impacted. Major projects include the construction of a courthouse complex, school renovations, and the construction of a new elementary school. Fitch does not believe that the city's additional issuance plans will materially impact credit quality.

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.

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=823337

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
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
One State Street Plaza
New York NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
One State Street Plaza
New York NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com