Fitch Rates Virginia $129MM GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Commonwealth of Virginia general obligation (GO) bonds:

--$63.945 million GO bonds series 2014A;

--$65.145 million GO refunding bonds series 2014B.

The bonds are expected to sell via competition on or about March 27, 2014.

In addition, Fitch affirms the 'AAA' rating on the commonwealth's approximately $1.7 billion in outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds represent general obligations of the commonwealth, with full faith and credit pledged.

KEY RATING DRIVERS

CONSERVATIVE COMMONWEALTH FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue stabilization fund (RSF). Revenue performance has improved considerably since the recession and deposits to Virginia's reserve fund are budgeted per policy during the current biennium.

DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. Reductions in government sector employment over the next few years are likely as the federal government contracts.

MODERATE DEBT LEVELS: Virginia's debt ratios are in the moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant and issuance has accelerated in recent years.

PENSION FUNDING REFORMS: The funded status of Virginia's retirement system declined in recent years, due in part to an underfunding of actuarially-calculated annual required contributions (ARC) to the system. Unfunded liabilities as a percentage of personal income remain below average for U.S. states rated by Fitch. The commonwealth has adopted a series of pension reforms that are expected to result in increased contributions to the system and limit further growth in the commonwealth's pension liabilities over time.

RATING SENSITIVITIES

The rating is sensitive to shifts in the state's fundamental credit characteristics including continuation of the state's conservative budgeting practices and prudent debt management.

CREDIT PROFILE

The commonwealth's 'AAA' rating reflects its substantial economic resources, conservative approach to financial operations which includes periodic revenue forecast updates, and lower-moderate debt levels. The series 2014 bonds will fund various capital needs at commonwealth higher education institutions and refund a portion of series 2004B GO refunding bonds.

COMMONWEALTH FINANCES REMAIN SOUND

Virginia's 'AAA' GO rating reflects its substantial fiscal resources, conservative approach to financial operations which includes periodic revenue forecast updates, and low-to-moderate debt levels. Economic and revenue performance has improved since the start of the 2010-2012 biennium, which began July 1, 2010, and continued through fiscal 2013 (the midway point of the 2012-2014 biennium). Revenue over-performance through fiscal 2012, combined with below-budget spending, allowed the commonwealth to close the 2010-2012 biennium on June 30, 2012 with a surplus of $448.5 million.

The commonwealth made a $133 million revenue stabilization fund (RSF) deposit in fiscal 2013, and an additional $245 million deposit is budgeted for fiscal 2014. Both deposits are required under constitutional provisions to dedicate a portion of annual tax revenue growth to the RSF. The legislature and governor also enacted a further $95 million prepayment towards RSF deposits required in the next biennium. Based on unaudited fiscal 2013 results, a $243 million deposit will be due in fiscal 2015. Following these deposits, the RSF balance is expected to increase substantially from its current level of $440 million to $689 million as of June 30, 2014 (the end of the current biennium), and to $939 million at the close of fiscal 2015.

Additionally, $30 million is programmed for deposit to a Federal Action Contingency Fund (FACT) (a second, statutory reserve established to address the risk of federal deficit reduction) with a further appropriation of $30 million contingent on attainment of a budget surplus during the 2012-2014 biennium. Assuming $60 million is ultimately set aside in the FACT fund, when combined with the expected $689 million in the RSF, the commonwealth is projected to have accumulated $749 million in reserves (representing approximately 4.4% of forecasted fiscal 2014 revenues) by the close of the 2012-2014 biennium.

Fiscal 2014 revenues collections are trailing the official (reflecting the enacted budget) and updated forecast estimates. In early February the governor recommended revising revenue estimates for fiscal 2014 and 2015 downwards by $125 million and $15 million respectively, from a December 2013 forecast. Fitch does not view the proposed reductions as a concern given their small magnitude relative to Virginia's nearly $17 billion general fund revenues estimate for fiscal 2014, as well as the commonwealth's solid financial cushion. Through February, total general fund revenues were down 0.8% year-over-year (YOY) versus 1.7% growth estimated in the official forecast and 1.0% growth estimated in the February 2014 mid-biennium forecast. All major general fund tax sources (personal income, sales and corporate income) are falling short of mid-biennium forecast expectations, with particular weakness in personal income (1.1% growth versus 2.9% in the updated forecast) and corporate income tax receipts (10.8% decline versus a 3.4% decline in the mid-biennium forecast).

The recent revenue weakness could reflect effects of federal sequestration, as well as the recent federal shutdown, which Fitch anticipated would negatively affect the commonwealth's general fund tax revenues given the commonwealth's exposure to federal government and government-related employment. Despite the recent enactment of a federal budgetary framework, Fitch anticipates ongoing federal contraction to continue. While the full extent of any decline is unclear, Virginia maintains sound and growing reserve levels to offset any near-term effect on revenues.

The legislature ended its 2014 regular session without final action on a budget for the next biennium beginning on July 1, though ample time remains to enact a budget and avoid any disruption in normal government operations. The key point of contention appears to be the new governor's proposal to expand access to health insurance under provisions of the Affordable Care Act. After the legislature ended its 60-day session on March 8, the governor ordered a two week special session beginning on March 24. Fitch will monitor the outcome of the special session, and any additional sessions required to enact a budget before the start of the new biennium.

BROAD ECONOMIC BASE

The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 and 2010 by 3.2% and 0.1%, respectively, though this performance was less severe than national declines of 4.4% and 0.7% for 2009 and 2010, respectively. Virginia employment bottomed out in mid-2010, and the commonwealth recorded 1.2% and 1.1% growth in 2011 and 2012, respectively. As of January 2014, YOY employment growth was 0.3%, well below the 1.8% growth rate for the nation. YOY employment losses in federal government employment associated with federal contraction began in June 2013 with a 0.4% decline and remains negative, spiking to a 4.1% decline in January 2014. Fitch will continue to monitor the effects of this contraction, although the agency believes the strength of the commonwealth's economy will allow it to absorb anticipated losses without significantly weakening Virginia's credit profile. Unemployment has historically been well below the national rate, and the 5% rate for January 2014 represents just 76% of the U.S. rate for the same month.

Personal income growth in Virginia has been strong through most of the last decade, typically exceeding that of the nation. After a 0.7% decline in 2009 (less severe than the national decline of 2.9%), personal income grew for the next three years. Growth in 2010 of 3.1% and 6.1% in 2011 met or exceeded U.S. growth, while 3.7% growth in 2012 slightly trailed national growth of 4.2%. Quarterly data through the third quarter of 2013 (3Q'13) indicate personal income growth continues to lag the national trend. Personal income per capita growth also lagged the national rate in 2012, but remains high at $48,377 or 110.6% of the U.S. average in 2012; Virginia ranks 10th among the states on this metric.

WELL-MANAGED DEBT PROFILE

The commonwealth's debt ratios are in the moderate range and have grown slightly over the past fiscal year. As of June 30, 2013, net tax-supported debt totaled approximately $10.7 billion, equal to 2.7% of 2012 personal income. GO debt constitutes approximately 16.4% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Certain appropriation-linked debt, are excluded from Fitch's calculation of state debt due to their track record of self-support. Capital needs for higher education and transportation improvements remain large with substantial authorized but unissued balances outstanding.

PENSION LIABILITIES UNDER CONTROL

On a combined basis, the burden of the commonwealth's net tax-supported debt and unfunded pension obligations equals 4.6% of 2012 personal income, below the median of 7% for U.S. states rated by Fitch (statistics as of Fitch's July 2013 State Pension Update report). The adjusted calculation includes the commonwealth's portion of the total liability of the Virginia Retirement System (VRS) covering only commonwealth employees, and the full liability for several much smaller systems where the commonwealth is the sole employer. The system-wide funding of the VRS declined in recent years in part due to underfunding of contributions (partially used as a budget balancing measure), and as of the June 30, 2012 valuation the funded ratio on a reported basis was 65.8%, down from 84% funded on June 30, 2009. As of 2011, the system utilizes a 7% investment return assumption, in line with Fitch's standard adjustments to pension system liability calculations for other governments. In recent years, the commonwealth enacted pension reforms addressing required contribution levels and various plan design changes, all expected to limit further growth in the commonwealth's pension liabilities in the coming years. Importantly, the commonwealth anticipates phasing back in full ARC payments by fiscal 2019. Funded ratios could weaken until then, though Fitch does not anticipate material reductions, absent significant investment market declines.

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 the Underwriter and IHS Global Insight.

Applicable Criteria and Related Research:

--'Fitch Rates VA Public School Auth's School Financing Bonds (1997 Resolution) Ser 2013 B 'AA+'' (Oct. 21, 2013);

--'State Pension Update' (July 16, 2013);

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

Applicable Criteria and Related Research:

State Pension Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709962

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824510

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com