NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following City of Virginia Beach, VA's (the city) general obligation (GO) bonds:
--$89,545,000 GO public improvement bonds, series 2014A.
The proceeds of the bonds will be used to finance various city and school public improvements. The bonds are scheduled to sell competitively on April 8.
In addition, Fitch affirms the following ratings:
--$616 million outstanding GO bonds of the city of Virginia Beach at 'AAA';
--$311 million outstanding Virginia Beach Development Authority (VBDA) revenue bonds at 'AA'.
The Rating Outlook is Stable.
The GO bonds are secured by the city's full faith and credit and unlimited taxing authority. The VBDA bonds are secured by annual payments to the authority from the city pursuant to a support agreement, subject to annual appropriation. Bondholders have no security interest in the financed projects.
KEY RATING DRIVERS
EXCEPTIONAL FINANCIAL MANAGEMENT: Management's conservative budgeting practices, maintenance of very sound reserves within policy levels, and detailed financial monitoring and forecasting reinforce the city's strong financial flexibility.
MODERATE DEBT AND RAPID AMORTIZATION: Prudent debt management policies have resulted in moderately low and stable debt levels with a rapid amortization rate. The city's traditional practice of pay-as-you-go capital funding has kept levels moderate and provides budget flexibility if necessary.
STRONG SOCIOECONOMIC INDICATORS: Wealth levels are above average and unemployment rates are low compared to the state and nation. The economy, although concentrated in the military and tourism sectors, continues to diversify spurring positive performance in economically sensitive revenues.
FULL FUNDING OF RETIREMENT COSTS: The city's pension and other post-employment benefits (OPEB) costs are manageable and city pension funded levels are strong. Management prudently funds 100% of its pension and OPEB annual required contributions (ARC).
VDBA REVENUE BONDS: The VBDA's 'AA' bond rating is notched down from the city's GO rating reflecting risk to annual appropriation and the absence of a security interest in the financed projects.
FINANCIAL MANAGEMENT PRACTICES: 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 unlikely.
Virginia Beach covers the eastern border of Virginia south of the Delmarva Peninsula including the entire area from the Chesapeake Bay to the North Carolina border. It is the most populous city in the Commonwealth of Virginia with a 2011 population of 443,033.
ECONOMY HIGHLIGHTED BY MILITARY AND TOURISM SECTORS
The city is located in the Hampton Roads region of Virginia and participates in a regional economy with a strong emphasis on naval activities. The government sector accounts for 22% of the Virginia Beach-Norfolk-Newport News metropolitan statistical area employment, or 132% of the U.S. average. Military installations in Virginia Beach include the Oceana Naval Air Station, the east coast's master jet base, and the Joint Expeditionary Base Little Creek-Fort Story, the primary east coast base supporting overseas contingency operations. In total, the city's military bases have an annual payroll of $2.1 billion and provide over 32,000 military and civilian jobs.
Fitch views favorably the city's development of a formulized contingency plan to prepare itself for any financial impact from sequestration. The plan includes the restriction of the first 1% of unassigned fund balance beyond the city's 8% minimum policy level and a reserve for contingencies of $724,000 was established in the fiscal 2014 budget to help mitigate sequestration impacts. City management will continue to monitor changes to the economy and its revenue streams and make decisions accordingly based on the results.
Federal sequestration cuts are expected by Fitch to have a modest impact on the city but could have a broader impact on the Hampton Roads region given the higher level of military-related ship repair and maintenance activities taking place outside of the city. Fitch believes the city's historically strong management practices and solid liquidity levels position it well to help it absorb the potential impacts from sequestration cuts.
TOURISM RELATED REVENUES CONTINUE TO IMPROVE
Tourism is also an economic mainstay of the region. In 2012 visitor spending was a record high $1.28 billion (up 5% from 2011), generating $102 million of city and state tax revenues, and supporting 12,025 jobs within the city. The city's convention center supports year-round tourism contributing to growing hotel and sales tax revenues for the city.
Visitor activity translates to additional revenue for the city, primarily in the form of hotel room and meal tax receipts. These revenues combined provided for 4.2% of general fund revenue as well as debt service support for tourism related improvements and support for the city's tourism advertising program. On a combined basis these revenues increased by 3.7% and 4.6% in fiscal 2013 and 2012, respectively, and are trending positively fiscal year to date. Sales taxes, which represent 5.7% of general fund revenue, have trended upward since fiscal 2010 and are again expected to meet budget for the year.
DIVERSIFIED TAX BASE PROJECTING GROWTH
The city's tax base is diversified with the top 10 taxpayers representing a low 4.3% of total assessed value (AV) for fiscal 2013. Total AV of $54 billion, which includes real and personal property, for fiscal 2013 is down 3% from fiscal 2012 and reflects a cumulative decline of 9.8% since fiscal 2009 primarily due to declines in real estate values. Fiscal 2014 real property AV (as of July 1, 2013) is down only 0.3% compared to fiscal 2013 levels and is projected to increase by 3.7% for fiscal 2015. This return to positive growth reflects the recent positive housing market trends and new economic development.
ABOVE-AVERAGE SOCIOECONOMIC INDICATORS
Despite federal budget cuts the city's unemployment rate continues to outperform that of the Commonwealth and the U.S., improving to 4.7% in December from 5.5% a year earlier reflecting gains in both the employment base and labor force. Financial services, education and health services, and construction have contributed to growth in the economy and employment. Median household income exceeds both Commonwealth and national levels at 104% and 125%, respectively, and per capita income figures are 103% of Commonwealth and 113% of national levels.
EXCEPTIONAL FINANCIAL MANAGEMENT PRACTICES
The city has a well-established history of strong financial management, which has resulted in healthy fund balances above policy levels. Operating margins are consistently positive, with the reserve draw-downs of fiscal 2013, 2011 and 2009 funding capital and other one-time projects.
The fiscal 2013 budget provided funding for more than $45 million in pay-as-you-go capital projects. To help offset the increase in spending the budget appropriated $21.1 million in existing fund balance, and increased the real property tax rate by 6.7% to $0.95 per $100 of AV. Conservative budget estimates resulted in non-ad valorem revenues coming in slightly better than budget and expenditures under budget by $42.5 million (4.1% of budget). These positive budget variances resulted in the city's general fund ending fiscal 2013 with a $2.5 million deficit, after transfers (including those for the capital improvement program).
Unassigned fund balance declined to $102.4 million, or 10.4% of fiscal 2014 budgeted revenues. This level of reserves continues to be within the city policy level of 8% to 12% of subsequent year's revenues. The unrestricted fund balance remains very strong, equal to $187 million or 19.1% of spending.
FISCAL 2014 BUDGET DRIVEN BY CAPITAL SPENDING
The city's fiscal 2014 budget for the city and schools combined is up by 0.65% (or $11.6 million) with the city portion up 2.1%. The property tax rate was reduced by 2 cents to $0.93 per $100 of AV but offsetting the reduction is an $11.36 per month increase in the solid waste fee. Additionally, a 5 cent per pack cigarette tax was approved to support economic development projects. About $925,000 in new annual revenues is anticipated. Moderate increases in restaurant, amusement and hotel taxes were prudently budgeted due to recent growth in these revenue sources.
The primary expenditure driver is capital pay-as-you-go spending of $51.6 million up from $45.7 million. Pension contributions went down by $5.8 million, reflecting the fact that employees are now paying 2% towards their state system retirement costs, but offsetting these savings are employee salary increases. A minimal $3.1 million of fund balance was appropriated to balance the schools operating budget. Management has indicated to Fitch that fiscal year-to-date results are tracking generally positive and that unassigned fund balance should remain within policy levels.
The city's willingness to raise recurring revenues is considered a credit positive by Fitch, and together with robust pay-go funding, mitigates any concerns regarding the planned use of fund balance. Fitch expects management to maintain fund balance within its policy levels and that the overall unrestricted fund balance will remain strong.
WELL-MANAGED LONG-TERM OBLIGATIONS
Prudent debt affordability policies and consistent use of pay-as-you-go capital financing have resulted in moderately low debt levels and significant debt capacity. The overall net debt burden equals $2,293 on a per capita basis and a low 1.9% of fiscal 2013 market value. Debt amortization is rapid with 75% of par paid off in 10 years.
The fiscal 2014 - 2019 capital improvement plan (CIP) totals $1.2 billion. Utility projects total approximately $423 million while schools and road improvements account for roughly $216 million and $193 million, respectively. Funding sources for the plan are evenly split between current resources (fund balance, state and federal sources and recurring revenue) and debt. Additional issuance plans are not expected to materially impact the city's debt profile. Helping mitigate this is the city's current rapid debt amortization rate of 75% of par paid off in 10 years.
The city participates in the state-wide VRS in a separate cost-sharing pool. The city's plan is 70% funded with an unfunded liability of $498 million (0.9% of AV) as of June 30, 2013 and assumes a 7% investment rate of return. The city paid a total of $55 million towards its pensions in fiscal 2013, equivalent to 4.3% of total governmental spending.
The city continued to fund the full ARC with respect to its OPEB liability, which Fitch considers a prudent practice. Unfunded OPEB liabilities for the city and school board are modest at $120 million (0.2% of AV). The city established a trust account for the city/schools OPEB liabilities and such account is funded with $50.2 million as of August 2013.
Total carrying costs, calculated by dividing city debt service, pension contributions and OPEB costs by fiscal 2013 governmental fund spending, equaled a relatively low 12.1%.
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
U.S. Local Government Tax-Supported Rating Criteria