Fitch Rates Loudoun County, VA's GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following Loudoun County, Virginia (the county) general obligation (GO) bonds:

--$69.96 million public improvement bonds, series 2014A.

Bond proceeds will be used to finance various school and county construction projects. The bonds are being sold via competitive sale on May 13, 2014.

In addition, Fitch affirms the following ratings:

--$800.7 million of outstanding GO bonds at 'AAA';

--$50.8 million of outstanding lease revenue bonds issued by the Industrial Development Authority of Loudon County, VA, at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are supported by a pledge of Loudoun County's full faith and credit and unlimited taxing power.

The lease revenue bonds are limited obligations of the Industrial Development Authority of Loudoun County, VA (the authority) as conduit issuer and are payable from lease rental payments from Loudoun County to the trustee. Payments are equal to debt service and subject to annual appropriation by the county board.

KEY RATING DRIVERS

ROBUST ECONOMY: The county's strong and diverse economic base benefits from its location near Washington, D.C., with high wealth levels, a highly educated labor pool and low unemployment.

SOUND FINANCIAL POSITION: Reserve levels and financial flexibility remain sound, supported by prudent fiscal policies and planning.

MODERATE DEBT LEVELS: The county continues to adhere to good debt management guidelines, which have allowed overall debt levels to remain moderate. Future needs according to the capital improvement plan (CIP) will not increase debt ratios significantly. Debt amortization is rapid.

APPROPRIATION DEBT: The rating on the lease revenue bonds reflects the general credit characteristics of the county and incorporates risk to annual appropriation by the county board of supervisors to make rental payments equal to debt service. Leased assets are essential and are subject to seizure should the county default on its rental payment obligation.

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 reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Located west of Washington, D.C., the county is among the fastest growing in the country. Population nearly doubled during the last decade and is expected to continue growing as development related to Dulles International Airport and the capital attract jobs to the county. The 2013 estimated population is 349,679. While the county maintains significant agricultural activity and open land in its western portion, the eastern portion has become increasingly developed.

DYNAMIC LOCAL ECONOMY

An established business base of federal contractors and high-tech companies leverage Loudoun's highly educated labor pool, technology infrastructure, and extensive transportation network anchored by Dulles International Airport. The county's wealth indicators are well above state and national averages, and unemployment remained low at 3.7% as of December 2013. Loudoun's median household income is more than double the national average and 90% higher than the state average.

The Metropolitan Washington Airports Authority (revenue bonds rated 'AA-' with a Stable Outlook by Fitch) is in the process of completing phase I of its Metrorail extension project. Phase II of the project will expand the Metrorail to Dulles International Airport with three stops in eastern Loudoun. Funding for phase II includes approximately $272 million in county contributions that have been incorporated in the county's CIP. Fitch believes that the phase II expansion will have a positive effect on the county's dynamic economy.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES

County finances are well-managed, adhering to long-standing policy guidelines, and include detailed planning for capital and operating needs. Fiscal 2013 concluded with a $17.6 million net surplus in the general fund and an unrestricted fund balance totaling $216.9 million or 19.3 of operating expenditures and transfers out.

The county's positive operating results in fiscal 2012 were mainly due to favorable variances in personal property, business license and recordation tax revenues, and expenditure savings resulting from personnel vacancies and cost reductions. There are no statutory or charter caps or restrictions on tax levy or tax rate growth.

The committed portion of the unrestricted general fund balance includes a fiscal reserve equal to 10% of general fund operating revenues. The fiscal reserve is designed as a source of funding during major economic, natural, or national emergencies and the county does not view it as a source for funding recurring expenditures. It may be used in certain circumstances to offset revenue variances, though this has not been done to date. Replenishment of the reserve fund after a draw is to occur over a three-year period.

ESTIMATED FISCAL YEAR 2014 RESULTS BEAT BUDGET

The fiscal 2014 adopted budget includes a three-cent reduction of the property tax rate (which is competitive with those of neighboring counties) and a higher $36.5 million general fund balance appropriation. The appropriation offsets the impact of the tax rate decrease and funds capital projects and asset replacement.

According to management, local tax revenue is projected to exceed budget in the areas of personal property and recordation tax. Estimated fiscal year-end 2014 results reflect 1%-2% net operating surplus, marking the sixth consecutive year of surplus operations.

FISCAL 2015 BUDGET

The adopted fiscal 2015 budget is a 7.6% increase ($86.7 million) from fiscal 2014. The county was able to reduce the tax rate for the fifth consecutive year by five cents and appropriate just $1.54 million of fund balance due to strong property tax revenue growth. The budget funds a limited number of enhancements focusing on public safety, community development and providing resources required to open new facilities coming online in the next year. The budget also includes an average 3%, pay-for-performance increase for eligible county employees.

Given the county's history of conservative budgeting and strong financial performance, Fitch expects operations to remain positive and reserves to remain in compliance with policy.

AFFORDABLE DEBT PROFILE

The overall debt burden is moderate at $3,572 per capita and 1.8% of market value. Pressure on the county's debt profile from the sizable $1.9 billion CIP is lessened to a degree by the wealth of the county's tax base and the county's debt affordability guidelines.

The debt guidelines restrict debt service to a manageable 10% of total governmental and education spending while ensuring rapid amortization of outstanding principal, currently at 74% within 10 years. Fitch calculates debt service spending as a percentage of total governmental spending at a manageable 10.7% in fiscal 2013.

The 2015-2020 CIP totals $1.9 billion. The bulk of capital needs are to alleviate growth pressures within the county's well-regarded public school system and to fund various transportation projects including the county's portion of the phase II Dulles rail expansion and the construction of three parking garages at the station stops. Projected debt financing totals over $1.18 billion through fiscal 2020; however, debt ratios are expected to remain moderate and under the 3% as a percentage of market value policy.

LOW OTHER LONG-TERM LIABILITIES

Pension and other post-employment benefit (OPEB) contributions do not stress financial operations. County employees participate in the state-administered Virginia Retirement System, and the county makes annual payments as determined by the state that equal its annual required contribution, which represented a modest 2% of total governmental spending in fiscal 2013. The plan's funded ratio as of fiscal 2012 was satisfactory at 76%.

The county also administers a defined benefit plan for volunteer fire and rescue personnel. The Loudoun County Board of Supervisors maintains the authority to establish and amend the benefit provisions of the plan. The 2013 contribution accounted for just 0.07% of total governmental spending and the plan is well-funded.

As of fiscal 2013, the county is fully funding its OPEB ARC. Funding costs are modest at less than half of 1% of total governmental spending in fiscal 2013. As of July 2013, the OPEB liability was 44% funded.

APPROPRIATION DEBT

Legal provisions are solid. The bonds, issued by the Industrial Development Authority of Loudoun County, are secured by lease payments received by the trustee (as assignee of the authority) from the county, in amounts equal to debt service. Lease payments are subject to annual appropriation. In the event of non-appropriation, the trustee could take possession of the leased property (a public safety building, detention center, and administrative building) and the county would be unable to use it for its essential government purposes.

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.

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

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1 212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Senior Director
+1 212-908-0538
or
Committee Chairperson
Douglas Offerman
Senior Director
+1 212-908-0889
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1 212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Senior Director
+1 212-908-0538
or
Committee Chairperson
Douglas Offerman
Senior Director
+1 212-908-0889
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com