Fitch Rates Arlington County, VA's GOs 'AAA'; Outlook Stable

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

--$74.9 million GO public improvement bonds, series 2014A,

--$68.2 million GO refunding bonds, series 2014B.

The bonds will be sold via competitive sale on May 28, 2014.

In addition, Fitch affirms the following ratings:

--$777.54 million of outstanding GO bonds at 'AAA',

--$69.37 million of outstanding 2013 Industrial Development Authority (IDA) revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of Arlington County for which the full faith and credit and unlimited taxing power of the county are pledged.

The revenue bonds issued by the Arlington County Industrial Development Authority are limited obligations of the authority payable solely from payments to be made by the county to the trustee, subject to annual appropriation by the county board.

KEY RATING DRIVERS

OUTSTANDING FINANCIAL PERFORMANCE: Conservative budgeting, timely tax increases, and closely monitored expenditure controls consistently produce surplus operating results leading to solid reserve levels and liquidity.

GOVERNMENT DOMINATED EMPLOYMENT BASE: The significant presence of the federal government served to insulate the region from economic downturns in the past; however, recent federal budget cuts create some uncertainty.

EXCEPTIONAL DEMOGRAPHIC INDICATORS: Very low unemployment, superior wealth levels, and one of the most highly educated labor forces in the nation underscore the economy.

WELL-MANAGED LONG-TERM OBLIGATIONS: Debt levels are moderate and expected to remain so given prudent planning and adherence to conservative debt policies. The county continues to fully fund obligations related to pension and other post-retirement benefits (OPEB).

APPROPRIATION RISK: The 'AA' rating on the IDA revenue bonds incorporates the general creditworthiness of the county, appropriation risk, and absence of security interest.

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 Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Arlington County is located in the northern section of Virginia across the Potomac River from Washington, D.C., and encompasses a land area of 25.8 square miles. As of July 2013 the population is estimated at 224,906.

AMPLE RESERVE LEVELS

The county's financial profile remains sound and well managed. The county's fiscal 2013 unrestricted fund balance was $197.3 million or a sound 18.2% of expenditures and transfers out.

The committed fund balance includes the county's 5% operating reserve, which may only be used to meet critical and unanticipated spending needs. Fitch expects a certain amount of variability in the county's committed and assigned portion of the fund balance as a result of expenditures associated with pay-go capital, affordable housing, and budget contingencies.

MODEST SURPLUS OPERATIONS ANTICIPATED AT YEAR-END FISCAL 2014

The fiscal 2014 adopted budget reflects an increase of 3.7% or $39.4 million year-over-year. The county funded the increase with a combination of revenue increases and fund balance usage. The budget includes a tax levy increase of 3.7% (approximately $21.6 million increase in real estate tax revenues), bringing the total tax rate to 1.006 cents per $100 of assessed value; the third increase in five years. The county also appropriated $25.8 million in fund balance (2.4% of spending), which is an increase from $17.6 million from the prior year.

The $1.09 billion budget funds ongoing cost increases, such as a $10.6 million increased transfer to schools and an approximate $6 million compensation increase for county employees and one-time costs such as $3 million for affordable housing and $2 million for land acquisition.

Year-to-date operations show revenues at approximately 2% higher than budget due to strong real estate tax assessments and additional highway state aid. Expenditures are about 1% lower than budget mainly due to a hiring slowdown and conservatively budgeted debt service costs. Management is estimating a modest operating surplus after transfers at year-end.

The 2015 general fund revenue budget is 2.6% over the FY 2014 adopted budget. The budget reflects a 6.7% tax levy increase supported by strong property value assessments. The budget increase is mostly due to additional funding to the schools and increases in compensation.

Multiyear projections show modest operating deficits beginning in fiscal 2016. Based on prior operating performance, Fitch expects strong and positive operations.

EXTENSIVE ECONOMY

Arlington County is located at the center of the Washington D.C. metro area and has consistently exhibited very strong economic characteristics. The presence of the federal government remains key to the region's overall stability, attracting a large number of private sector contractors. A healthy retail base, government employers outside the defense sector and a significant tourism component add breadth to the county's economy.

The high-paying employment base is supported by a local workforce that is among the most educated and highly skilled in the nation. Wealth indicators are very strong and income growth rates measure favorably when compared to the region and nation. Unemployment remains low, at 3.5% in March 2014.

Job relocation outside of the county and increased vacancies associated with the 2005 military base realignment and closure are anticipated through 2015 but Fitch continues to believe the county will be able to absorb these losses over time based on an uptick in private investment and a strong pipeline of future construction projects.

The county's tax base has recovered since its relatively mild dip during the recession, with healthy growth averaging 5.4% annually between 2011 and 2014. The county incorporates 2 - 3% annual tax base growth into its long-range plans, which Fitch believes is sustainable.

SOUND DEBT PROFILE

Formally adopted conservative debt management guidelines that include a detailed debt capacity analysis serve as the financial framework for the county's capital initiatives. Fitch expects the county's debt ratios to remain moderate. The moderately high debt per capita of $4,010 is offset by the strong wealth and economic activity, as evidenced by the low debt as a percent of market value ratio of 1.4%. Rapid amortization of over 64% of principal retired within 10 years enhances the debt profile.

The adopted fiscal 2015-2024 CIP totals $2.69 billion, including self-supporting utility projects. Transportation and metro projects ($1.6 billion) are the major cost drivers. Pay-as-you-go capital financing is slated to provide about 18% of the funding for general government projects, with the balance funded by debt issuance and state/federal funding. The county projects compliance with its prudent debt policies throughout the course of the CIP.

WELL-FUNDED LONG-TERM LIABILITIES ARE EXPECTED TO REMAIN AFFORDABLE

Long-term liabilities are well-managed. The county consistently funds 100% of the actuarial required contribution (ARC) for its single-employer, defined benefit plan. The plan covers substantially all employees with the exception of teachers and some employees associated with state agencies, who participate in the Virginia Retirement System (VRS).

The plan was well funded as of July 1, 2013, estimated at over 86% using Fitch's more conservative 7% discount rate. The adjusted unfunded actuarial accrued liability of $243 million (0.24% of taxable market value) is low. On a reported basis the plan is 92% funded and uses a 7.5% discount rate assumption.

The county also provides other post-employment benefits (OPEB) to its retirees. For fiscal 2013 the county funded 99.3% of the OPEB ARC. According to the latest actuarial valuation (7/1/2012) the funded ratio was 16.2%. Fitch views even this moderate level of OPEB pre-funding as a strength. The UAAL associated with OPEB totals $224.8 million or a low 0.37% of market value. Carrying costs for debt service, pension ARC and OPEB totaled a low 9.5% of fiscal 2013 governmental fund spending.

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=831216

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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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-1608
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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-1608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com