Fitch Rates Isle of Wight County, VA's GO Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following general obligation (GO) bonds of Isle of Wight County, Virginia (the county):

--$24.9 million series 2014A (tax-exempt);

--$12.31 million series 2014B (taxable).

The bonds will sell via negotiated sale on or about June 24. Proceeds will be used to restructure a portion of the county's debt for upfront debt service saving.

In addition, Fitch affirms the following rating:

--$132.63 million in outstanding county GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, secured by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

FISCAL IMBALANCE: Unrealized revenue projections and increasing debt service costs resulted in an operating deficit in fiscal 2013 and a projected deficit for fiscal 2014. Measures planned for the next several fiscal years are projected to restore budgetary balance.

MODERATE DEBT LEVELS: Debt levels should remain moderate given no additional debt plans. The amortization is slow at 34% retired in 10 years.

SOUND RESERVE LEVELS: Despite the fiscal 2013 operating deficit, general fund reserves remain healthy with an unrestricted balance of roughly 25% of spending at year-end.

DIVERSIFYING ECONOMY: The county's employment base remains heavily concentrated in manufacturing, although this risk is somewhat offset by the diversity exhibited in the broader regional economy and continued local investment in non-manufacturing enterprises.

RATING SENSITIVITIES

STRUCTURAL BALANCE: The rating is sensitive to the county's ability to meet current projections for fiscal 2014 operations, and to reverse a recent trend of operational imbalance and maintain satisfactory reserve levels going forward.

CREDIT PROFILE

Isle of Wight County is located in the Hampton Roads region of southeastern Virginia. The county's population is small at an estimated 35,656 in 2013, but growth has been strong with a 19% increase over the past decade. The population is expected to increase an additional 10% by 2020.

HEALTHY RESERVES MAINTAINED DESPITE DECLINES

Reflecting a planned use of reserves for one-time capital spending and a smaller than expected gain from the sale of certain assets, fiscal 2013 ended with a larger than projected $4.66 million operating deficit. The unrestricted balance was reduced to $16.65 million but was still strong at 25.8% of general fund spending.

The adopted fiscal 2014 budget included an eight cent real estate tax increase ($3.2 million in additional revenue) and no fund balance appropriation. The county prudently implemented a tax rate increase to fund education and public safety increases, and five cents was dedicated to the equalization of revenues to offset assessed value declines. Management reports the decline was due to a decline in real estate values following reassessment.

Estimated year-end results show a manageable $2.5 million operating deficit (4% of projected 2014 spending), further reducing the unrestricted balance to $14.15 million or a still healthy 22% of general fund spending. Management reports the operating deficit was mostly due to an error in the budgeting of property tax revenues.

The county's fund balance policy requires the unassigned general fund balance to equal 10% of budgeted governmental funds expenditures, plus budgeted expenditures in the school operating and food service funds. Fitch believes the policy is conservative in that it measures fund balance against much larger spending base. The county remains in compliance with its policy.

Liquidity has declined but remains satisfactory with approximately three months of cash on hand, down from approximately four and half months in fiscal 2011.

PLAN TO REGAIN FISCAL BALANCE

The fiscal 2015 budget addresses the initial $3.9 million gap from fiscal 2014, $700,000 in additional school needs and a $3.2 million conversion of water reservation fees from being accounted for as capital to operating expenses. County management has prudently developed a plan to regain balanced operations with a combination of revenue raising measures (one-time and recurring) and spending reductions.

The county had previously bonded for the funding of the water reservation fees. The county's new management has discontinued that practice and has added the reservation fees to operating expenditures. Although the fiscal 2015 budget includes rate increases, the public utilities fund is not self-supporting and will continue to require support from the general fund.

The first year of the plan, which has been adopted by the Board of Supervisors, includes a $.12 cent real estate tax increase that is expected to generate approximately $4.8 million in additional revenue, and a $3.2 million use of fund balance. Despite being the second consecutive tax rate increase, the tax burden remains low relative to rates of neighboring communities and affords additional financial flexibility.

Management expects to balance operations in fiscal 2016 with additional revenues from a property reassessment scheduled for fiscal 2015 and a $1.6 million use of fund balance. A number of development projects have been approved recently, including 1,583 new single family homes and apartments, nearly 1,000 square feet of retail space and a 100-room hotel. These projects are expected to generate an increase in various revenues, including meals and lodging taxes, water/sewer connection and usage fees and property taxes.

Future rating actions will reflect the county's ability to balance operations with recurring revenues and minimize or eliminate the use of reserves to close budget gaps.

MANUFACTURING BASED ECONOMY BEGINNING TO DIVERSIFY

The county's economy remains concentrated in manufacturing (29% of employment) but is diversifying as a result of the increased demand for warehousing and distribution being driven by the growth of the nearby Port of Virginia. Fitch anticipates that the presence of the port, with its commercial and military activities, will continue to help broaden the local economy.

Per capita and median household income metrics are above the national average and track closely to those of the state despite the high number of local manufacturing jobs.

The county's employment base has done well to recover from the loss of 1,100 jobs due to the closure of an International Paper facility in 2010. At 5.5% as of March 2014 the county's unemployment rate tracks well below the national average and has significantly improved from a high of 7.4% in 2010.

In July 2012, International Paper invested $90 million and reopened a portion of the mill, creating 220 plus jobs. Also in July 2012, Tak Investments, Inc. announced it would invest $60 million to establish a recycled tissue plant at the International Paper site. In June 2013, Franklin Lumber LLC announced that it would purchase the idle International Paper sawmill and restart operations, investing $14.8 million over five years and creating 72 jobs.

Also, the county is continuing to develop a 3,200 acre intermodal industrial complex along U.S. Route 460 in the Windsor section of the county. To date, Keurig Green Mountain Coffee opened a $180 million facility in the park, and several other companies also have located facilities there.

MODERATE DEBT PROFILE; DEBT RESTRUCTURING WILL RELIEVE COST PRESSURES

Fitch expects the county's moderate overall debt ratios (3.9% of market value or $4,348 per capita) will remain largely unchanged given the county's lacks of additional borrowing plans, modest assessed value growth assumption and slow amortization rate following the current restructuring. Debt ratios also include GO water and sewer bonds, as the utility system is currently not self-supporting.

Debt service expenditures accounted for 10.3% of total governmental spending in fiscal 2013, up sharply from the prior year's expense of 4.15%. The current amortization schedule includes a doubling in annual debt service payments by fiscal 2016. The substantial increase is mostly due to the maturity of the $7.5 million literary anticipation note.

This restructuring refinances the literary loan and extends the maturities of the county's water and sewer debt. The county is expecting to achieve $27.4 million in total cash flow saving through 2023, with a present value cost of $2.9 million.

The county participates in the state-wide Virginia Retirement System in a separate cost-sharing pool. The plan is adequately funded at 76% for county employees and assumes a discount rate of 7%. The county regularly contributes its annual required contribution (ARC). For fiscal 2013 the $1.9 million ARC equaled a modest 2.5% of total governmental spending.

The ARC to amortize the county's other post-employment benefits ($224,000) is also very manageable at a low 0.3% of total governmental spending, although the county currently funds this cost on a pay-as-you-go basis. Carrying costs for debt service, pension and OPEB totaled a low 12.8% 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, Virginia Employment Commission.

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=834162

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze, +1 212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York NY 10004
or
Secondary Analyst
Michael Rinaldi, +1 212-908-0833
Senior Director
or
Committee Chairperson
Steve Murray, +1 512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Evette Caze, +1 212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York NY 10004
or
Secondary Analyst
Michael Rinaldi, +1 212-908-0833
Senior Director
or
Committee Chairperson
Steve Murray, +1 512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com