NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Fairfax County, Virginia general obligation (GO) bonds:
--Approximately $259 million public improvement refunding bonds, series 2014B.
Proceeds from the series 2014B bonds will refund various series of outstanding GO bonds for debt service savings. The county is taking the savings upfront to fund one-time capital projects.
The bonds are scheduled for competitive sale on Oct. 21, 2014.
Fitch also affirms the following ratings:
--$2.35 billion outstanding GO bonds at 'AAA';
--$35.15 million Fairfax County Economic Development Authority (EDA) lease revenue refunding bonds series 2003 (Government Center Properties) at 'AA+';
--$810,000 Fairfax County Redevelopment & Housing Authority (RHA) lease revenue bonds, series 2005 (Herndon Senior Center Issue) at 'AA+';
--$178.4 million Fairfax County EDA facilities revenue and refunding bonds, series 2014A at 'AA';
--$30.2 million Fairfax County EDA facilities revenue, series 2014B (federally taxable) at 'AA';
--$63.6 million Fairfax County EDA facility revenue bonds, series 2012A (Community Services Facilities Project) at 'AA';
--$44 million Fairfax County EDA facilities revenue refunding bonds, series 2012A (Laurel Hill Pub Facilities Issue) at 'AA'; and
--$40.02 million Fairfax County EDA facilities revenue bonds, series 2005A (School Board Central Admin Building Project Phase I;
--$10.9 million Fairfax County EDA parking revenue refunding bonds, series 2005 (Vienna II Metrorail Station Project) at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are general obligations of Fairfax County, for which its full faith and credit and unlimited taxing power are irrevocably pledged.
The outstanding revenue bonds issued by the EDA and RHA are secured by the county's obligation to make lease payments equal to debt service, subject to annual appropriation. A two notch distinction is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities. The series 2005 parking revenue bonds are secured by the county's obligation to replenish any reserve fund deficiency.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Financial operations are characterized by a conservative approach to budget development, timely revenue and spending adjustments, and consistent compliance with a minimum reserve policy requirement of 5% of spending.
ROBUST ECONOMY & EXCEPTIONAL DEMOGRAPHIC INDICATORS: The county's strong and diverse economic base benefits from its location near Washington D.C., with high wealth levels and low unemployment. Assessed value continues to expand, reflecting a strong housing market.
FAVORABLE DEBT PROFILE: Fairfax County continues to adhere to good debt management guidelines, which have allowed overall debt levels to remain low. Future needs according to the capital improvement plan are affordable and should not impact debt ratios. The pace of debt amortization is above average.
APPROPRIATION RISK: The lower ratings on the revenue bonds issued by the EDA and the RHA reflect appropriation risk. Where bondholder payments are not secured by a leasehold interest in essential governmental facilities, the rating is two notches lower than the county's ULTGO rating.
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
Fairfax County is located in the northeastern corner of the Commonwealth and encompasses an area of 407 square miles. Its current estimated population exceeds 1.13 million. The county is part of the Washington, D.C. metropolitan area, which includes jurisdictions in Maryland, the District of Columbia and Northern Virginia.
STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES
Historical financial operations are characterized by maintenance of healthy reserves, adherence to internal reserve policies, a conservative approach to budget development, and timely revenue and spending adjustments.
Fiscal 2013 general fund revenues showed notable year-over-year growth (3.2%), reflecting a 4% increase in the tax levy resulting from tax base growth and a five cent tax rate increase. Property taxes are the county's largest general fund revenue source at more than 70% of the total. Sales taxes moderately increased by $7.6 million or 3% year-over-year.
Revenue gains were offset by 3.3% year-over-year growth in expenditures, mainly attributable to increased education costs and a full year of compensation and benefit increases. As a result, the county experienced a modest operating deficit of $24.4 million, reducing the unrestricted general fund balance to $328.5 million or a still healthy 9.3% of spending (down from 10.3% at the end of fiscal 2013). Fund balance includes two policy directed reserves equal to a combined 5% of spending.
FISCAL 2014: ADDITIONAL REVENUES & SPENDING CUTS
The fiscal 2014 general fund budget totaled $3.6 billion and was up $48.6 million or 1.4% over the prior year. The increase was primarily attributable to $41.27 million in additional funding for Fairfax County public schools. The budget included a tax levy increase of $20.7 million and spending reductions of about $20 million, including the eliminations of 41 positions. The county appropriated $17.5 million of fund balance, which was a $43.5 million year-over-year decline.
Preliminary fiscal 2014 year-end results show an $11 million operating surplus, due mostly to reduced spending. Management has not determined which portion of the fund balance the surplus will fall to; however, it is important to note that reserve levels will remain in compliance with the aforementioned policy.
The fiscal 2015 adopted general fund budget is $3.7 billion, which is a 3.6% ($129.9 million) increase from the fiscal 2014 budget. The budget includes a $0.05 increase in the tax rate, providing $10.9 million in additional revenue. The budget funds a $51.5 million increased transfer to county schools. A 2.3% compensation increase for general fund employees and a merit increase for public safety are included (approximately $30 million). Also, the budget funds an increased pension contribution of $9.4 million.
The county currently is projecting a $71.4 million shortfall for fiscal 2016. The shortfall mostly reflects conservative revenue growth estimates, and includes full funding of an increased compensation plan, an increased transfer to the schools and additional pension funding. Fitch expects management will make the necessary adjustments to minimize drawdowns of fund balance.
ROBUST AND DYNAMIC REGIONAL ECONOMY
Fairfax County's economy continues to perform well, benefiting from an established business base of federal contractors and high-tech companies that leverage Fairfax's highly educated labor pool, technology infrastructure, and extensive transportation network anchored by Washington Dulles International Airport (Dulles).
The county's unemployment rate remains well below the state and nation at 4.2% in July 2014. Solid employment gains have been reported within the professional, scientific and technical business services, and retail trade sectors.
The strong local job market is complemented by one of the more highly educated labor forces in the nation, contributing to median household income of twice the national average. The housing market has exhibited signs of stabilization, with median home sale prices up 5.7% in September 2014 compared to a year prior, according to Zillow.
An expansive multi-modal transportation system serves the region; however, significant additional infrastructure is necessary to alleviate congestion and further promote commerce and industry. Management has identified transportation as a long-term challenge, and notes the recent completion of Phase 1 of the Dulles Metrorail expansion project which includes five new stations in Fairfax County.
LOW DEBT LEVELS REFLECT PRUDENT POLICIES
Overall debt remains very low (1.4% of market value) and well below the county's 3% policy, largely reflecting the affluence of the county's tax base and a conservative approach to debt management and long-term capital planning. Debt service accounted for an affordable 8.1% of fiscal 2013 governmental spending (debt service may not exceed 10% of spending by policy). Outstanding debt is repaid at an above average rate (65% within 10 years), helping to provide flexibility for future bond sales. Fitch does not anticipate a material change in debt ratios in the near term.
Pension costs consume a reasonable share of the governmental spending (approximately 7.5% for fiscal 2013) and the county-administered pension plans are funded at 70.6% using a Fitch-adjusted discount rate of 7%. The funded ratio is marginally adequate, and the county continues to underfund the annual required contribution (ARC); this practice is a weakness relative to most 'AAA' rated entities. The county plans to incrementally increase pension contributions to the full ARC by 2020. Other post-employment benefit (OPEB) costs represent less than 1% of governmental spending and the ARC is essentially fully funded.
Fitch has withdrawn its 'AA' ratings on certain maturities for the following issuer due to prerefunding activity:
Fairfax County Economic Development Authority (VA)
--(School Board Central Administration Project Phase 1) facility revenue bonds series 2005A.
The updated rating history for the above maturities is now reflected at 'www.fitchratings.com'.
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, 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=892134
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