NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to the Loudoun County, Virginia's (the county) general obligation (GO) bonds:
--$69.9 million GO public improvement bonds series 2015A rated 'AAA'.
GO bond proceeds will be used to finance various school and general government projects. The bonds will be sold via competitive sale on June 9.
In addition, Fitch affirms the following ratings:
--$948 million of outstanding GO bonds at 'AAA';
--$44.2 million of outstanding lease revenue bonds issued by the Industrial Development Authority of Loudoun County, VA (the IDA), at 'AA+';
--$31 million public facilities lease revenue bonds series 2015A issued by the Economic Development Authority of Loudoun County (the EDA) at 'AA+';
--$211.6 million metrorail service district improvement revenue bonds series 2014 issued by the EDA at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are payable from a pledge of the county's full faith and credit and unlimited taxing power.
The lease revenue bonds are limited obligations of either the EDA or IDA as conduit issuer for the respective bonds issue and are payable from lease rental payments from the county to the trustee. Payments are equal to debt service and subject to annual appropriation by the county board.
The metrorail service district improvement bonds are payable from appropriated special tax revenues and in the event of a special tax revenue deficiency, additional appropriated funds. Special tax revenues are revenues resulting from the levy and collection of the special tax levied on taxable property within the metro rail service district.
The county is not legally obligated to impose the special tax revenues. The obligation to collect and pay to the trustee the special tax revenues is contingent upon the levy and appropriation of such by the board of supervisors. Bondholders are additionally secured by a cash funded revenue stabilization fund which is expected to equal to $17.2 million (or maximum annual debt service (MADS)) at by Oct. 1, 2022.
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 increase the debt burden but ratios should remain moderate. 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. A two notch distinction is assigned where bondholder payments are not secured by a leasehold interest in essential governmental facilities.
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 but at a slower rate as development related to Dulles International Airport (Dulles) and the nation's capital attract jobs to the county. The 2014 estimated population is 363,050. 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. The county's wealth indicators are well above state and national averages, and unemployment remained low at 4% as of February 2015. Loudoun's median household income is more than double (230%) the national average and 92% higher than the state average.
The Metropolitan Washington Airports Authority (revenue bonds rated 'AA-'/Outlook Stable by Fitch) has completed phase I of the Silver Line Metrorail extension project. Phase II of the project will expand the Metrorail to Dulles with three stops in the eastern portion of the county. Funding for phase II includes approximately $273 million in county contributions. The county has issued $195 million in revenue bonds through the EDA and plans to issue an additional $58.6 million in fiscal 2017. 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 2014 concluded with a sixth consecutive net operating surplus of $3.2 million (0.3% of spending) and an unrestricted fund balance totaling $218.7 million or 18% of operating expenditures and transfers out. The county maintains additional reserves ($179 million or 15% of fiscal 2014 expenditures) outside of the general fund that could be used if needed.
The county's positive operating results in fiscal 2014 were mainly due to favorable variances in property tax revenues, and expenditure savings resulting from personnel vacancies and cost reductions. The county generates the majority of its revenues from property taxes. There are no statutory or charter caps or restrictions on tax levy or tax rate growth and the county's tax rate is comparable to neighboring counties.
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 2015 RESULTS ARE POSITIVE
The 2015 general fund expenditure budget is 7.6% over the fiscal 2014 adopted budget and appropriates $1.5 million of fund balance. 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. Year-to-date operating results are positive relative to budget.
The adopted fiscal 2016 budget is approximately a 7% increase over fiscal 2015. The budget includes a 2.5 cent tax rate reduction which is the sixth consecutive reduction reflecting strong tax base growth. The majority of the increase will fund the opening and construction of new schools, a 3% compensation increase for employees and additional public safety costs. While the budget does include a higher $48.2 million fund balance appropriation, Fitch expects at a minimum that reserves will remain in line with the county's reserve policy.
AFFORDABLE DEBT PROFILE
The overall debt burden is moderate at $3,989 per capita and 2% 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, consistent tax base growth 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 72% within 10 years. Fitch calculates debt service spending as a manageable 10.4% of total governmental spending in fiscal 2014.
The fiscal 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 county's 3% 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 (VRS), an agent multi-employer defined benefit plan. 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 2014. The county's portion of the plan is funded at 84% as of fiscal 2014 using the plan's assumed 7% investment return assumption. Loudoun County Schools also participate in VRS. Although the county does not have a direct obligation to fund the schools pension costs, an increase in costs could impact county operations.
The system-wide funding level of the VRS declined in recent years in part due to underfunding of actuarially-based contributions (partially used as a budget balancing measure by the commonwealth), but recovered more recently with the exclusion of 2009 investment losses from the smoothing formula, recent strong investment gains, and increased annual funding. As of the June 30, 2014 valuation from VRS the funded ratio on a reported basis was 67.9%, down from 84% funded on June 30, 2009, but up from a trough of 65.1% on June 30, 2013. Importantly, the commonwealth anticipates phasing back in full actuarially-determined contribution payments by fiscal 2019.
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 2014 contribution accounted for just 0.02% of total governmental spending and the plan is well-funded.
As of fiscal 2014, the county is fully funding its OPEB annual required contribution. Funding costs are modest at less than 0.2% of total governmental spending in fiscal 2014. As of July 2013, the OPEB liability was 44% funded.
APPROPRIATION DEBT
Legal provisions are solid. The bonds, issued by the EDA and IDA are payable by lease payments received by the trustee 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 (various essential facilities) and the county would be unable to use it for its essential government purposes for the IDA and 2015A lease revenue bonds. The 2014 EDA metrorail bonds are not secured by a leasehold interest in essential governmental facilities.
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
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985821
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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