Fitch Affirms Fredericksburg, VA's $32.5MM GOs at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its 'AA+' rating on the following outstanding bonds of Fredericksburg, VA (the city):

--$32.5 million general obligation (GO) bonds, series 2011A.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

HEALTHY FINANCIAL PROFILE: City management has implemented prudent financial policies largely yielding operating surpluses and additions to healthy reserve levels.

SOUND REVENUE FLEXIBILITY: Incremental increases in the real estate tax rate and economic turnaround in the area have brought in additional revenue from property, local sales, meals, and business license taxes.

ECONOMY TIED TO REGION: Higher education, health care, and government sectors underpin the city's somewhat narrow economy and attract residential and retail growth to the area. Socioeconomic indicators trail regional and national levels, somewhat offset by the presence of the University of Mary Washington and access to the Northern Virginia job market.

MODEST LONG-TERM LIABILITIES: Moderate debt ratios are expected to remain within the city's formal debt policy given its affordable capital improvement plan (CIP). Pension contributions are made in full and costs will be manageable going forward.

RATING SENSITIVITIES

STRONG CUSHION: Fitch expects the city's strong financial position to remain stable over the next several years. The rating may be sensitive to results that could unexpectedly weaken the city's financial reserves.

CREDIT PROFILE

Fredericksburg, population 28,350 (2014), is part of the Northern Virginia region and located on Interstate-95 approximately 50 miles south of Washington, D.C. and 50 miles north of Richmond, VA. Amtrak and the Virginia Railway Express provide service to Washington D.C. from downtown Fredericksburg. The city is steadily increasing in population with residents up 17% since 2010.

ECONOMY TIED TO REGION

The area economy is somewhat narrow, underpinned by higher education, health services, and government. Additionally, the city serves as a regional retail center for Spotsylvania (GOs rated 'AA+'/Outlook Stable by Fitch), Stafford (GOs rated 'AA+'/Outlook Positive by Fitch), and Caroline counties (combined population of 298,958). The city's economy has rebounded from the recession as evidenced by growth in local sales, meals, hotel, and business license taxes in fiscals 2010-2015.

The city's economy continues to be anchored by Mary Washington Hospital and the University of Mary Washington (the university), which are the first and second largest employers in the city at 4,335 and 840 employees, respectively. The university continues to invest in expansion projects.

HEALTHY EMPLOYMENT TRENDS

The unemployment rate in July 2015 dropped to a low 5.6% which is equal to the United States, though slightly behind the region. Wealth and income metrics fall below regional, state and federal averages, partially driven by the approximately 4,500 undergraduate students at the university. Population growth has occurred faster than any city in the Commonwealth of Virginia since 2010 according to the Weldon Cooper Center at the University of Virginia.

ASSESSED VALUE REBOUNDING

The city had seen taxable assessed value decline by a total of 11.2% for the period of fiscal 2009 through fiscal 2013, which turned to expansions of 1.7% in fiscal 2014 and 0.8% in fiscal 2015 with a total assessed value (TAV) of $4.05 billion. Median home sale price has increased to $274 thousand, up 6.2% year-over-year from August 2014 according to Zillow.

The property tax rate increased 4% to $0.82 per $100 for fiscal 2016, after a 7% increase in 2015, primarily to pay increased debt service costs and increase school funding. The rate is up 46% since fiscal 2009 with previous increases implemented to offset tax base declines. The tax rate remains favorable compared to peers, despite the increases.

STRONG FINANCIAL PROFILE

Property taxes are the largest revenue source, representing 44% of fiscal 2014, which ended with an unrestricted fund balance at an ample $26.8 million, or 33% of spending. The city stipulates that unrestricted fund balance be maintained at no less than 7% of the prior year's general fund revenue, with a goal of 12%. The city has consistently exceeded their goal.

CONSERVATIVE BUDGETING IN FISCAL 2016

The fiscal 2016 adopted budget for the general fund is $88.6 million, or a 2.4% increase from the fiscal 2015 adopted budget. It includes a $3.2 million general fund balance draw on reserves which will primarily be used for pay-as-you-go capital. Revenue flexibility permits the city to easily address increased capital spending, employee compensation, and debt service payments. The fiscal 2016 adopted budget includes what Fitch considers conservative estimates of tax revenue increases given the recent year-over-year trends and consistently positive budget-to-actual variances.

MANAGEABLE DEBT AND LONG-TERM LIABILITIES

Debt levels are expected to remain moderate given the city's satisfactory debt policy and capital needs. Current debt is $3,948 per capita or 2.8% of market value, and amortization is slight faster than average with 62% of principal retired after 10 years. As of fiscal 2014, the city had reached 44.5% of its policy-driven debt limit, and Fitch believes that the city will stay well within the limit with a CIP for fiscals 2016-2019 at an affordable $138 million. Near term tax-supported debt plans include $32 million in fiscals 2016 and 2017 and $40 million in the next three to five years.

The city participates in the Virginia Retirement System and consistently makes 100% of its actuarially required contribution (ARC). For fiscal 2014, the city and school board's combined annual pension cost was $3.1 million, or just 2.8% of total government expenditures. As of June 30, 2013, the funded ratio of the city's portion of the state pension plan was 69.4%, and the school board's portion had a funded ratio of 91.1%. Both plans assume a conservative investment rate of return of 7%.

Other post-employment benefit (OPEB) costs are a very modest share of government spending. The city's unfunded OPEB liability was $22.6 million (about 0.6% of market value) as of the Jan. 1, 2014 valuation. Total carrying costs, consisting of debt service, pension ARC, and OPEB payment are a modest 10.2% of government spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992465

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992465

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com