NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating on the following outstanding bonds of Chesapeake, Virginia:
--$188.57 million general obligation (GO) bonds.
The Rating Outlook is Stable.
The bonds are GOs of the city for the payment of which its full faith and credit is irrevocably pledged. In addition, some of the bonds have additional sources of repayment.
KEY RATING DRIVERS
DIVERSE ECONOMY WITHIN HAMPTON ROADS REGION: Chesapeake's economy, though diverse and steadily expanding, retains its underpinnings from the stable military and port presence in the Hampton Roads region.
STRONG FINANCIAL PROFILE: Conservative financial management and policies have contributed to stable reserves, ample financial flexibility and adequate liquidity levels after taking into account the cash position of schools.
STRONG DEBT PROFILE: The city's debt profile is supported by the extensive use of pay-as-you-go capital financing, adherence to prudent debt policies, and rapid amortization.
AFFORDABLE CARRYING COSTS: Carrying costs including debt service, pension and other post-employment benefits (OPEB) are manageable.
MAINTENANCE OF STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
Chesapeake is the third-most populous city in the Commonwealth of Virginia, with an estimated 2014 population of 233,371.
SOUND RESERVE LEVELS
Financial reserves are healthy, and financial flexibility is ample, attributable to prudent management and adherence to conservative reserve policies. The general fund balance policies designate reserves equal to 6% of revenues are restricted for cash-flow emergencies and a minimum of 10% of revenues are maintained as unassigned fund balance. In addition, the city's detailed multi-year projections, with seemingly reasonable assumptions, increase fund balance throughout the upcoming five-year period.
The city ended fiscal 2015 with a modest operating surplus after transfers of $6 million (1.2% of spending), increasing unrestricted fund balance to $125 million or an ample 23.9% of general fund spending. When including the city's $32 million reserve for cash flow emergencies the unrestricted fund balance increases to a very healthy 30% of spending.
The adopted fiscal 2016 budget increases revenues by 1.9% over the prior year's budget, primarily from increased property taxes due to strong new residential construction. Expenditures increase by 4.1% year-over-year, primarily due to rising healthcare costs for active employees (up $2.1 million). The budget adds $1.6 million to the total general fund balance at year end after including $7.5 million in budgeted savings for estimated position vacancies, of which the city saved $12 million in fiscal 2015. Year-to-date revenues are performing on track of budget.
DIVERSE ECONOMY WITHIN HAMPTON ROADS REGION
Chesapeake is located in the Hampton Roads area of Virginia where the diverse economy benefits from the regional economic underpinnings of the military and port operations. The city is centered on providing labor to the region and maintains a substantial retail sector and an increasing number of international corporations. The region's employment growth is significantly slower to recover from the recession compared to the state, though it is ahead of the nation over the same time.
Population growth in recent years is behind the state. The city anticipates steady and manageable future growth, which Fitch believes will mitigate potential capital and service pressures. Per capita income levels hover around national averages and slightly below those of the commonwealth, although the city's above average median household income is positively augmented by military pensions. The unemployment rate, at 4.2% as of November 2015, trends below the U.S. average and is on par with the state.
The city's taxable assessed value (TAV) is recovering from the low in fiscal 2013 and has since experienced a growing annual increase of 1.1%, 2.2% and 2.4% for fiscals 2014, 2015 and 2016, respectively. Management is projecting slow, minimal growth for the near future based on the annual reassessment report from the Real Estate Assessor's Office. The recent increases are despite the closing of a large coal plant by Dominion Power, the city's largest taxpayer. Dominion's assessed value will see a reduction of $180 million from their $693 million TAV in fiscal 2015 (the city's total TAV in fiscal 2015 was $25.9 billion). The decline will be effective in the fiscal 2016 audit and is expected to impact annual property taxes from Dominion by $1.5 million.
Property taxes produced approximately 56% of fiscal 2015 general fund revenue. Fitch notes that the city has the ability to adjust its property tax rate to temper the financial impact of TAV declines but has not found it necessary to do so anytime in the last two decades. Rates are competitive compared to neighboring counties.
MODEST DEBT PROFILE AND AFFORDABLE CAPITAL PLANS
Debt levels are very low with overall debt equaling 1% of market value and $1,164 on a per capita basis. Amortization is rapid at 70% repaid within 10 years. Debt service payments are declining by $14 million in fiscal 2016 as older debt issues are retired. These savings are expected to be reinvested into paygo capital projects until debt levels are expected to increase slightly over the next several years as some debt issuance is anticipated for school and other city projects. Future capital needs appear moderate, and Fitch expects the tax-supported portion of the debt burden to remain manageable given the use of self-supporting enterprise debt (revenue bonds rated 'AA'/Outlook Stable) and the city's ongoing commitment to cash-fund many of its capital needs.
The fiscal 2017-2021 $397 million capital improvement plan includes $123 million in new tax-supported debt and $185 million of cash financing including $20 million in fund balance use. The use of fund balance for capital needs is consistent with the city's policy of designating fund balance for future pay-as-you-go capital funding or for debt service payments for the general government and schools.
LIMITED OTHER LONG-TERM LIABILITIES
All city employees participate in the Virginia Retirement System (VRS), an agent multiple employer defined benefit pension plan administered by the commonwealth. The city pays the full contractually required contribution (CRC), which is based on an actuarially determined rate. The city's portion of the VRS liability is funded at 85% using a 7% discount rate assumption at the most recent measurement date of June 30, 2014. The city's net pension liability (NPL) as a percentage of market value is very low at less than 0.5%; these figures exclude pensions associated with the school board.
OPEB liabilities are minimal and well-managed. In fiscal 2015, the city contributed an amount over the OPEB actuarially required contributed (ARC) for the third consecutive year, growing the trust established to prefund the liability. The total unfunded liability is now less than 0.2% of market value and the most recent actuarial analysis indicates there is no longer a need to contribute an amount to the trust that exceeds the ARC, which positively reflects the city's management of this liability.
Carrying costs for debt service, pension and OPEB totaled a moderate 15.6% of governmental spending in fiscal 2015.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and
Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 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, Lumesis, and IHS Global Insight.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form