Fitch Rates Portsmouth, VA's GO Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns ratings to Portsmouth, Virginia's (the city) bonds as follows:

--$32.9 million general obligation (GO) refunding bonds, series 2016A (tax-exempt) 'AA';

--$24.58 million GO refunding bonds, series 2016B (taxable) 'AA'.

GO bond proceeds will be used to refund various series of bonds for debt service savings. The bonds will sell via public bid the week of April 4.

In addition, Fitch affirms the following rating:

--$565.6 million of GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable by the full faith and credit and unlimited taxing power of the city.

KEY RATING DRIVERS

MODERATELY-CONCENTRATED LOCAL ECONOMY: Maritime activities, including military research and medical care, continue to anchor the local economy. Economic indicators compare unfavorably to most national and Commonwealth averages.

HEALTHY FINANCIAL FLEXIBILITY: The city's financial condition benefits from healthy reserves, strong liquidity and ample revenue raising capacity.

MODERATE DEBT BURDEN: The city's overall debt burden is high in part due to the recent issuance of pension obligation bonds and amortization is average. Future capital needs are affordable.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong reserve position. The Stable Outlook reflects Fitch's expectation that reserves will decline over the short term for capital spending but remain at or above the city's policy level.

CREDIT PROFILE

Portsmouth is located in the Hampton Roads region of Virginia on the Chesapeake Bay.

LARGE NAVAL AND PORT PRESENCE

The city is home to significant naval operations. The three largest employers for the city are the Norfolk Naval Shipyard, the Naval Hospital, and the U.S. Fifth District Coast Guard Command, which in total employ over 21,500. A high 29% of the city's workforce is employed directly by the federal government. Fitch is not aware of major planned federal budget cuts that could adversely affect the city's naval operations.

Port operations are also important to the local economy. Facilities include the Portsmouth Marine Terminal (PMT) and the Virginia International Terminals (VIT). PMT is owned and operated by Virginia Port Authority and in April 2014 entered into a deal to export Jeeps and Chryslers from the terminal and is now transporting nearly 200,000 containers annually. VIT is the largest privately-owned container terminal in the United States and the city's largest taxpayer. In October 2015, the Virginia Port Authority and VIT extended VIT's lease agreement by 50 years. The new agreement is expected to include a $230 million expansion of the terminal to double its capacity. Maritime and naval activities have encouraged growth in related industries. InterChange Group Inc., a logistics provider, is investing $5 million to put a new location in Portsmouth.

WEAK ECONOMIC INDICATORS

Economic indicators generally trend below state and national averages. Median household income is 68% of the state and 84% of the nation average, respectively. The city's unemployment rate continues to trend downward, with year-over-year improvement to 6.6% as of January 2016 from 6.9% a year prior. The unemployment rate remains above the state and national average but employment levels have grown over the past four years.

STABLE FINANCIAL PERFORMANCE

Fiscal 2015 ended with a $10.5 million deficit, reflecting the use of fund balance for school funding and one-time capital spending. The unrestricted balance totals $58.7 million or a healthy 24.5% of general fund spending. The city council's goal is to maintain an unassigned fund balance of at least 15% of operating revenues, which it has exceeded.

The fiscal 2016 budget is a 1.8% increase over the prior year, incorporates the use of $4.6 million in fund balance and includes a three cent tax rate increase (approximately $1.7 million in revenue). A larger property tax rate increase was avoided by freezing vacant positions, cutting spending to various departments and transferring funds from the risk management fund. Year-to-date operations are tracking close to budget.

The city relies mostly on property tax revenues (53%) for general fund operations. The city's tax rate and levy are not subject to statutory or charter limitation or cap, but the rate is the highest in the Hampton roads region. Additional revenues are generated from a 1% local sales tax as well as taxes on business and occupational licenses, cigarettes, and utilities.

MANAGEABLE PENSION COSTS DUE TO POBS

Following the issuance of POBs during fiscal 2013 the unfunded liability for the city's two closed pension plans, Portsmouth Supplemental Retirement System (PSRS) and the Portsmouth Fire and Police Retirement System (FPRS), has declined to an aggregate $79 million (approximately 1% of market value [MV]) as of July 2015 from $247 million, and the funded ratio for both plans has increased to 76% (based on a Fitch adjusted 7% assumed return) from 30%. In addition to the two closed plans, the city participates in the state-wide Virginia Retirement System (VRS), an agent multi-employer defined benefit plan. The city's portion of the plan is funded at 91% reflecting the plan's assumed 7% investment return assumption. Pension costs during fiscal 2015 accounted for 6% of total governmental spending. The city fully funds the required contribution annually for all pension plans.

REDUCED OPEB BENEFITS

The city restructured its other post-employment benefits (OPEB) plan in 2015. Future employees must have 25 years of employment to qualify for benefits (an increase from 10 years for existing employees) and post-65 retiree health coverage has been eliminated. This change is expected to reduce the unfunded accrued liability to $43.5 million (0.5% of MV) from a notable $178 million (2.5% of MV). OPEB costs during fiscal 2015 accounted for 1.2% of total governmental spending.

HIGH DEBT BURDEN WITH POBs

The city's overall debt burden is high at $4,792 per capita and 6.4% of MV. These metrics exclude self-supporting GOs issued on behalf of the city's utility systems. The current $147 million capital improvement plan (CIP) includes $70.28 million of additional debt. Management is in the process of reevaluating the plan to reduce borrowing plans. Debt service costs are manageable at 12.9% of 2015 total governmental spending. Carrying costs of 20% during fiscal 2015 were on par with fiscal 2013, reflecting a shift from pension to debt service payments following the issuance of the POBs.

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, dated Feb. 2, 2016). 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 beginning of the second 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 and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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=1001543

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001543

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com