Fitch Rates Norfolk, VA's $212.5MM GOs 'AA+' Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following Norfolk, VA (the city) general obligation bonds (GOs):

--$104.87 million GO capital improvement bonds, series 2016A;

--$97.11 million GO refunding bonds, series 2016B;

--$10.5 million GO qualified energy conservation bonds, series 2016C (taxable).

The series 2016A & B bonds are expected to sell on a negotiated basis during the week of Sept. 26, 2016. The series 2016C bonds are expected to sell competitively on Sept. 27, 2017. Proceeds of the bonds will be used for various general government capital purposes and to refund outstanding tax supported debt for interest savings.

In addition, Fitch affirms the city's Issuer Default Rating (IDR) and approximately $693.72 million of outstanding GO bonds at 'AA+'.

The Outlook is Stable.

SECURITY

The bonds are general obligations of the city to which the city has pledged its full faith and credit and unlimited taxing power for payment.

KEY RATING DRIVERS

The 'AA+' long-term IDR and GO ratings reflect the city's strong revenue flexibility, moderate long-term liability burden, healthy reserves, and broad budgetary tools.

Economic Resource Base

Norfolk is located in the Hampton Roads region of Virginia, along the Atlantic Ocean. The city covers 66 square miles. With a 2015 population of 246,393 the city's population has increased modestly in recent years.

Revenue Framework: 'aa' factor assessment

Revenues have been increasing at a pace below both U.S. GDP and inflation, but near-term prospects appear positive. The city enjoys strong revenue flexibility given the independent legal ability to increase property taxes without limitation.

Expenditure Framework: 'aa' factor assessment

Fitch expects the natural pace of spending growth to generally track revenue growth. Moderate carrying costs and broad flexibility to manage labor-related costs allow the city solid leeway to adjust spending.

Long-Term Liability Burden: 'aaa' factor assessment

The city's overall debt and pension liability burden is low. Future debt needs are manageable, and the pace of debt amortization is above average (62% in 10 years).

Operating Performance: 'aaa' factor assessment

Fitch expects the city to maintain a high level of fundamental financial flexibility throughout economic cycles based on its expenditure and revenue flexibility.

RATING SENSITIVITIES

Stronger Revenue Growth Prospects: The city's general fund revenue growth over the past decade has been less than robust. A notable, sustained boost in general fund revenues above U.S. economic performance and inflation, combined with maintenance of the city's strong overall financial flexibility, could put positive pressure on the rating.

CREDIT PROFILE

Site of world's largest naval complexes, Norfolk's economy and employment are centered on defense-related activity. Hampton Roads has about 150,000 active-duty and civilian Navy personnel, about 45% of whom are assigned to Norfolk. Government sector workers within the city represent 25% of employment totals. The heavy presence of military personnel contributes to lower income levels.

Despite the significant military presence within the city, the economy does not appear to have been affected by sequestration or budget cuts. Employment has grown for five consecutive years and as of July 2016 the unemployment rate was 5.4% (down from 6% a year prior).

Fitch expects the city's local economy and employment base to continue to diversify given ongoing development in sectors other than government. IKEA is opening a 331,000 square foot store in the city in 2018, which is expected to generate 250 permanent jobs. Also, ADP is making a $32.5 million investment which is projected to generate 1,800 new jobs by 2017.

Revenue Framework

The city's revenue base is dominated by property and other taxes (mostly sales, meals and utility taxes) at about 44% and 26%, respectively, of fiscal 2015 general fund revenues. Total general fund revenues are expected to increase given projected assessed value (AV) growth resulting from ongoing economic activity and home value appreciation.

The city's natural pace of general fund revenue growth over the past 10 years (FY2004-FY2014) has trended below both U.S. GDP and inflation at 1.8%. The slow rate of growth was partly due to a decline in the real property tax rate over this period. On a positive note, the city's housing market continues to rebound. As of the July 2016 Zillow report, median home values were 89% of peak 2007 values; 2016 real property AV is approximately 122% of 2007 levels. Given ongoing economic development as well as positive housing trends, growth prospects for revenues appear positive.

The city's property tax rate remains competitive relative to neighboring similarly sized jurisdictions. Lack of a legal cap on the property tax rate or levy provides the city with significant independent legal revenue-raising flexibility.

Expenditure Framework

The city's expenditures are led by public safety and education. These costs comprise approximately 43% of total general fund outlays. Virginia public schools are largely funded by a mix of state and local aid contributions. The amount of local contribution is determined by the city council, with the minimal requirement decided by the state.

Excluding the city's manageable capital spending plans, Fitch expects spending growth to generally be aligned with revenue growth.

The city has solid flexibility to adjust major expenditure items. Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consumed approximately 15% of fiscal 2015 governmental spending. The city has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. Flexibility to adjust funding levels for education is limited to a minimum funding level according to state standards. However, the city currently funds education above the state standard by $65 million, affording some flexibility to adjust spending.

Long-Term Liability Burden

Overall debt and unfunded pension liabilities are low--approximately 8.3% of the city's personal income--and are primarily driven by city and overlapping debt. Fitch expects the liability burden to remain consistent with the 'aaa' assessment based on future debt issuance plans and a 10-year principal amortization rate of approximately 62%.

The adopted fiscal 2017 to 2021 five-year general capital improvement plan (CIP) totals approximately $116.7 million. The capital plan focuses on maintenance of existing infrastructure and is to be funded primarily with $84.5 million in bonds. Given the city's amortization rate, the additional debt is not expected to impact the city's debt profile materially.

Full-time salaried employees participate in the Norfolk Employee's Retirement System defined benefit pension plan. The city's contributions to the plan are actuarially calculated. The fiduciary net position of the plan covered approximately 87% of the total pension liability at the plan's 7% discount rate as of the June 30, 2014 valuation date. The city also contributes to the Virginia Retirement System for constitutional officers. As of 2014 the fiduciary net position was approximately 93% of the total liability.

OPEB liabilities are funded on a pay-go basis. In addition to city employees, the city pays OPEB benefits for school employees. At the close of fiscal 2015 the UAAL for city employees was reported at $56 million and $39.8 million for school employees, a combined 1% of personal income.

Operating Performance

Given the moderate economic sensitivity of the city's revenues and its superior inherent budget flexibility, Fitch expects the city to manage through economic downturns while maintaining a high level of fundamental financial resiliency. The city has historically maintained healthy reserve levels, and continued to do so during the last recession. The unrestricted general fund balance of $95.5 million was a solid 16% of spending at fiscal 2015 year-end, comfortably above the city's 5% reserve floor.

The fiscal 2016 general fund budget (excluding the transfer to the school board) was essentially flat compared to fiscal 2015. The budget included a modest $3.1 million use of fund balance and no tax rate changes. Preliminary fiscal year-end 2016 results suggest an operating surplus and reflect mostly conservative budgeting of expenditures.

The fiscal 2017 budget is again essentially flat compared to the prior year. The budget keeps the real property tax rate unchanged but increases the cigarette tax by five cents, which is dedicated to economic development. The budget funds a 2% general wage increase for city employees, additional school funding and $4.3 million toward a smart city initiative program.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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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
Steve Murray
Senior Director
+1-512-215-3729
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
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com