NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following ratings of Culpeper County, VA:
--The Issuer Default Rating (IDR) to 'AAA' from 'AA';
--$17.8 million general obligation (GO) school bonds series 2012 to 'AAA' from 'AA';
--$46.6 million lease revenue refunding bonds series 2014 to 'AA+' from 'AA-', issued by the Economic Development Authority of Culpeper County.
The Rating Outlook is Stable
SECURITY
The GO bonds are general obligations of the county, payable from its full faith and credit and unlimited taxing power.
The lease revenue bonds are payable from lease rental payments, subject to annual appropriation, to be made by the county to the Economic Development Authority (EDA).
KEY RATING DRIVERS
The rating upgrade reflects application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18th. The revised criteria highlight the county's stable economic base, supporting historically strong operating performance and a solid revenue framework, coupled with conservative liability management that supports the 'AAA' IDR.
The lease revenue bonds are rated on notch below the IDR reflecting appropriation risk.
Economic Resource Base
Culpeper County is located west of Interstate-95 in central Virginia, approximately 75-85 miles from both Washington, D.C. and Richmond, VA. With a 2015 population of 49,432 the county's population has increased by an average annual rate of 1.1%.
Revenue Framework: 'aaa' factor assessment
Revenues have been rising at a pace above U.S. GDP growth. The county 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 county solid leeway to adjust spending. School funding exceeds the state minimum by a wide margin.
Long-Term Liability Burden: 'aaa' factor assessment
The county's overall debt and pension liability burden is low. Future debt needs are manageable, and the pace of debt amortization is above average (65% in 10 years).
Operating Performance: 'aaa' factor assessment
The county's historical operating performance demonstrates resiliency. Reserves remained healthy during and after the recession. Given the county's revenue flexibility and strong reserves, the county is poised to perform well in an economic downturn.
RATING SENSITIVITIES
MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating assumes the county's continued strong financial flexibility, revenue growth prospects and budget controls.
CREDIT PROFILE
Culpeper is a bedroom community with over 50% of the labor force commuting outside the county for work to places such as Fairfax County, Prince William and Fauquier County. The local employment base consists mostly of retail, health care, manufacturing and government (county) jobs. The health care sector is dominated by Novant Health University of Virginia Health System Culpeper Medical Hospital, which is the county's second largest employer. Euro-Composites Group, an aerospace and defense contractor, announced a plan to invest $10.5 million at its Culpeper County manufacturing plant, which will create 58 new jobs.
Employment has grown for five consecutive years. Most growth has been in the health care sector reflecting continuous expansion at the medical center. As of July 2016, the unemployment rate was 3.8% down from 4.5% a year prior.
Revenue Framework
Property taxes are the largest revenue source for the county at 62% of general fund revenues followed by intergovernmental revenues at 22%. Homes values are approximately 84% of the pre-recession peak of fiscal 2006 according to Zillow, and the fiscal 2016 budget includes an 11% taxable assessed value (TAV) increase, reflecting a biennial reassessment. Intergovernmental revenues are comprised mostly of state funding for health and welfare programs.
The county's natural pace of general fund revenue growth of over the past decade (fiscal 2004-2014) has trended above inflation and U.S. GDP. The county's compound average growth rate of 4.4% reflects a steep decline in the tax rate at the beginning of the decade followed by numerous modest tax rate increases. Given ongoing economic development as well as positive housing trends, revenue growth prospects are positive.
Lack of a legal cap on the property tax rate or levy provides the county with significant independent legal revenue-raising flexibility.
Expenditure Framework
The county's expenditures are primarily composed of education and public safety. These costs comprise 33% and 19% respectively, of total general fund expenditures. Virginia public schools are funded by a mix of state and local contributions. The county board of supervisors determines the amount of local contribution but the state sets a minimal requirement.
Given strong revenue growth, Fitch expects the natural pace of spending to be in line with revenue growth over time.
The county has solid flexibility to adjust its major expenditures items. Fixed carrying costs associated with debt service, actually determined pension payments and other post-employment benefit (OPEB) actual payments consumed approximately 17% of fiscal 2015 government spending. The state's minimum funding level potentially limits the county's flexibility to adjust funding levels for education. However, the county currently funds education well above the state standard ($12.4 million, or 14% of fiscal 2015 general fund spending), giving it ample legal ability to reduce education expenditures if necessary.
The county has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining and Fitch does not expect salary and pension costs to pressure the rating.
Long-Term Liability Burden
Overall debt and unfunded pension liabilities are low--approximately 5% of the county's personal income--and are primarily driven by county debt issued for schools. 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 65%.
The adopted fiscal 2017 to 2021 five-year general capital improvement plan (CIP) totals approximately $159.7 million. The capital plan is dominated by projects related to education (69%). The plan is 70% debt funded, but, management has indicated that many of the projects are optional rather than required. Given the county's amortization rate and low liabilities the additional debt is not expected to impact the county's debt profile materially.
The county provides pension benefits via the state-wide Virginia Retirement System (VRS), an agent multi-employer defined benefit plan, and annually contributes 100% of the required contribution. The county's portion of the plan has an asset to liabilities ratio of 88% reflecting the plan's assumed 7% investment return assumption. The net pension liability totaled $5.5 million as of the June 30, 2014 valuation report or less than 1% of personal income.
OPEBs are provided to county and school employees until medicare eligibility. The obligation is funded on a pay-go basis. As of the last valuation date, the UAAL for county employees was reported at $1.86 million and $1.9 million for school employees, a combined modest .02% of personal income.
Operating Performance
Given the county's superior inherent budget flexibility in the form of control over revenues and spending flexibility, Fitch expects the county to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the county's 10%-15% target - a level of financial cushion far higher than is consistent with an 'aaa' subfactor assessment for the county. The unrestricted general fund balance of $33 million in fiscal 2015 was a high 35.6% of spending (excluding refunding bond proceeds).
The county proved its financial resilience and strong budget management through the most recent recession by making reductions in force and reducing capital spending among other measures. Fitch expects the county to make similar operational changes as needed during an economic downturn.
The fiscal 2016 approved budget was balanced and represented a 2.6% increase from the fiscal 2015 budget. The budget included a decline in the tax rate to $0.73 per $100 of assessed value from $0.83, due to TAV reassessment. Preliminary general fund operating results show a modest $1.58 million operating surplus despite budgeting a $5.2 million use of fund balance. Positive results are mostly due to conservative budgeting of expenditures. The fiscal 2017 budget is a 4.5% increase over 2016. The budget keeps the tax rate constant and includes a $5.6 million use of fund balance, although $8.3 million has been budgeting for pay-go capital spending.
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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