Fitch Rates Virginia Beach Development Authority's, (VA) $30MM Series 2016A&B Revs 'AA+'

NEW YORK--()--Fitch Ratings has assigned a 'AA+' rating to the following Virginia Beach Development Authority, VA (VBDA, or the authority) revenue bonds:

--$21,625,000 public facility revenue bonds series 2016A;

--$8,260,000, public facility refunding revenue bonds (taxable) series 2016B.

The proceeds of the series 2016A bonds will be used to finance various city capital improvements. The series 2016B bonds are refunding a portion of the authority's outstanding series 2005B and 2007B revenue bonds for savings. The bonds are scheduled to sell competitively on October 18.

In addition, Fitch has taken the following rating actions:

--$353 million outstanding VBDA revenue bonds upgraded to 'AA+' from 'AA';

--City of Virginia Beach (the city) Issuer Default Rating (IDR) affirmed at 'AAA';

--$646 million outstanding city general obligations (GO) bonds affirmed at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The VBDA bonds are backed by annual payments to VBDA from the city pursuant to a support agreement, subject to annual appropriation. Bondholders have no security interest in the financed projects. The GO bonds are backed by the full faith and credit and unlimited taxing authority of the city.

KEY RATING DRIVERS

Appropriation Debt Notching

The 'AA+' rating on the series 2016 VBDA bonds and one-notch upgrade of the outstanding bonds reflects application of Fitch's revised criteria for U.S. state and local government credits, which was released April 18, 2016. With few exceptions, Fitch rates appropriation debt one notch below the obligor's IDR, reflecting the slightly higher degree of optionality associated with lease/appropriation payments compared to unlimited tax general obligation bond payments. None of the exceptions apply to the rating assigned to VBDA debt.

The 'AAA' IDR and GO ratings reflect the city's exceptionally strong gap-closing capacity, sound revenue base, and stable operating performance. The city's strong financial profile reflects a diverse revenue base, manageable expenditure growth demands and a demonstrated ability to control expenditures during economic downturns. Fitch expects long-term liabilities to remain low based on management's history of managing its capital plans within its debt policies and maintenance of rapid debt amortization levels.

Economic Resource Base

Virginia Beach covers the eastern border of Virginia south of the Delmarva Peninsula, including the entire area from the Chesapeake Bay to the North Carolina border. It is the most populous city in the Commonwealth with a 2015 census-estimated population of 453,500 (up 3.5% since 2010).

Revenue Framework: 'aaa' factor assessment

The city's revenue base is diversified amongst property taxes and consumption related sales, meals and hotel taxes. Over a 10-year period through 2014 revenue growth was below the rate of GDP but slightly in excess of CPI. Revenues are sensitive to levels of tourism and Fitch expects future long-term natural revenue growth to follow a similar historical pattern. The city has unlimited tax levying authority.

Expenditure Framework: 'aa' factor assessment

The city has significant control over spending, including the power to dictate terms of labor given the absence of collective bargaining. Fitch expects growth in expenditures to be in line with to slightly above revenue growth. Fixed costs are a moderate proportion of overall spending and additional flexibility can be found in a history of pay-go capital spending.

Long-Term Liability Burden: 'aaa' factor assessment

Virginia Beach's overall debt position coupled with its allocated portion of the liability associated with the state operated pension plan is low as a percentage of personal income. Fitch anticipates this burden to remain low based on the city's history of prudently managing its long-term liability burden in conformance with its conservative debt policies, modest pension liability, and very rapid debt amortization.

Operating Performance: 'aaa' factor assessment

Fitch expects the city to manage through periods of economic decline while maintaining a substantial financial cushion based on its history of sound financial management throughout the economic cycle and strong budget flexibility.

RATING SENSITIVITIES

Management Practices: Fitch expects the city's ratings to remain stable in the absence of a shift in management practices and/or policies that result in weakening of the city's long-term operating profile.

CREDIT PROFILE

The city is located in the Hampton Roads region of Virginia and participates in a regional economy with a strong emphasis on naval activities. Military installations in Virginia Beach include the Oceana Naval Air Station, the east coast's master jet base, and the Joint Expeditionary Base Little Creek-Fort Story, the primary east coast base supporting overseas contingency operations. In total, the city's military bases had an annual payroll of $1.7 billion for 32,000 military and civilian employees in 2014.

Tourism is also an economic mainstay of the region due to the city's beachfront location and year-round convention center events and such activity translates into additional revenue for the city, primarily in the form of hotel room and meal tax receipts. Such taxes have experienced growth since fiscal 2010 as tourism spending and hotel occupancy rates have been strong.

The city's $55 billion tax base is diversified and assessments have grown for the last three years, with real estate assessed values increasing by 3% - 4% annually. This return to growth after a period of declines following the recession reflects the positive housing market trends and new economic development. Wealth levels have typically exceeded both state and national levels while unemployment rates have been lower than state and national averages.

Revenue Framework

City revenues are diversified with property taxes comprising 53% of total fiscal 2015 general fund revenues followed by other local taxes at 23% of revenues. Growth in revenues has been modest over the ten year period through 2014 with revenues exceeding CPI growth but below GDP growth. The historical trend in consumption taxes has been positive with only modest declines in fiscal 2010 as a result of the national recession.

Combined hotel and meal tax revenues were up 5.2% compared to fiscal 2014 and provided for 4.4% of general fund revenue in fiscal 2015; they also support debt service for tourism-related improvements and the city's tourism advertising program. Sales taxes, which represent 5.8% of general fund revenue, have also trended upward since fiscal 2010.

Fitch expects operating revenues to continue to be sound with growth in excess of the level of inflation over time largely due to expectations for moderate tax base and population growth. The popularity of Virginia Beach as a tourist attraction along with recently completed or in-progress upgrades to hotel facilities and other associated tourist amenities support an expectation for continued modest annual growth of tourist-related revenues.

The city retains the legal ability to raise property taxes without limit, providing strong revenue flexibility.

Expenditure Framework

The city maintains healthy expenditure flexibility with moderate spending associated with fixed carrying costs. Virginia Beach's spending is primarily for education and city employee salary and benefits and management has kept growth in these costs at moderate levels.

Fitch expects expense growth to be moderate and generally in line with to slightly above revenues without policy action. Virginia public schools are largely funded by a mix of state and local aid contributions. The amount of the local contribution is determined by city council, with the minimum requirement decided by the state.

The city has the ability to reduce expenses tied to its services and budgets generally include an allocation for pay-as-you-go capital spending. Management has the ability to dictate the terms of labor as there is no 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 a notable $244 million (13% of combined city and school budget), affording solid flexibility to adjust spending if necessary.

Fixed costs associated with debt service, pensions and OPEB contributions are moderate at 15% of fiscal 2015 governmental spending. The city has a policy restriction on debt service costs of 10% of general government spending. Pension costs are relatively stable. The city participates in a state retirement plan. The city fully funds its annual OPEB actuarial contribution and assets of $35 million held in trust at Jan. 1, 2015 covered accrued liabilities of $84 million by 35%.

The city's six-year capital improvement program is sizable at $1.56 billion and includes potential funding of $310 million for an extension of the existing light rail system. The Commonwealth has committed to funding $155 million of the costs. Utility related projects account for $345 million or 22% of the CIP. A potential $683 million in combined GO and VBDA revenue bond issuances have been earmarked to support funding the CIP, but the city's rapid amortization rate of 75% over ten years mitigates a material increase in the debt burden as $409 million in principal matures over the next five years and $745 million matures over 10 years.

Long-Term Liability Burden

Long-term liabilities for debt and unfunded city pensions represent a low 6% of personal income. The city complies with a series of debt management policies which limit debt issuance to prudent levels compared to market value, population and personal income. The city's proportional share of the unfunded liability related to the state-administered Virginia Retirement System was $341 million (1.4% of personal income) and the ratio of assets to liabilities was 81% as of June 30, 2015.

The school board is a component unit of the city and reported a combined $635 million net pension liability, or 2.7% of personal income, for its proportionate share of the net pension liability of the state-operated Teachers' Retirement Plan and Non Professional (non-teacher) Retirement Plan as of a June 30, 2014 measurement date.

Fitch expects the city's liability burden to remain low even with future planned debt issuances due to these policies in place and a fairly modest net pension liability.

Operating Performance

Fitch expects the city will continue to maintain sound reserve levels throughout economic cycles given its historically stable operating performance, superior inherent budget flexibility, and demonstrated commitment to maintaining unassigned reserves within its policy level of 8% - 12% of budgeted expenditures. Unrestricted reserves are well above the level Fitch deems adequate to maintain a 'aaa' financial resilience assessment. Operating margins are consistently positive, with reserve draw-downs in four of the last five fiscal years used to fund capital and other one-time projects.

During economic downturns management has taken actions to control spending, raise fees and taxes if necessary and subsidize the budget with reserves as necessary to offset declines in the tax base.

The city outperformed budgetary expectations in fiscal 2015. The fiscal 2015 final budget originally included the use of $53 million in fund balance, primarily for pay-as-you-go capital spending. Due to positive expenditure variances only $8 million of fund balance was drawn upon at fiscal year-end. The city's unrestricted fund balance declined to $156 million from $163 million in fiscal 2014, but totaled a still sound 15.2% of spending

The adopted fiscal 2016 budget of $1.87 billion for city and schools was up by $40.7 million or 2.2% compared to the prior year. The city increased its real estate tax rate by 6 cents in part to offset a reduction in state aid for schools. Even with this tax increase, the city's tax rate remains one of the lowest in the region. Pay-as-you-go capital of $58 million is funded in part from $31 million in fund balance appropriations. Preliminary results for fiscal 2016 reflect a net operating surplus of approximately $12.6 million (1.2% of spending) negating the appropriated use of fund balance as expenditures were once again below budget.

The fiscal 2017 budget for the city and schools totaled $1.9 billion and includes no tax increases. Pay-as-you-go capital was budgeted at $57 million and management appropriated $46 million of reserves. Highlights of the budget include new public safety and education hires, and a pay increase for city and school employees. Conservative revenue and expenditure estimates were made as has historically been the city's practice. Unrestricted fund balance levels are projected to remain sound and unassigned reserves within policy levels.

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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Secondary Analyst:
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Director
or
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Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com