Fitch Upgrades Stafford County, VA's IDR to 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following Stafford County, VA ratings:

--Issuer Default Rating (IDR) to 'AAA' from 'AA+';

--$30.2 million general obligation (GO) bonds series 2013 and 2015 to 'AAA' from 'AA+'.

Fitch has also upgraded the following Stafford County Economic Development Authority, VA rating:

--$26.3 million lease revenue bonds series 2008 to 'AA+'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

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

The lease revenue bonds are limited obligations of the EDA of Stafford County, payable from payments to be made by the county, subject to appropriation, pursuant to a Master Trust Agreement.

KEY RATING DRIVERS

The upgrade reflects the county's strong revenue framework, low long-term liability burden, and outstanding gap-closing capacity. The 'AAA' IDR and GO ratings reflect the county's strong growth prospects, ample reserves, and broad budgetary tools.

The rating one the lease revenue bonds is one notch lower than the IDR at 'AA+', reflecting the slightly higher optionality associated with the requirement for annual appropriations in support of lease payments.

Economic Resource Base

Stafford County is located 25 miles south of Washington D.C. and 50 miles north of Richmond, and it benefits from accessibility to several interstate highways, rail lines and major airports. Ongoing transportation improvement along I-95 as well as numerous road improvement projects throughout the county is expected to improve accessibility and promote development. With a 2015 population of 142,003 the county's population has increased by an average annual rate of 1.6% since 2010.

Revenue Framework: 'aaa' factor assessment

Revenues have been rising at a pace above both the rates of inflation and U.S. GDP growth and Fitch expects this trend to continue. 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 the ability to adjust spending.

Long-Term Liability Burden: 'aaa' factor assessment

The county's overall debt and pension liability is low as a percentage of personal income at 6.4%. Amortization is average with 55% of outstanding principal retired in 10 years.

Operating Performance: 'aaa' factor assessment

The county's superior budget flexibility and ample general fund balance position it to comfortably manage through economic downturns without diminishing its overall financial flexibility.

RATING SENSITIVITIES

MAINTENANCE OF SOLID REVENUE PERFORMANCE: The rating assumes the county's continued strong revenue growth prospects despite the notable presence of the federal government within the county.

CREDIT PROFILE

The county benefits from its proximity to the Washington, D.C. metropolitan region and a well-educated and trained workforce. The county's stable economic base is anchored by the presence of the federal government.

A portion of the Quantico Marine Corps Base falls within the county. Quantico was chosen as the home of consolidated investigative agencies as a result of the 2005 Base Realignment and Closure (BRAC) which brought 3,000 to the base and a $300 million investment by the federal government. Among the base's long standing non-marine tenants are Drug Enforcement Agency's (DEA) and the FBI's principal training facilities as well as the FBI's national crime lab. The federal government represents a high 11% of the county's employment.

Total employment has increased for four consecutive years. As of July 2016, the unemployment rate is 4% which is below the state and nation.

Revenue Framework

The county's revenue base is dominated by property and sales taxes at about 69% of fiscal 2015 general fund revenues. Total general fund revenues are expected to increase given projected assessed value (AV) growth as a result of ongoing economic activity and home value appreciation.

The county's general fund revenue growth has trended above U.S. GDP growth, increasing at a 10-year CAGR of 4.9% through fiscal 2014. Revenue growth does include tax rate adjustments but the county's assessed value (AV), which is reassessed every other year, has increased by an average annual rate of 4.69% over the same time series. The 2016 AV increased 8% over 2015 to $16.96 billion and 2017 AV is estimated to increase by 2%.

The 'aaa' revenue framework assessment is also supported by the lack of legal limitation on the property tax rate and levy, providing the county with significant revenue-raising authority.

Expenditure Framework

Fitch expects the natural pace of spending growth to remain below or in line with revenue growth. Moderately low carrying costs and broad flexibility to manage labor-related costs allow the county solid spending flexibility.

The county's largest expenditure category is education at roughly 42% of general fund outlays, followed by public safety at 20%. Virginia public schools are largely funded by a mix of state and local aid contributions. The amount of local contributions is determined by the county's board, and based on the state-determined performance standards for the school system. The county's 2017 budget includes $61.4 million (approximately 25% of the general fund budget) in additional funding over the required local effort (RLE). The county does have the legal ability to reduce spending to the RLE level, affording the county notable flexibility.

The county's fixed cost burden is affordable, with carrying costs for debt, pensions, and other postemployment benefits equaling 13.8% of fiscal 2015 governmental expenditures, with debt service accounting for 13.7%. The 10-year principal amortization rate is average at 55%.

Long-Term Liability Burden

The county's overall liability burden is modest at 6.4% of personal income, primarily driven by overall debt (6%), but also includes the unfunded portion of the pension. The county's 10-year capital improvement plan of $558 million is $318 million debt funded. Additional debt plans are not expected to materially impact the county's debt profile.

County employees participate in the state-administered Virginia Retirement System, an agent multi-employer defined benefit pension plan. The county makes annual payments as determined by the state that equal its annual required contribution. The June 30, 2015 net pension liability of $28.28 million represents less than 1% of personal income.

OPEB liabilities do not represent a cost pressure. In addition to county employees, the county pays OPEB benefits for school employees, although the payment is not a requirement. As of the last valuation report the UAAL for county employees and school employees was reported at $60 million and $52.1million respectively or about 1.6% of personal income. The county pays for OPEB benefits on a pay-go basis. The county's plan is 8% funded while the teachers' plan is 26% funded.

Operating Performance

Given the county's superior inherent budget flexibility in the form of control over revenues and spending capacity, 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 12% target throughout the economic cycle - a level of financial cushion far higher than is sufficient for a 'aaa' financial resilience assessment. The unrestricted general fund balance of $62.6 million in fiscal 2015 was a high 24% of spending.

The county proved its financial resilience and strong budget management through the most recent recession by holding vacancies and postponing capital spending, reducing staff through attrition and offering a retirement incentive among other tactics. Fitch expects the county to make similar operational changes as needed during an economic downturn.

Preliminary results show fiscal 2016 ended with an estimated general fund surplus of $4.1 million (approximately 1.5% of fiscal 2016 general fund spending). The estimated surplus reflects increased property tax collections, consumer taxes and development fees as well as expenditures being about 4% under budget. The fiscal 2017 adopted budget for the general fund is $275.3 million, an increase of $9.7 million, or 3.7% increase over fiscal 2016. The budget includes no change to the tax rate and no appropriation of fund balance. The budget increase will mostly fund a 2% cost of living adjustment, 27 new public safety positions and over $8 million in additional funding for education.

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

In addition to the sources of information identified in Fitch's 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
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Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
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Arlene Bohner
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+1-212-908-0554
or
Media Relations
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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
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com