Fitch Rates $188MM Virginia GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following Commonwealth of Virginia general obligation (GO) bonds:

--$70,715,000 GO bonds, series 2016A;
--$117,550,000 GO refunding bonds, series 2016B.

The bonds are expected to sell via competitive bid on Oct. 20, 2016.

The Rating Outlook is Stable.

SECURITY
The bonds represent general obligations of the Commonwealth, with full faith and credit pledged.

KEY RATING DRIVERS

Analytical Conclusion
Virginia's 'AAA' Issuer Default Rating (IDR) reflects its solid fiscal resources, conservative approach to financial operations, and exceptional financial flexibility. The state's strong fundamental economic profile provides a stable revenue base and indicates solid growth prospects. Low long-term liability levels indicate the Commonwealth retains ample capacity.

Economic Resource Base
Virginia's economic profile remains strong with a diverse mix of industries and high wealth levels, and Fitch expects the Commonwealth to absorb the negative effects of federal contraction and maintain economic growth. Government and professional and business services are the leading sectors. Government employment has been flat to declining for the past several years, but professional and business services employment has grown rapidly since mid-2014 declines, driving overall gains in the Commonwealth's employment levels. Growth prospects are solid with above-average population growth and high education levels signaling a well-positioned workforce.

Revenue Framework: 'aa' factor assessment
Fitch expects that Virginia's revenues, primarily income and sales taxes, will continue to reflect the depth and breadth of the economy, but also its volatility. The Commonwealth has complete control over its revenues, with an unlimited legal ability to raise operating revenues as needed.

Expenditure Framework: 'aaa' factor assessment
The Commonwealth maintains ample expenditure flexibility with a low burden of carrying costs for liabilities and the broad expense-cutting ability common to most U.S. states. Also, as with most states, Medicaid remains a key expense driver, but one that Fitch expects to remain manageable.

Long-Term Liability Burden: 'aaa' factor assessment
Virginia's long-term liability burden is low and well-managed. Debt issuance is carefully monitored through both constitutional limitations and more stringent policy and institutional practices. Despite a budget-driven deferral of pension contributions that weakened the funded position, the Commonwealth's unfunded obligations remain below those of most states.

Operating Performance: 'aaa' factor assessment
The Commonwealth remains extremely well-positioned to deal with economic downturns, with exceptionally strong gap-closing capacity in the form of its control over revenues and spending and a demonstrated willingness to restore financial flexibility at times of recovery.

RATING SENSITIVITIES
SOLID FINANCIAL MANAGEMENT: The rating is sensitive to shifts in Virginia's fundamental credit characteristics including its history of timely action to address budgetary challenges, as demonstrated most recently in the response to the 2014 revenue shortfall.

CREDIT PROFILE

Current Developments
Economic and revenue performance underperformed in fiscal 2016 compared to earlier forecast expectations. Commonwealth fiscal 2016 general fund revenues increased modestly but fell 1.5% ($268.9 million) short of the forecast. Weakness in personal income tax (PIT) withholding and sales and use tax revenues accounted for nearly the entire shortfall - both sources increased but well below forecast levels. The Commonwealth attributed the performance to federal sequestration's continued dampening effect on Virginia's broad industry of federal contractors, and more rapid growth in lower-wage versus higher-wage jobs.

Unlike in other PIT-dependent states, nonwithholding revenues were not a driver of the revenue shortfall. After a fiscal 2014 revenue shortfall, Virginia implemented measures to limit the budget forecast's exposure to nonwithholding PIT revenues. Absent those measures, the revenue shortfall would have been nearly $200 million larger in fiscal 2016.

The weaker fiscal 2016 revenue collections triggered a reforecast and downward adjustment of revenue for the current fiscal 2017-2018 biennium. In August, the state estimated a 3.1% shortfall ($1.2 billion) versus the official revenue estimate used for the enacted biennial budget. The governor has already directed state agencies to develop spending reduction plans and the administration and legislative leadership have begun efforts to jointly develop budget changes.

Fitch anticipates the Commonwealth will address the new $1.2 billion biennial revenue gap in a structurally sound manner, largely weighted towards expenditure reductions. The enacted biennial budget funds substantial growth in operations, implying areas for possible cuts. Budget balancing could also include draws on the RSF - inclusive of a required deposit in the current year, the RSF balance will be $845.3 million at the end of fiscal 2017 (4.6% of revised revenues). The governor will propose a plan to address the fiscal 2017 gap within the next few weeks, with recommendations for fiscal 2018 to follow in December before the next legislative session. Within the budget appropriation act, the governor retains authority to withhold up to 15% of general fund agency appropriations to maintain fiscal balance.

For further information on the state, please see 'Fitch Rates Virginia Public Bldg Auth's 2016 Revs 'AA+'; Outlook Stable' dated Sept. 9, 2016, available at 'www.fitchratings.com'.

Date of Relevant Rating Committee: April 21, 2016

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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012836
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com