Fitch Affirms Hanover County, VA's IDR at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Hanover County, VA (the county) ratings at 'AAA':

--$120.2 million outstanding general obligation (GO) bonds;

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, backed by its full faith, credit, and unlimited taxing power.

KEY RATING DRIVERS

The 'AAA' IDR and GO ratings reflect the county's notable financial flexibility, lack of legal limitations on taxing its growing property base, and low debt levels. Strong revenue growth prospects reflect the county's ability to capture tax base increases attributable to likely economic development as well as the appreciation of existing properties. The county has managed its expenditure and long-term liability profiles well, as evidenced by moderate carrying costs and a low debt burden. Fitch expects that these factors, coupled with conservative financial management, would enable the county to maintain financial stability and solid reserves in a potential economic downturn.

Economic Resource Base

Hanover County's location just 12 miles north of the state capitol of Richmond (IDR 'AA+'/Outlook Stable) provides its residents with a deep, broad employment base. The county's population, estimated at 103,227 in 2015, has increased steadily since the 2000 census. The taxbase has surpassed pre-recession levels, and Fitch expects continued solid growth, reflective of ongoing commercial and residential expansion.

Revenue Framework: 'aaa' factor assessment

A location adjacent to the state's capital coupled with plans for continued economic development should facilitate strong revenue growth. The county has an unlimited legal ability to raise revenues.

Expenditure Framework: 'aa' factor assessment

Moderate carrying costs, ample control over staffing, wages, and benefits, and the capacity to reduce spending meaningfully underlie the county's solid expenditure flexibility.

Long-Term Liability Burden: 'aaa' factor assessment

Moderate intermediate-term debt plans, above-average amortization, and a minimal unfunded pension liability will enable the county to maintain its currently low long-term liability burden.

Operating Performance: 'aaa' factor assessment

Solid reserves, conservative financial management, and superior inherent budget flexibility underscore strong and resilient financial operations. Fitch believes that these factors, coupled with low revenue volatility, would allow the county to maintain a satisfactory reserve safety margin in a moderate economic downturn.

RATING SENSITIVITIES

STRONG MANAGEMENT PRACTICES: The IDR and GO rating are sensitive to shifts in the county's conservative financial management practices and maintenance of fundamental financial flexibility. The Stable Outlook indicates that Fitch believes this is unlikely to occur.

CREDIT PROFILE

A comprehensive plan that addresses schools, transportation, and infrastructure needs guides the economic development of a county that still retains its largely suburban/rural nature. Retail, healthcare, high-end manufacturing, and construction are among the more dominant economic sectors. Wealth levels and economic indicators compare favorably to national levels.

Revenue Framework

Property taxes comprise almost two-thirds of county revenues. Intergovernmental revenues and sales taxes, the next two largest sources, together equal slight more than one-quarter of total revenues.

General fund revenue has demonstrated strong growth over the past decade, at a rate slightly below national GDP but above inflation. Fitch expects long-term growth to trend in line with recent performance. The large amount of land available for development and an active economic development program enhance the county's ability to attract commercial concerns.

There is no legal limitation on the county's ability to increase its millage or tax levy.

Expenditure Framework

Education is the largest operational expenditure, equal to about 40% of fiscal 2015 general fund spending, followed by public safety at approximately 28%. In Virginia, the public school system is funded by a mix of state and local revenues. The Board of Supervisors determines the local contribution, based on a state-determined performance standard for the school system. The county typically funds in excess of the state's required local expenditure, augmenting the county's flexibility.

As with most local governments, spending growth will likely be near to slightly ahead of revenue growth as a result of moderate increase in the cost of services and a growing population in the region.

The county has the ability to reduce expenditures without compromising essential services. The county reports it could easily defer spending in excess of 5% annually if faced with an economic downturn, representing out-year budgeted costs for additional personnel, operating, and capital needs. Fitch believes that the county could, if required, implement additional spending reductions in excess of those outlined above without adversely affecting core services. Fixed carrying costs are moderate at around 12% of governmental spending, primarily driven by debt service. The county has broad discretion over the terms of employee wages and benefits, given the absence of collective bargaining.

Long-Term Liability Burden

Long-term liabilities, consisting primarily of direct debt, place a very low burden on the county, representing 4.4% of the personal income base. The county's $216 million capital improvements program includes $56 million of non-enterprise debt issuance, below the principal expected to roll off during the same period. Fitch anticipates that the county's solid income growth prospects and rapid amortization provide notable capacity within the 'aaa' assessment for this key rating factor.

The county participates in the statewide Virginia Retirement System (VRS), an agent multiple-employer defined benefit pension plan. The county's portion of the plan is well-funded at around 91%, using a 7% return on investment assumption. The net pension liability is minimal at $19.5 million, less than 0.5% of personal income. The county pays the full contractually required payment, which is based on an actuary's determined rate.

The school board is a component unit of the county and reports a net pension liability for teachers at $153 million, or an additional 2.9% of personal income, based on a 7% return on net assets.

The county provides an implicit rate subsidy for retirees' other post-employment benefits (OPEB) and the outstanding net liability is negligible as a percent of personal income.

Operating Performance

Healthy fund balances, low revenue volatility, and a high level of inherent budget flexibility create a strong capacity to maintain solid reserves, even if a moderate economic downturn were to result in revenue stress. Fitch believes the county has the ability to spend a good portion of its reserves in a downturn and still maintain a fund balance above the safety margin expected for its 'aaa' financial resilience assessment.

Historically, the county has maintained reserves well above its conservative fund balance policy, even following the Great Recession.

The county concluded fiscal 2015 with a $1.8 million operating surplus, equal to 0.9% of spending, resulting in an unrestricted general fund balance equal to an ample 24.7% of expenditures. Preliminary fiscal 2016 results indicate positive operations, as careful expenditure management resulted in positive variances to the budget.

The $233 million fiscal 2017 budget represented a 5% increase from the prior year, as an uptick in the taxbase allowed the county to leave residential property tax rates unchanged. The budget includes $10.3 million in fund balance appropriations.

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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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012934

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012934

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rachel Grossman
Analyst
+1-646-582-4967
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rachel Grossman
Analyst
+1-646-582-4967
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com