Fitch Affirms Purcellville, VA's IDR at 'AA'; Outlook to Positive

NEW YORK--()--Fitch Ratings has affirmed the following ratings of the town of Purcellville, Virginia (the town) at 'AA':

--Issuer Default Rating (IDR)

--$26.13 million general obligation (GO) refunding bonds, series 2013A;

--$6.54 million GO refunding bonds, series 2013B (federally taxable).

--$4.84 million GO public improvement and refunding bonds, series 2012A.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

The bonds are a GO of the town backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

The 'AA' on the IDR and GO reflects the town's strong and growing economic base and superior budget flexibility, supporting historically strong operating performance. The Positive Outlook is based on Fitch's expectation of continued improvement in the utility system's financial profile, reducing in the general government's financial exposure to potential subsidy of utility system debt service.

Economic Resource Base

The town of Purcellville is located in western Loudoun County, approximately 10 miles west of the town of Leesburg and 30 miles northwest of Washington Dulles International Airport. The town has an estimated 2015 population of 9,232. Population growth continues in the town, with residents up from 7,800 in the 2010 census and now almost three times the 2000 census population of 3,644. The town is only about three square miles and approaching full build out.

Revenue Framework: 'aaa' factor assessment

General Fund revenues have increased faster than national economic expansion over the previous decade, and Fitch expects this trend to continue. Town Council retains the independent legal ability to increase the property tax rate, which is the main revenue source, without limitation.

Expenditure Framework: 'aa' factor assessment

Fixed carrying costs are moderate at 17% of governmental spending and will trend slightly higher as debt service increases; debt service is the largest fixed cost of the town.

Long-Term Liability Burden: 'aa' factor assessment

The town's liability burden as a percentage of total person income is low at 8%. The town's personal income metric benefits from access to the region's strong economy.

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

UTILITY MANAGEMENT: The rating is sensitive to the town's ability to effectively manage the utility system, which is currently, but has not always been, self-supporting. Maintenance of positive utility debt service coverage beyond the completion of the Mayfair project would lessen the potential exposure to the town's overall financial profile, which would improve credit quality.

MAINTENANCE OF STRONG FINANCIAL PROFILE: The Positive Outlook assumes the town's continued strong financial flexibility, revenue framework and budget controls.

CREDIT PROFILE

The town enjoys impressive income metrics reflecting its highly skilled labor force. 51% of persons age 25+ hold a bachelor's degree, similar to the rest of Loudoun County and nearly double the national standard. The proximity to the vibrant employment markets of Northern Virginia furthers indication of the town's status as a desired location. The individual poverty rate is very low at 3.5%, compared to 15.5% nationally. The town is largely residential with small business owners dominating the local commercial segment.

Employment growth in Loudoun County has been strong since the recession, well ahead of the state and nation. The property tax base is on the rebound after declining about 19% from fiscals 2007-2010. Assessed value has increased 9.8% since then, including the 6.7% improvement for fiscal 2015 and further increase in fiscal 2016 that is estimated to be above the pre-recession assessed value peak for the first time. Tax base growth is likely to slow over the intermediate term, as full build-out is projected.

The town's mixed use Mayfair development is several years into construction and includes 257 residential units of single-family detached homes and townhouses. The development is expected to be complete in 2020.

Revenue Framework

The town's operating budget is funded by diverse sources of revenue including property taxes (33%), meals tax (17%), state aid (14%) and a mix of other taxes. The general fund also receives a $1.12 million annual transfer in from the town's water and sewer funds for shared administration expenses that comprise 10% of general fund revenues.

General fund revenues have grown at a rapid 5.9% annual compound rate over the previous decade with only modest tax rate adjustments. Fitch expects this trend to continue due to the current projects under construction and continued strong building permit numbers. While the town is becoming more mature the potential for commercial annexation and building redevelopment offset the potential for a near-term slow down.

There is no legal limit to the property tax rate or levy in Virginia.

Expenditure Framework

Public works is the largest general fund expenditure in the town at 31% of spending; slightly less spending is attributed to general government administration, followed by public safety.

Fitch expects the natural pace of spending growth to remain in line with or slightly ahead of revenue growth to accommodate a population that more than doubled since 2000 and is likely to continue to increase.

Fixed carrying costs for GO debt (not including the utility system) combined with the town's required pension payments and actual contribution for OPEB was an affordable 17% of governmental funds spending for fiscal 2015. Fitch believes expenditure flexibility would remain solid even including the full debt service expenditure for the utility system. The town has broad discretion over headcount and the terms of employee wages and benefits given the absence of collective bargaining. The annual paygo capital for fiscal 2015 was a little over 2% of spending, but in the previous years a much larger amount was used for one-time items.

Long-Term Liability Burden

The combined burden of the overall debt and the town's net pension liability is low at just 8% of personal income, but closer to 12% when including the GO debt of the utility system. The town reports no major infrastructure needs in the five-year capital program that totals $13.4 million for both general fund and utility projects, and no plans to issue additional long-term debt.

All full-time employees of the town participate in an agent multi-employer pension plan covered by the Virginia Retirement System (VRS). The plan's assets covered nearly the entire liability at year-end June 30, 2015. The outstanding net pension liability is less than 0.1% of the town's personal income.

The town provides post-employment benefits (OPEB) which it funds on a pay-go basis; the UAAL associated with the OPEB plan is a minimal $2.1 million.

Operating Performance

Fitch expects the town to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the town's formal policy of maintaining unassigned fund balance at the greater of 30% of general fund revenues or $3 million throughout the economic cycle - a level of financial cushion far higher than is sufficient for a 'aaa' financial resilience assessment considering the town's low revenue volatility and its superior budgetary flexibility. Management has adjusted property tax rates as necessary throughout the recession and recovery.

The town updates a five-year financial forecast on an annual basis. The forecast assumes an average annual rate of revenue growth of 3% and increases to the real estate tax rate. The plan projects manageable operating deficits that are not expected to pressure credit quality. The projections show unassigned fund balance remaining above the town's formal policy.

The town managed budgets through the recent recession by trimming expenditures as necessary, primarily by delaying paygo capital. The town avoided significantly reducing headcount and did not postpone funding liabilities.

Fiscal 2015 concluded with a surplus of $811 thousand adding to general fund balance that totals $5.6 million or 63% of general fund spending. Unaudited results for fiscal 2016 indicate a net general fund operating surplus (after transfers) of about 5% of spending. The town adopted a balanced budget for fiscal 2017 that does not increase the tax rate or appropriate existing reserves. The town's real property tax rate is above other incorporated towns in northern Virginia, which believes could ultimately provide a practical limit to revenue-raising. Future increases are not currently expected.

UTILITY INTERIM OUTLOOK IMPROVED; CHALLENGES REMAIN

A total of $41.6 million (over two-thirds) of the town's outstanding GO debt has been issued to finance expansion and regulatory requirements relating to the water and sewer system. Net revenues of the system excluding availability fees have covered only 80% of debt service on the utility portion of the town's GO bonds on average from fiscals 2013-2015. Including the availability fees associated with the Mayfair Agreement, the utility debt is fully self-supporting. The utility generated 1.5x all-in debt service coverage in fiscal 2015 with unrestricted cash and investments totaling $6.3 million or the equivalent of 560 days of operations. Unaudited fiscal 2016 results estimate similar debt service coverage.

The town raised water and sewer rates in four out of the last five years and forecasts continued increases as part of a plan to generate positive system cash flows to fully cover debt service and build reserves for an upcoming balloon payment coming due in fiscal 2021. The availability fees account for a high 44% of projected net revenue available for debt service and are a fixed amount annually through 2020 ($13 million in total) pursuant to the development agreement. The developer made its second full payment of $2.1 million in fiscal 2016. The forecast assumes moderate 3%-7% annual rate increases; the Fitch-estimated current monthly bill of $165 equates to a reasonable 1.6% of median household income (MHI), below Fitch's affordability metric of 2% of MHI.

The town forecasts paying the fiscal 2021 balloon payment through the partial use of their significant cash reserves, decreasing cash and investments to $14.8 million from $16.9 million in fiscal 2020. Annual debt service then declines to $3.9 million at which point management expects increased rates to cover debt service. Debt service remains level through 2030.

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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Contacts

Fitch Ratings
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
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
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com