NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA+' rating to $92.1 million of Virginia Public School Authority's (VPSA) school financing bonds (1997 resolution).
The bonds are expected to price via competitive sale on Oct. 25, 2016.
The Rating Outlook is Stable.
VPSA school financing bonds are secured by general obligation (GO) bond payments from participating localities that are pledged by the authority to the bonds. A sum-sufficient appropriation for any shortfalls in debt service that is available from the Commonwealth of Virginia's literary and general funds enhances credit quality and provides the basis for the rating.
KEY RATING DRIVERS
The 'AA+' rating on the VPSA bonds, one notch below the Commonwealth's 'AAA' Long-Term Issuer Default Rating (IDR), is based on the availability of a 'sum sufficient' appropriation for debt service deficiencies from the Commonwealth's literary fund and, if necessary, the general fund.
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. 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.
IDR LINKAGE: The rating on the bonds is sensitive to changes in the Commonwealth's IDR, to which it is linked.
SOLID FINANCIAL MANAGEMENT: The Commonwealth's IDR 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.
The series 2016B bonds are being issued pursuant to the 1997 resolution, which includes a 'sum sufficient' appropriation from available moneys of Virginia's literary fund and, if those are not adequate, the Commonwealth's general fund. The appropriation, which the governor must request from the general assembly pursuant to statute, provides credit enhancement to the local government loan repayments that are the primary source of security. Additional strength derives from state law providing for the withholding of state payments to local governments in the event of a local loan payment default, along with Virginia's fundamental credit strengths and the state commitment to education.
Under the 1997 resolution, the Commonwealth uses VPSA bond proceeds to purchase GO bonds issued by Commonwealth localities for school capital projects. Local repayments of principal and interest on the locally issued GO bonds will be used to pay debt service on the VPSA school financing bonds. No local government has defaulted in VPSA's history, but in the event of a default, state law requires the intercept of state payments due to the local unit until the default is cured. Local payments are due approximately 15 days in advance of bond payments, allowing time for implementation of the intercept. Finally, if required, the sum-sufficient appropriation would be used.
Economic and revenue performance lagged the forecast in 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 recent experience in other PIT-dependent states, nonwithholding revenues were not a driver of the general fund 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 recently proposed a 2017 savings plan to address the combined fiscal 2016 and 2017 revenue shortfall of $861.4 million. The plan relies heavily on a $392.3 million draw from the Revenue Stabilization Fund (RSF), as well as spending reductions that include a $125.1 million pullback on planned employee pay increases and $73 million in agency savings. Draws on the RSF require legislative approval although the Commonwealth will also make a required $605.6 million deposit to the RSF in 2017 (triggered by robust revenue growth in prior years), leading to an expected net increase in the RSF balance at year end.
The governor will propose additional budget measures to address the forecast $632.7 million fiscal 2018 revenue shortfall 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: Apr. 21, 2016
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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