Fitch Affirms Albemarle County (VA)'s IDR at 'AAA'; Upgrades EDA Revs to 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following rating for Albemarle County, VA (the county):

---Issuer Default Rating (IDR) at 'AAA'.

Fitch has also upgraded the following rating for the Albemarle County Economic Development Authority (EDA):

--$38.9 million public facility revenue bonds (Albemarle County project), series 2015B to 'AA+' from 'AA'.

In addition, Fitch has affirmed the following Albemarle County EDA ratings:

--$30.2 million public facility revenue bonds (Albemarle County project), series 2013 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The revenue bonds are limited obligations of the EDA, payable solely from payments to be made by the county to the authority. Payments are subject to annual appropriation by the county board. The series 2013 bonds are additionally backed by assets under a ground lease.

KEY RATING DRIVERS

The upgrade of the public facility revenue bonds series 2015B to 'AA+' reflects the application of Fitch's revised criteria for the U.S. state and local government credits, which was released on April 18, 2016. Along with the series 2013 public facility revenue bonds, which are affirmed at 'AA+', the bonds are rated one notch lower than the IDR and reflect the requirement for annual appropriations in support of lease payments. The series 2015 bonds do not carry any of the additional risk features that Fitch identifies for rating appropriation debt more than one notch below the IDR.

The 'AAA' IDR reflects the county's notable financial flexibility and low debt levels. Strong revenue growth prospects reflect the county's ability to capture tax base increases. 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

Albemarle County is located in north central Virginia, approximately 120 miles southwest of Washington D.C. and 75 miles northwest of Richmond. Anchored by the University of Virginia and the U.S. Department of Defense, the county has a well-educated labor force. Economic and labor metrics are strong, including high levels of wealth and consistently low unemployment. The resilient tax base has returned to solid growth levels subsequent to a mild dip attributable to the Great Recession.

Revenue Framework: 'aaa' factor assessment

Fitch expects revenues to continue rising at a pace above both the rates of inflation and U.S. GDP growth. 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 track revenue growth. Moderate carrying costs and broad flexibility to manage labor-related costs facilitate the county's ability to adjust spending.

Long-Term Liability Burden: 'aaa' factor assessment

Modest intermediate-term bonding requirements, 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

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

STRONG MANAGEMENT PRACTICES: The IDR is sensitive to shifts in the county's strong financial management practices and maintenance of fundamental financial flexibility. The Stable Outlook indicates that Fitch believes these shifts are unlikely to occur. The lease revenue bond ratings would parallel the IDR.

CREDIT PROFILE

Academia and the defense industry provide a solid employment base within the county. The University of Virginia, predominantly located within the county, enrolls over 20,000 students. The University Foundation's research park fosters advanced biotechnology, cyber security, and military support, leveraging the sizable defense industry presence that includes the Defense Intelligence Agency, the National Intelligence Center, and private sector contractors such as Northrup Grumman. The health care industry, insurance, manufacturing, and tourism represent other notable employment sectors. Nearby Charlottesville provides additional employment opportunities for the well-educated labor force.

Revenue Framework

Property taxes have historically comprised nearly two-thirds of county revenues. Intergovernmental revenues and sales taxes, the next two largest sources, together equal slightly more than one-quarter of total revenues.

General fund revenue has demonstrated strong growth over the past decade, above both national GDP and inflation. Fitch expects long-term growth to trend in line with recent performance, given positive housing growth and retail sales trends.

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

Expenditure Framework

The county's expenditures are primarily composed of public safety and education. These costs comprise slightly above two-thirds of total general fund expenditures. 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 board, and based on the state-determined performance standards for the school system.

Given the county's history of revenue growth that has exceeded GDP and inflation, positive housing trends over the past several years, coupled with an affordable debt plan, Fitch expects spending growth to be below or more or less aligned with revenues over time.

The county has solid flexibility to adjust major expenditure items. Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consume approximately 9% of governmental spending, which could increase somewhat in the intermediate term, based upon future issuance.

The county has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. A state mandate for a minimum funding level for education in theory limits the county's ability to reduce expenditures; however, the county currently funds education at around twice the state's required local expenditure.

Long-Term Liability Burden

Long-term liabilities, consisting primarily of direct debt, place a very low burden on the county, representing about 3% of the personal income base. An upcoming referendum will provide the opportunity for voters to authorize a $35 million bond resolution, part of the county's $190 million fiscal 2017 - 2021 capital improvements program. The county's rapid amortization rate of approximately 41% of principal retirement within five years and 74% of principal retirement within ten years implies that in five years they will retire an amount that exceeds the proposed issuance.

The county participates in the statewide Virginia Retirement System (VRS), an agent multiple-employer defined benefit pension plan. The county's portions of the plan, for county general employees and the school board's non-professional employees, have an asset to liability ratio of around 84%, using a 7% return on investment assumption. The joint net pension liability is minimal at just under $29 million, less than 1% of personal income. The county pays the full contractually required payment, which equals an actuarially determined contribution.

The school board is a component unit of the county and reports a net pension liability for teachers at $135 million, or an additional 2% of personal income, based on a 7% return on net assets.

The county provides limited other post-employment benefits (OPEB) and the outstanding net liability is minimal 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.

The county has consistently maintained positive operations, with recent fund balance draw-downs funding capital or other one-time projects. Reserve levels are well above the county's conservative fund balance policy.

The county concluded fiscal 2015 with a $3.2 million operating surplus, equal to 1.4% of spending, resulting in an unrestricted general fund balance equal to an ample 16.6% of expenditures. Total government-wide days cash on hand is weak at 63 days, attributable to the narrow liquidity of the school board. Preliminary fiscal 2016 results indicate positive operations, with both revenues and expenditures favorable to the budget.

The $257.5 million fiscal 2017 general fund budget represented a 3.3% increase from the prior year, incorporating anticipated property tax revenue increases of 3.9%. Sales tax is projected to rise by 5.8%, reflecting a new major retailer in the county. The budget includes a $1.3 million fund balance appropriation, consisting largely of funding for one-time projects.

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
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Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: 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
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com