Fitch Affirms Leesburg, VA's IDR and GOs at 'AAA'; Outlook Stable

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

--Issuer Default Rating (IDR);

--$137 million general obligation (GO) bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by the town's full faith and credit and unlimited ad valorem taxing ability.

KEY RATING DRIVERS

Leesburg's 'AAA' IDR reflects historically stable revenues with strong growth prospects and the legal ability to adjust the property tax rate. This revenue environment combined with solidly flexible expenditures and a very healthy level of fund balance provides exceptionally strong gap-closing capacity.

Economic Resource Base

The town of Leesburg is located in Loudoun County (rated 'AAA'/Stable) in northern Virginia, about 15 miles from Washington-Dulles Airport and 40 miles from the nation's capital. The estimated 2015 population of 51,209 has increased nearly 20% since the 2010 census.

Revenue Framework: 'aaa' factor assessment

General fund revenue has increased ahead of national GDP growth and Fitch expects continued solid growth. Revenue sources are diverse, with property taxes, the largest source of general fund revenue, representing just over one quarter of revenues. The revenue framework benefits from the lack of a legal property tax rate limit in Virginia and local control over other taxes and fees.

Expenditure Framework: 'aa' factor assessment

The town's fixed carrying costs are about 15% of governmental spending and, combined with the lack of other major mandated spending items and favorable workforce environment in Virginia, provide solid expenditure flexibility. Debt service costs are expected to increase significantly through fiscal 2023, though remain manageable.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability associated with debt and pension is low. Minimal new money debt is planned and the pension plan's assets offset over 85% of the total pension liability.

Operating Performance: 'aaa' factor assessment

The town maintains very healthy reserves relative to the level of historical revenue volatility. Fitch believes these reserves, in combination with the rapidly rebuilt financial flexibility subsequent to the most recent recession, highlight the town's financial resilience.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the town's strong financial profile. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The town is primarily a residential community located 40 miles from Washington D.C., with access to the nearby job markets of Loudoun and Fairfax counties as well as Washington D.C. It is the county seat of Loudoun County.

With a well-educated workforce and close proximity to vibrant labor markets, the town has maintained low unemployment rates and very high wealth indicators. The town's unemployment rate stayed at 5% or below on an annual basis throughout the economic downturn. Its strong economic profile is rounded out by very high educational attainment, with nearly half of the population attaining a bachelor's degree compared to about 21% in the rest of Virginia.

Revenue Framework

General fund revenues are derived from diverse sources that include property taxes (28%) and other local taxes like those for communications (14%), sales (11%) and meals (10%).

General fund revenues increased more rapidly than U.S. GDP over the decade ending in fiscal 2015, benefiting from the rebound in assessed value (AV) that is back to slightly below the pre-recession high and also from increased revenues from sales, meals and communications taxes. These benefit from the strong economic performance of the region. Fitch expects solid revenue growth through the next business cycle due to the region's economic outlook and as the town's housing market continues to recover.

There is no legal limit to the property tax rate or levy in Virginia and the town retains the ability to adjust other local taxes fees, such as the meals and business license fees, as necessary, providing the town with significant revenue-raising flexibility.

Expenditure Framework

The town of Leesburg's largest general fund expenditure is public safety, which consumes about a quarter of the budget. Fitch believes that the town has expenditure flexibility given the more discretionary nature of certain spending categories, lack of mandated spending requirements and workforce environment in the commonwealth that is favorable to management. The largest expenses after public safety are public works at 23%, including street and sidewalk maintenance, transportation and the operation of the town's airport, followed by parks and recreation at 17%.

The town's spending obligations are likely to increase at or slightly ahead of revenues in absence of policy action to control spending, given the expanding service needs of the growing resource base.

The town's fixed carrying costs for debt service, required pension payments and other post-employment benefits (OPEB) actual contributions are moderate at about 15% of fiscal 2015 governmental spending. Principal is retired at an above-average rate with nearly 70% paid down within 10 years. Minimal additional debt is planned in the capital program; however, debt service increases through fiscal 2023 due to the front-loaded structure of outstanding debt. Fitch expects the additional carrying costs will be closer to 20% of fiscal 2017 spending as debt service increases from $4.8 million in fiscal 2015 to $8.1 million in fiscal 2017. Management highlights the level of cash available in its debt service reserve fund (part of the assigned general fund balance) set aside for this purpose and projects draws on the debt service reserve fund of $1 million annually through fiscal 2023.

Long-Term Liability Burden

The long-term liability burden associated with debt and pensions is low at about 7% of personal income. Prudent capital planning, reasonable debt policies and above-average amortization are expected to keep the town's debt burden manageable. The town's current capital improvement plan for fiscal years 2017-2021 totals $106.5 million and includes only about $5 million in debt funding.

All full-time town employees participate in the Virginia Retirement System (VRS), an agent multiple-employer defined benefit pension plan administered by the commonwealth. The town's portion of the VRS net pension liability is about $11.3 million or less than 1% of personal income at the plan's 7% investment rate of return assumption. Total pension assets equal 86.4% of the total pension liability as of fiscal 2015.

The town's other-post employment benefits (OPEB) are similarly well-managed. The net liability is minimal as the town regularly contributes greater than the actuarially required contribution and keeps assets in an OPEB trust to offset the liability.

Operating Performance

Fitch believes the town's very healthy level of reserves provides exceptionally strong gap-closing capacity considering the stable revenue base and superior level of budgetary flexibility. Fiscal 2015 operations produced a surplus of about $2 million that increased reserves to $21.6 million or about 44% of general fund expenditures. Unaudited fiscal 2016 results indicate a similar surplus. The town has increased the unrestricted fund balance reserve policy to 20% of general fund expenditures and is committed to maintaining that level of reserves, which it did throughout the last downturn despite some use of fund balance.

Management highlights no significant capital needs or deferred spending item that currently pressure town finances and has instead developed multi-year plans focused on meeting several years of increased debt service that began in the current fiscal year. The town has assigned portions of recent general fund surpluses for increased debt service that averages $7 million to $8 million through fiscal 2023, up from $5.7 million in fiscal 2016. At fiscal 2016 year-end the town held $8.5 million in assigned fund balance and plans to use $1 million per year to meet the increased debt service schedule. Given the town's strong history of conservative budgeting and controlling spending growth by managing vacancies, Fitch expects the town to outperform its projections given anticipated economic growth.

The fiscal 2017 budget assumes a continued increase in the tax base from annual reassessment and an equalized tax rate that is an increase of 1.6% to $.186 per $100 AV. Management expects sales tax will come in ahead of budget and help fund a 5.5% increase over the fiscal 2016 budget that primarily funds the increase in debt service. The town's overall tax rate, inclusive of the county rate, is above average within the region.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015490

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015490

Endorsement Policy

https://www.fitchratings.com/regulatory

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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
Karen Krop
Senior Director
+1-212-908-0661
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
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com