Fitch Rates Virginia Public School Authority's $125MM 2008B School Financing Bonds 'AA+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to $125.1 million Virginia Public School Authority (VPSA) school financing bonds (1997 resolution), series 2008B, expected to sell via negotiation on Nov. 25, 2008. In addition, Fitch has affirmed the rating on $2.8 billion outstanding VPSA 1997 resolution bonds at 'AA+'. The Rating Outlook is Stable.

The bonds will be 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 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.

Bond proceeds will be used to purchase general obligation school bonds of thirteen Virginia localities. Local payments of principal and interest are used to pay bond debt service. No local government has defaulted in the 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 expected to be used.

The literary fund is a constitutional perpetual fund for school purposes that receives escheats, fines, forfeitures, unclaimed property, and unclaimed lottery prizes. The fund received $180.9 million from these sources in fiscal year (FY) 2008, up from $169.35 million in FY2007 and $167.53 million in fiscal 2006. The literary fund's cash and investment balance was $146.3 million on June 30, 2008, up from $119.5 million one year prior. Major literary fund appropriations for the teacher retirement fund, alleviating general fund pressures, resumed in FY2002 and continued through FY2008, when nearly $125 million was appropriated.

Virginia's 'AAA' rating reflects its substantial resources, conservative approach to financial operations which include periodic revenue forecast updates, and careful attention to the level of its debt obligations. While the real estate downturn has affected state revenues during the current and past fiscal year, the commonwealth continues to implement balancing measures while gradually drawing upon its reserve.

Financial pressures from the recession earlier in this decade led to operating deficits in fiscal years 2002 and 2003, but the commonwealth undertook broad counterbalancing actions in order to maintain fiscal stability. Financial trends dramatically improved late in fiscal 2004 and posted strong results in fiscal years 2004, 2005, and 2006, and the strong revenue performance allowed the commonwealth to fully fund the stabilization reserve at $1.06 billion at the close of fiscal 2006. Fiscal 2007 revenue performance fell short of original projections and revenue estimates for fiscal 2008 were revised downward on two occasions, leading to an expected shortfall of nearly $750 million resolved through expenditure reductions, operational savings measures, the use of unspent carry-over funds, and a draw of approximately $351 million from the commonwealth's revenue stabilization fund.

Preliminary fiscal 2008 year-end figures indicate reduced revenue expectations were met and a small surplus was achieved. Given continuing revenue weakness, revenue expectations for the current 2008-2010 biennium have been revised downward in early October 2008 by $2.5 billion, or 7.4% of projected general fund revenues. Measures to address the fiscal 2009 shortfall have been put forth and include an additional withdrawal from the revenue stabilization fund, which at the end of fiscal 2009 would hold approximately $614 million, representing nearly 4% of fiscal 2009 revenues. General fund revenue performance through October 2008 is tracking slightly ahead of recently revised expectations. Revenues have declined by 3.5% for the fiscal year to date, versus a projected decline of 4.0%. Sales tax performance through October 2008 remains below annual projections, while individual income tax growth of 4.1% for the year to date exceeds an expected 0.4% decline.

Virginia benefits from a diverse economic base and high wealth levels. Following three years of little or no employment growth in 2001-2003, job growth of 2.5% in 2004 and 2.3% in 2005 exceeded national levels. Employment growth continued in 2006, though the commonwealth's growth rate of 1.7% was slightly below the 1.8% growth recorded nationally. Strong employment gains in recent years moderated in 2007 to 0.9%, slightly below the national growth rate; September 2008 employment was up 0.5% from the prior year, compared with a national loss of 0.4% over the same period. State unemployment, at 3% for 2007, increased to 4.3% in September 2008. Personal income growth for 2007 was 4.6%, short of national growth of 6%. At $41,561, personal income per capita equaled 107% of the U.S. average in 2007, ranking eighth among the states.

The commonwealth's debt ratios are in the lower moderate range and have grown over the past fiscal year. As of June 30, 2008, net tax-supported debt was $8 billion, equal to $1,033 per capita and 2.5% of 2007 personal income. GO debt now constitutes approximately 19% of net tax supported debt, with the remainder principally represented by various appropriation credits. Capital needs for higher education and transportation improvements remain large.

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