NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following bonds issued by Colonial Heights, VA (the city):
--$3.7 million general obligation (GO) public improvement bonds, series 2015;
--$8.2 million GO refunding bonds, series 2015.
The bonds are scheduled to sell via competitive sale on Jan. 21. Proceeds will be used to refund certain bonds and to finance storm water drainage and utility improvements.
In addition, Fitch has affirmed the following GO bond ratings for Colonial Heights, VA:
--$34 million GOs, series 2004, series 2007, series 2010 and series 2012, at 'AA'.
The Rating Outlook is Stable.
The bonds are payable from a general obligation pledge of the city, to which the full faith and credit and unlimited taxing power of the city are irrevocably pledged.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The city's generally conservative fiscal management practices help offset potential vulnerability from economically sensitive revenues.
REGIONAL RETAIL CENTER: The economy's large retail sector benefits from proximity to highways, the state capital and the U.S. army installation, Fort Lee.
MANAGEABLE DEBT LEVELS: Debt levels are moderate and repayment is rapid. The city's carrying costs - debt service, pension and other post-employment benefit (OPEB) contributions - place only a moderate burden on the governmental budget.
AVERAGE ECONOMIC METRICS: Resident income levels are average and the poverty rate is low. Access to a diverse regional job market offsets risk associated with the city's more limited employment base, and contributes to the favorable unemployment rate.
CONSERVATIVE BUDGETING: Failure to conservatively budget economically sensitive revenues could weaken credit strength.
WEAK ENTERPRISE FUND OPERATIONS: Increased reliance on the general fund for liquidity would also be a credit negative. The Stable Outlook reflects Fitch's expectation that the tenured management will maintain a favorable financial profile.
The city is located in central Virginia, within the Richmond metropolitan area. The 2013 population is 17,634 and is relatively stable, with 4.4% total census growth since 2000.
HISTORY OF FAVORABLE GENERAL FUND POSITION
Colonial Heights has a long history of financial stability despite an above average reliance on economically sensitive revenues. The risk associated with economically sensitive revenues is mitigated by adequate reserves, management's demonstrated commitment to the goal of maintaining unassigned fund balance levels at 12% of expenditures, and monthly monitoring of revenues derived from retail sales and meal and lodging activity. Expenditure reductions throughout the economic downturn were minimal.
The city's revenue base is diverse with the dominant sources property, sales taxes, and meal and lodging taxes, which represent 41%, 15% and 13% of fiscal 2014 revenues, respectively. Property tax rates are not limited by state law or city charter, therefore providing a flexible revenue stream for city management. Intergovernmental revenue, 13% of revenues, is largely for law enforcement and street maintenance. Dominant expenditure needs are for public safety (21%) and education (37%).
STABLE FISCAL 2013 OPERATIONS
General fund results for fiscal 2013 were essentially balanced, aided by a modest transfer to the general fund from incorporating the solid waste fund into general fund operations. Taxes were raised to fund the series 2012 bonds issued for a new courthouse: the real property millage rate was increased from 11 to 11.4 mills per $1,000 of assessed valuation and the meal tax was increased from 5% to 6% (an increase partially felt in fiscal 2012). Excess funds, after payment of debt service, from these additional revenues will be shared with the schools.
MODERATE RESERVE USE IN 2014
The original fiscal 2014 general fund budget included a minimal appropriation of reserves for one time capital projects. Operations closed with a manageable $683,000 operating deficit, larger than budget, but a still modest 1.3% of spending. General fund revenues fell short of budget by almost $1.1 million, with the food and lodging tax the most significant source of the shortfall. The 2013 opening of a lodging facility at Fort Lee impacted lodging stays within the city as well as general cutbacks in spending and travel by the Army dampened lodging tax collections.
The fiscal 2014 year-end $9.3 million general fund unrestricted fund balance is a healthy 17.4% of operating expenditures and transfers out (or spending). The general fund cash balance is 3.9x total liabilities (adjusted for deferred revenue) and an adequate 11% of spending.
Total actual spending for the year approximates the original budget and is well under the amended budget. Employee benefits and incarceration spending was moderately over budget. Mid-year emergency bridge repairs necessitated a $549 thousand transfer from the capital projects fund.
The water and sewer funds year end unrestricted cash position is weak, necessitating increased reliance on the general fund for liquidity. The city operates distribution/collection systems, purchasing water from the Appomattox Regional Water Authority and sewerage treatment provided by the South Central Sewer Authority. Sewer rates were raised 2.5% (effective January 2014) and in fiscal 2015 a new rate structure was implemented to improve the fund's position.
The city makes annual transfers to the school board, a component unit in the city's audit. The school operating fund closed fiscal 2014 with an unrestricted balance of $3 million, which represents 15.7% of the city's net transfer or 8.6% of total school spending. Under an agreement with the schools, shortfalls in city tax collections are to be shared with the school board.
FAVORABLE OUTLOOK FOR FISCAL 2015 BUDGET
The fiscal 2015 general fund budget of $52.9 million, is a 0.4% increase over the prior year. The budget includes a full year of the 2% cost of living adjustment implemented in January 2014 and no increase in health insurance costs. The budget is essentially balanced with no real property tax rate increase. Year to date collections of sales, food and lodging taxes show 4.9% growth, in excess of the budgeted growth rates. The budget includes small staffing increases at the Sherriff's Office related to the opening of the new courthouse in late 2013 as well as the implementation of the Affordable Care Act. Capital outlay spending in the general fund is budgeted at $1.23 million. With economically sensitive revenues tracking favorably to budget, the city anticipates a small increase in fund balance.
An agreement is in place for the sale of the old courthouse property to Kroger's at a price of $2.6 million plus other in-kind commitments. The closing has been delayed and is now expected for March 2015. The funds are expected to be used for capital projects.
ECONOMIC CONCENTRATION IN RETAIL SECTOR
Colonial Heights serves as a regional shopping destination due to the presence of Southpark Mall, which with peripheral development contains more than two million square feet of commercial retail space. The city's strategic location near interstates 85 and 95 enables the retail trade to draw from beyond local residential communities. Southpark Mall is at near full occupancy, according to city management. The city's retail sector also draws from nearby Fort Lee which benefitted under 2006 base realignment. The base is a Sustainment Center of Excellence (CoE), one of the army's eight CoEs charged with military training. The base is on the list for possible negative impact in the 2020 sequestration, although no near term impacts are expected.
Economic indicators for Colonial Heights are average despite the concentration in retail trade. Income levels approximate the national average, and the 2013 poverty rate is a low 9.3%. Unemployment in October 2014 was 5.0%, somewhat favorable to the national rate of 5.5%. Growth in both employment and the labor force outpaced the national rates for the year ended October 2014.
There is some concentration among the city's top taxpayers. Southpark Mall pays 4.6% of the city's property taxes, and the top 10 taxpayers account for 14.4% of taxable values. Assessed values have experienced moderate losses, with fiscal 2012 and fiscal 2014 declines of 3.7% and 1.5%, respectively. Conversions of closed auto dealerships to medical office space is expected to provide some taxbase growth in fiscal 2015. Taxable value per capita is a favorable $93,000.
LOW LONG-TERM LIABILITIES
The city's overall debt burden is low at $2,138 per capita and 2.3% of market value. Debt amortization is rapid at 62% retired in 10 years. The city typically annually funds over $1 million in capital outlay needs on a pay-go basis thereby moderating borrowing needs. The city has no near term borrowing plans. Upgrades to the 911 communication system may entail borrowing of as much as $7 million, possibly in fiscal 2017. Given the city's rapid debt retirement, Fitch expects debt metrics will remain favorable.
Overall carrying costs for the city are low, with debt service, pension contributions and OPEB contributions, consuming a moderate 10.6% of fiscal 2014 government spending.
All full-time salaried permanent employees of the city participate in the state-administered Virginia Retirement System (VRS), a multi-employer, defined benefit pension plan. The city's portion of the plan and the school board's portion are funded at 70% and 87%, respectively per the last actuarial study as of June 30, 2013. The city offers a single-employer defined benefit retiree health insurance plan funded on a pay-as-you-go basis. The city and school board's unfunded OPEB liability was $2.9 million and $7.9 million, respectively.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria