NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following general obligation (GO) bonds of Portsmouth, Virginia (the city):
--$21.3 million GO refunding bonds, series 2015A;
--$29 million GO refunding bonds, series 2015B (taxable).
The bonds are expected to sell on or about March 11, 2015. Proceeds will be used to refinance certain outstanding GO bonds for debt service savings.
In addition, Fitch affirms the following ratings:
--$578 million of GO bonds at 'AA'.
The Rating Outlook is Stable.
The GO bonds and notes are general obligations secured by the full faith and credit and unlimited taxing power of the city.
KEY RATING DRIVERS
MODERATELY-CONCENTRATED LOCAL ECONOMY: Maritime activities, including military research and medical care, continue to anchor the local economy. Economic indicators compare unfavorably to most national and Commonwealth averages.
HEALTHY FINANCIAL FLEXIBILITY: Significant expenditure reductions and conservative revenue forecasting have resulted in favorable financial operations. Liquidity is strong.
MODERATE DEBT BURDEN: The city's overall debt burden is high and amortization slow, in part due to the recent issuance of pension obligation bonds. Capital needs are modest so additional debt plans are limited.
OPEB CONCERNS REDUCED: OPEB costs will decline over the near term given the elimination of the benefit to employees and reduction to retiree payments.
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and ability to reduce long-term liabilities over time. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next review cycle.
Portsmouth is located in the Hampton Roads region of Virginia on the Chesapeake Bay.
LARGE NAVAL AND PORT PRESENCE
The city is home to significant naval operations. The three largest employers for the city are the Norfolk Naval Shipyard, the Naval Hospital, and the U.S. Fifth District Coast Guard Command, which in total employ over 16,500. A high 12% of the city's workforce is employed directly by the federal government. Fitch is not aware of major planned federal budget cuts that could adversely affect the city's naval operations.
Port operations are also important to the local economy. Facilities include the Portsmouth Marine Terminal (PMT) and the Virginia International Gateway (VIG). PMT officially re-opened for business in September 2014, after being closed for three years, during which time port activity was shifted to other port terminals. With new infrastructure improvements, the facility is expected to move over 100,000 containers through the terminal annually. VIG is the largest privately-owned container terminal in the United States. In July 2010, the Virginia Port Authority and VIG entered into a 20-year lease agreement under which the VPA is now operating VIG.
Maritime and naval activities have encouraged related industries, such as research and development initiatives like the Modeling, Analysis, Simulation and Technology Center (MAST) Center. An $80 million research and education park, MAST is a joint development with the city of Suffolk. A new $60 million campus for Tidewater Community College which is expected to improve educational attainment rates that currently lag the state and nation.
WEAK ECONOMIC INDICATORS
Economic indicators generally trend below state and national averages. Median household income is 72% of the state and 87% of the nation average, respectively. The city's unemployment rate continues to trend downward, with year-over-year improvement to 6.2% as of December 2014 from 6.7% a year prior. However, the unemployment rate remains above the state and national average but employment trends have remained positive over the past four years.
SOUND FINANCIAL FLEXIBILITY
Financial management is sound, incorporating conservative budgeting and fund balance guidelines. Following five consecutive operating surpluses, fiscal 2014 ended with a modest $1.5 million operating deficit. After transfers, which mostly included bond proceeds from the prior year, the year ended with a $25.3 million deficit. The unrestricted balance totals $68.8 million or 27.3% of adjusted spending. The city council's goal is to maintain an unassigned fund balance of at least 15% of operating revenues, which it has exceeded.
The 2015 budget is a 2.8% increase over the prior year and incorporates the use of $13 million in fund balance. The increase in the budget funds $6.5 million in one-time capital spending and establishes a $6.4 million debt service sinking fund to cover the increase in cost of debt service for the pension obligation bonds. Year-to-date operations are tracking close to budget. The city prepares multi-year financial forecast to identify and address future fiscal challenges which Fitch views as a positive.
The city relies mostly on property tax revenues (51%) for general fund operations. The city's tax rate and levy is not subject to statutory or charter limitation or cap, but it is high for the region. Additional revenues are generated from a 1% local sales tax as well as taxes on business and occupational licenses, cigarettes, and utilities.
MANAGEABLE PENSION COSTS DUE TO POBS
Following the issuance of POBs during fiscal 2013 the unfunded liability for the city's two closed pension plans, Portsmouth Supplemental Retirement System (PSRS) and the Portsmouth Fire and Police Retirement System (FPRS), has declined to an aggregate $83 million (approximately 1% of MV) from $247 million, and the funded ratio for both plans has increased to 74% (based on a 7% assumed return) from 30%. In addition to the two closed plans, the city participates in the state-wide Virginia Retirement System (VRS), an agent multi-employer defined benefit plan. The city's portion of the plan is funded at 80% reflecting the plan's assumed 7% investment return assumption. Pension costs during fiscal 2014 accounted for 5% of total governmental spending.
REDUCED OPEB BENEFITS
The city has restructured its OPEB plan. Effective January 2015, future employees must have 25 years of employment to qualify for benefits an increase from 10 years and effective April 2015, employees aged 65 and over will be eliminated for current retirees. Also, for employees eligible for benefits a health care savings account will be created. This change is expected to reduce the unfunded accrued liability to $43.5 million (0.5% of MV) from a notable $178 million (2% of MV). OPEB costs during fiscal 2014 accounted for 1.3% of total governmental spending.
HIGH DEBT BURDEN WITH POBs
The city's overall debt burden is high at $5,297 per capita and 5.6% of market value (MV). These metrics exclude self-supporting GOs issued on behalf of the city's utility systems. Future capital needs are manageable, which includes $41.7M of additional debt or an affordable 0.5% of MV. Debt servicing costs are manageable at 12.8% of 2014 total governmental spending. Carrying costs totaled 19% during fiscal 2014 which is on par with fiscal 2013 prior to the issuance of the POBs.
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, IHS Global Insight, National Association of Realtors, Virginia Employment Commission.
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