Fitch Upgrades the City of Suffolk, VA's GO rating to 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following general obligation (GO) bonds for Suffolk, Virginia (the city):

--Approximately $42.58 million GO and refunding bonds series 2015.

The proceeds of the 2015 bonds will be used to finance various general government as well as school capital projects. Proceeds will also refund $15.5 million of outstanding GO debt for debt service savings. The bonds will be sold competitively the week of July 6th.

In addition, Fitch upgrades the following ratings:

--$252.5 million in city GO Bonds to 'AAA' from 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city, payable from an unlimited ad valorem tax pledge.

KEY RATING DRIVERS

STRONG FINANCES DRIVE RATING UPGRADE: The rating upgrade reflects the city's strong financial position, supported by prudent budgeting and strong institutionalized policies. Reserves are robust and revenue raising capacity is strong.

AFFORDABLE DEBT; LONG TERM LIABILITIES: Debt levels are moderately low and amortization is above average. The city's capital program is expected to be largely debt funded, but affordable. The city's share of retiree pension and OPEB obligations are low.

GROWING; DIVERSIFYING ECONOMY: The city's local economy continues to experience healthy population growth, and steady capital investment by major employers and taxpayers supported by a highly educated workforce.

RATING SENSITIVITIES

ONGOING ECONOMIC AND FISCAL GROWTH: The rating upgrade reflects Fitch's expectation that the city will maintain strong financial performance, and that positive economic momentum will be reflected in near-term growth in AV.

CREDIT PROFILE

Located in the western part of the Hampton Roads region of southeastern Virginia, Suffolk is the largest city by area in the state and one of the fastest growing. Population, at 86,806 in 2014, increased 33% between 2000 and 2010 and is projected by the Virginia Employment Commission to increase 17% by 2020.

TREND OF POSITIVE OPERATIONS & PRUDENT FUND BALANCE POLICY

The city ended fiscal 2014 with the sixth operating surplus in seven years. Unrestricted general fund reserves improved to $56.7 million or an ample 31.9% of general fund spending. The city's fund balance policy requires an unassigned general fund balance of 12% of all budgeted governmental funds expenditures, including expenditures in the school operating and school food service funds. General fund balances continue to exceed the policy.

MODEST SURPLUS OPERATIONS ANTICIPATED FOR FISCAL 2015

The fiscal 2015 general fund expenditure budget was just a 0.2% over the FY 2014 adopted budget. Year-to-date operating results are positive relative to budget. Management is projecting an $850,000 operating surplus.

The adopted fiscal 2016 expenditure budget is approximately a 4% increase over the adopted 2015 budget. The budget includes a four cent property tax rate increase to provide additional school funding. The city's tax rate is regionally competitive and not subject to any statutory caps on the rate or levy. Such flexibility is a key measure of financial flexibility given the importance of property taxes to general fund revenues at 61% of the total.

The city's five-year forecast shows annual operating deficits. However, the underlying assumptions are conservative and the city's does maintain the flexibility to adjust spending and increase taxes to maintain balance. Based on the city's historical performance, financial operations are expected to remain solid.

EXPANDING ECONOMY WITHIN HAMPTON ROADS REGION

The city's economic and demographic characteristics continue to improve, primarily due to its available land, close proximity to job markets in the Hampton roads region and regionally competitive tax burden. Government, specifically military modeling and simulation, remains an economic driver, although diversification continues, especially in the warehouse and distribution sectors. Federal government accounts for about 15% of the employment base and contractors provide additional employment that could potentially be impacted by federal spending cuts. The city's larger employers and taxpayers continue to invest providing stability to the local economy.

The city's unemployment rate has continued to decline from a peak of 7.6% in 2010 to 5.5% as of March 2015. Per capita money and median household income are both above the national average.

The city's tax base has remained essentially flat over the past five years with modest fluctuations. Fiscal 2015 assessed value shows growth of 2.2% reflecting an improving housing market. Management expects similar growth going forward.

WELL-MANAGED LONG-TERM OBLIGATIONS

Debt levels are moderate and projected to remain stable and within the internal guidelines of the city. Debt service costs are manageable and the city's is in compliance with its 10% of spending policy. The outstanding debt burden is on the low side at 3% of market value (and well below the 4% city policy). Debt amortization is above average at 66% retired in 10 years is average.

The 2016 - 2020 capital improvement plan totals $172.5 million. Transportation and education projects account for 36% and 33% respectively. Virginia Department of Transportation is expected to provide approximately half of the funding for the transportation projects included in the CIP. The majority of the total plan's funding (64%) will be with debt. Fitch expects the debt burden to modestly increase. The city has a policy of budgeting 3% of expenditures for pay-go capital needs, which equates to 9% of the CIP.

The city provides pension benefits via the state-wide Virginia Retirement System (VRS), an agent multi-employer defined benefit plan. The city's portion of the plan is funded at 79% reflecting the plan's assumed 7% investment return assumption. The fiscal 2014 $10.5 million ARC equaled a modest 4.25% of total governmental spending.

The city prudently funded 83% of its OPEB ARC in fiscal 2014, which accounted for a low 1% of total governmental spending. The unfunded actuarially accrued liability ($14.3 million) represents less than 1% of market value. As of the last actuarial valuation (7/1/2012) the plan was 50% funded, which is quite strong for an OPEB plan.

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.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986590

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986590

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan, +1-212-908-0538
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan, +1-212-908-0538
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com