Fitch Affirms Purcellville, VA's Rfdg GOs at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the rating of 'AA' on the following general obligation (GO) bonds of the town of Purcellville, Virginia (the town):

--$26.6 million GO refunding bonds, series 2013A;

--$6.54 million GO refunding bonds, series 2013B (federally taxable);

--$4.84 million GO public improvement and refunding bonds, series 2012A.

The Rating Outlook is Stable.

SECURITY

The bonds are a GO of the town secured by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: General fund reserves and liquidity are strong and have been for an extended period. Operations have generally been stable. Revenues are diverse and provide good flexibility to management.

STRONG SOCIO-ECONOMIC METRICS: Town income levels are very high reflecting the highly educated nature of the labor force and proximity to vibrant labor markets in the northern Virginia area.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are moderate and the town has limited capital needs. The bulk of outstanding GO bonds have been issued for utility improvements; however, utility self-support has been uneven in recent past and is currently reliant on the receipt of availability fees (connection charges) predominantly paid by a single developer.

RATING SENSITIVITIES

UTILITY MANAGEMENT: The rating is sensitive to the town's ability to effectively manage the utility system, which is currently, but has not always been self-supporting. Weakening of the utility system could exert negative pressure on the rating. Conversely, maintenance of positive utility debt service coverage would lessen the potential exposure to the town's overall financial profile, which could improve credit quality.

CREDIT PROFILE

Purcellville is located in western Loudoun County adjacent to State Route 7, approximately 10 miles west of the town of Leesburg and 30 miles northwest of Washington Dulles International Airport. The city encompasses approximately 3.2 square miles and has an estimated 2013 population of 8,606.

VERY STRONG WEALTH AND EMPLOYMENT METRICS

Resident per capita personal income is 15% above the Virginia and 38% above the U.S. averages. Individual poverty rates are very low at 3.7% compared to 11.3% across Virginia. Market value per capita is strong at $145,000.

The town's impressive income metrics reflect its highly skilled labor force, with 51% of persons age 25+ holding a bachelor's degree (or 176% of the national standard), and proximity to the vibrant employment markets of northern Virginia. The town is largely residential with small business owners dominating the local commercial segment. Purcellville's largest employers include the county school system (553), Blue Ridge Veterinary Assoc. (125), Harris Teeter (125), Home School Legal Defense (112), and Veolia Transportation Services (100).

Loudoun County's unemployment rate was a low 4.0% in May 2015 compared to the Virginia and U.S. rates of 5.0% and 5.5%, respectively. The county's labor force averaged 3% annual growth over the last decade, which was slightly faster than the reported employment growth. Purcellville's population has more than doubled since the year 2000 but will likely taper off in the intermediate term given constraints on its geographic boundaries.

The city's property tax base is on the rebound after declining 18.5% from fiscals 2007-2010. Assessed value has increased 9.8% since then, including a 3.3% improvement for fiscal 2014. Tax base growth is likely to slow over the intermediate term, as full build-out is projected at no more than 9,000 residents. Importantly, the town recently approved a mixed use project called the Mayfair development which includes 257 residential units of single-family detached homes and townhouses. The Mayfair development is currently under construction and expected to be complete in six to seven years, at which point in time the town estimates additional recurring revenue to the general fund in the amount of $515 thousand.

SOLID GENERAL FUND POSITION BACKED BY HEALTHY RESERVES

The town's operating budget is funded by a diverse source of general fund revenue including property taxes (33%), meals tax (17%), state aid (14%), sales tax (11%), and business licenses (8%). With the exception of sales tax and state aid the town generally has the ability to control its revenues by setting tax rates and fees without restriction. The town's real property tax rate is above other incorporated towns in northern Virginia. The town's past willingness to increase revenue as part of an effort to maintain a sound fiscal position is reflected in the 'AA' rating.

Reserves remain strong offering a cushion against unanticipated budgetary pressures. The fiscal 2014 unrestricted general fund balance totaled $4.9 million or 52.1% of spending adjusted to exclude bond related activity. The town remains compliant with a fairly conservative reserve policy requiring an unassigned general fund balance equal to $3 million or 30% of total general fund revenues, whichever is greater.

Fiscal 2014 concluded with a relatively minor $420 thousand use of unrestricted general fund balance (or 2.5% of general fund spending). Unaudited results for fiscal 2015 indicate a net general fund operating surplus (after transfers) of a little under $1 million. The town adopted a balanced budget for fiscal 2016 that increases the real estate tax rate by $0.01 (expected to generate $230 thousand) and does not appropriate existing reserves.

The city updates a five-year financial plan on an annual basis. The forecast assumes a fairly reasonable average annual rate of revenue growth of 2.6% without further increases to the tax rate. The plan projects manageable operating deficits ranging from $29 thousand to $470 thousand are not expected to pressure credit quality.

UTILITY INTERIM OUTLOOK IMPROVED; CHALLENGES REMAIN

A total of $41.9 million (over two-thirds) of the town's outstanding GO debt has been issued to finance expansion and regulatory requirements relating to the water and sewer system. Net revenues of the system have covered debt service on the utility portion of the town's GO bonds by only 0.7x, on average, from fiscals 2010-2013, with cash flow deficits averaging about $1 million per year. Utility liquidity remains strong, with unrestricted cash and investments totaling $4.5 million or the equivalent of 637 days cash on hand (DCOH).

In January 2014, the town adopted a 7% and 20% increase in water and sewer rates, respectively, as part of a plan to generate positive system cash flows. In addition, fiscal 2014 annual debt service charges declined by $1.3 million or 36% following the fiscal 2013 bond restructuring. As a result, the utility generated 1.6x coverage of debt service in fiscal 2014.

The utility's five-year forecast shows debt service coverage in the range of 1.4x-1.9x through fiscal 2019. Coverage subsequently declines to 0.7x by fiscal 2021 as debt service increases by nearly $2 million to $4.8 million. The town has discussed the possibility of another debt restructuring to alleviate pressure from the 2021 spike in debt service. Absent the potential refunding, the forecast shows the use of a portion of the utility system's significant reserves, decreasing cash and investments to $8.7 million from $10.3 million in fiscal 2020. Annual debt service then declines back down to $3.9 million and remains level through 2030.

Furthermore, the forecast assumes the full collection of one-time availability fees which account for a high 44% of projected net revenue available for debt service. The forecasted availability fees are largely related to the previously mentioned Mayfair development. The fees are a fixed amount annually through 2020 ($13 million in total) pursuant to a development agreement. The developer made payments of $1.25 million in fiscal 2015.

The forecast assumes moderate 3%-5% annual rate increases; the Fitch-estimated current monthly bill of $165 equates to a reasonable 1.6% of median household income (MHI), below Fitch's affordability metric of 2% of MHI.

MODERATE LONG-TERM LIABILITY EXPOSURE

Debt levels, including the full amount of outstanding utility related debt, are high at $7,041 per capita, and more moderate at 4.9% of market value, reflecting the strength of the tax base. The town reports no major infrastructure needs within a five-year capital program totaling $3.5 million, and no plans to issue additional long-term new money debt.

The town participates in the Virginia Retirement System (VRS), an agent and cost sharing plan administered by the commonwealth. The town portion of VRS has a reported funded ratio of 86% and assumes a conservative 7% investment rate of return. The unfunded actuarial accrued liability (UAAL) of $1.4 million is a low 0.13% of the town's market value. The town does administer a single-employer plan for other post-employment benefits (OPEB) which it funds on a pay-go basis; the UAAL associated with the OPEB plan is only $1.7 million.

The total carrying costs for GO debt (not including the utility system) combined with the town's annual required contribution for pension and actual contribution for OPEB was an affordable 14.4% of governmental funds spending.

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989858

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Contacts

Fitch Ratings
Primary Analyst:
Parker Montgomery, +1-212-908-0356
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Parker Montgomery, +1-212-908-0356
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Arlene Bohner, +1-212-908-0554
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com