Fitch Rates City of Richmond, VA's GO Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following general obligation (GO) bonds of the city of Richmond, Virginia (the city):

--$60.74 million GO public improvement bonds, series 2015B;

--$23 million GO public improvement bonds (taxable), series 2015C.

The bonds are scheduled for competitive sale on Nov. 12. Series B bond proceeds will be used to reimburse the city for costs related to school projects and general capital improvement projects. Series C bond proceeds will be used to reimburse the city for costs related to Stone Brewery Economic development project.

In addition, Fitch affirms the following ratings:

--$739.9 million in outstanding city GO bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are payable from the city's full faith and credit and unlimited tax pledge.

KEY RATING DRIVERS

HEALTHY FINANCIAL PROFILE: City management has implemented prudent financial practices and policies largely yielding positive operating results relative to budget.

SOUND REVENUE FLEXIBILITY: The city has not increased the property tax rate in over a decade, potentially retaining notable revenue flexibility. The city's tax rate is not subject to any statutory limitations.

ANCHORED ECONOMY: Higher education, health care, and government sectors underpin the city's economy supported by a well-educated labor force. Socioeconomic indicators trail regional and national levels, somewhat offset by the consistent employment growth resulting in improved unemployment rates.

FAVORABLE DEBT PROFILE: The city's debt burden is expected to remain moderate given affordable future planned debt financings.

WEAK PENSION POSITION: While the city continues to fully fund the annual required pension contribution, the plan's funded ratio remains weak.

RATING SENSITIVITIES

SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics, including the city's moderate debt profile, strong financial management practices, and solid economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The City of Richmond, which is the state capital, is situated on the Interstate 95 corridor at the midpoint of the eastern seaboard, 107 miles south of Washington, D.C., and 93 miles north of Norfolk. The estimated 2014 population was 217,853.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES

City finances are well-managed, adhering to conservative policy guidelines. Fiscal 2014 concluded with essentially break-even operating results of negative $680,000 and an unrestricted fund balance totaling $126.35 million or 19.6% of operating expenditures and transfers out. Preliminary results for fiscal 2015 show approximately a $24 million use of reserves as budgeted with $6.5 million (less than 1% of budgeted spending) being used for ongoing uses.

The committed portion of the unrestricted general fund balance includes the $10 million revenue stabilization and contingency reserve. The unassigned portion of the unrestricted general fund balance is in compliance with the city's 10% reserve policy.

The adopted fiscal 2016 budget is flat to fiscal 2015. The budget does not include any revenue enhancements and $3 million fund balance appropriation. The city generates the majority of its revenues from property taxes. There are no statutory or charter caps or restrictions on tax levy or tax rate growth and the city's tax rate is comparable to neighboring communities.

STABLE AND DIVERSE ECONOMIC BASE

Richmond serves as the core of a growing metropolitan area and is a regional center for employment and cultural amenities. The economy, which has traditionally been dominated by the government sector, has gained strength from education and health services, anchored by Virginia Commonwealth University (VCU) and eight other higher education institutions located in the city.

Economic development efforts are focused upon leveraging additional growth in the life-sciences sector, enhancing a solid financial services sector, and redeveloping select city neighborhoods. The city's employment base has increased annually between 2011 and 2014 with growth notably outpacing the state and national rates. As such, the unemployment rate, at 5.4% as of August 2015, continues to improve but remains above the state and national averages.

The city's historical trend of population decline appears to have reversed, with population increasing 7% since 2010. The city's poverty rate of 26% is 166% of the nation. Wealth indicators are weak with median household income at just 63% and 76% of the state and national average respectively.

MODERATE DEBT LEVELS

The city's overall debt burden is expected to remain moderate despite future planned debt financings. Overall debt equals $3,849 per capita and 3.8% of market value. Principal amortization is a rapid 63.1% within 10 years. The city remains in compliance with its debt burden policy of 4.5% and debt service to expenditure policy of 10%.

The city's capital improvement plan (CIP) for fiscal years 2016-2020 totals $200 million. The CIP is 75% debt funded. A portion of the debt will initially be funded through a bank line of credit program with planned long-term financing approximately every 15-18 months. The additional debt should not notably impact debt ratios. The plan includes about 25% of pay-go funding.

PENSION FUNDED LEVELS WEAK BUT IMPROVING

The funded ratio of the city's pension plan, which is closed to non-public safety employees, has historically been weak. The most recent actuarial valuation report shows that the funded ratio has improved to an adjusted 63% using Fitch's adjusted return on investment of 7%. The city also participates in the Virginia Retirement System. The city's portion of the plan is 81.7% funded. The city contributes 100% of the annual required contribution (ARC) to both plans which totaled $45.9 million or a low 5.5% of total governmental spending for fiscal 2014. The total adjusted unfunded actuarial accrued liability is approximately $338.5 million, or 1.7% of assessed value.

Other post-employment benefit (OPEB) costs consume a modest share of total governmental spending (less than 1%). During fiscal 2014, the city funded 109% of the ARC.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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=993217

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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
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com