Fitch Upgrades Fauquier County, VA's IDR and GO Ratings to 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following Fauquier County, Virginia ratings to 'AAA' from 'AA+':

--Issuer Default Rating (IDR);

--$12.99 million general obligation (GO) school refunding bonds series 2012.

The upgrade reflects the application of Fitch's revised 'U.S. Tax-Supported Rating Criteria', which was released on April 18, 2016.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county, for which its full faith and credit are irrevocably pledged.

KEY RATING DRIVERS

The 'AAA' IDR and GO rating reflects the county's longstanding fiscal discipline and strength as seen in the conservative budgeting, prudent fund balance policy, cash-funding of capital needs and ample revenue raising capacity that support Fitch's expectation for resilient operations going forward. Long-term liabilities are expected to remain modest as a percent of the county's high personal income given prudent debt planning and nearly fully funded pension plans.

Economic Resource Base

Fauquier County is located 40 miles southwest of Washington, D.C., and is largely rural and agrarian in nature. Development activity is centered in the county's nine service districts and three incorporated towns, reflecting the county's stated intention to retain its rural character. The county benefits from its proximity to employment opportunities in the thriving Northern Virginia job market contributing to strong economic indicators including high wealth levels and low unemployment.

Revenue Framework: 'aaa' factor assessment

Revenue growth prospects are strong based on the county's ability to capture tax base growth and expected continued economic growth. Revenue raising flexibility is strong given the county's unlimited independent legal ability to raise taxes.

Expenditure Framework: 'aa' factor assessment

Flexibility of main expenditure items is solid and benefits from relatively low fixed carrying costs and broad legal controls over personnel and wages. A majority of the budget is for education spending.

Long-Term Liability Burden: 'aaa' factor assessment

Moderate intermediate-term debt plans and rapid existing debt amortization will allow the county to maintain the current low debt burden. Long-term obligations related to pension and retiree health benefits are low and do not pressure the credit profile.

Operating Performance: 'aaa' factor assessment

The county's healthy fund balance provides considerable flexibility to manage through a downturn. Conservative budgeting and strong management through the current economic recovery provide additional strength to the operating profile.

RATING SENSITIVITIES

Maintenance of Strong Financial Flexibility: The 'AAA' rating assumes the county maintains its strong financial position due to budgetary flexibility and solid reserves relative to revenue volatility. Material growth in the long-term liability burden could pressure the rating.

CREDIT PROFILE

The county's well-educated workforce and proximity to vibrant labor markets contributes to low unemployment rates and high wealth indicators. Roughly 82% of residents commute outside of the county for employment, primarily to Fairfax, Prince William, and Loudoun counties. As of May 2016, the county's low unemployment rate of 3.1% was well below that of the state at 3.6% and nation at 5.1%. Personal income is approximately 20% and 30% higher than that of the state and nation, respectively. Poverty rates are extremely low at 7.4%.

The bedroom community's access to strong employment markets translates into relatively high average home prices of $336,000 according to Zillow Group, which have shown healthy recovery from the trough in 2009, though remain below pre-recession peak values.

Recent local economic development announcements include a $200 million data center expansion that will create 51 jobs near Warrenton. The private investment is the largest in Fauquier County history and is expected to be complete in 2018 with new tax revenue to begin in fiscal 2019 after three years of significant tax breaks. Otherwise, the majority of county businesses are small in nature with 91% having fewer than 20 employees.

Revenue Framework

County operations are funded primarily through property taxes, which make up 70% of general fund revenues. Property is revalued every four years. Similar to much of Northern Virginia, the first revaluation after the recession in fiscal 2010 was down a significant 20% after very strong gains leading up to that point. Assessed values are currently about 10% below the previous peak, but the county has raised property tax rates to offset the decline. Intergovernmental revenues are the next most significant component of revenue at 18% of the total.

General fund revenue has seen strong growth over the last decade at a rate faster than national GDP and inflation. Fitch expects long-term growth to trend in line with recent performance due to the access to an expanding regional economy with incomes that are improving ahead of the national pace and large amount of recent private investment.

There is no limit to rate or levy to the property tax in Virginia and the county has made policy adjustments to tax rates as needed in the past.

Expenditure Framework

The county spends slightly over half the general fund budget on education, followed by public safety at 16%. The public school system in Virginia is funded by a mix of state and local revenues. The amount of local contributions is determined by the county council, and based on the state determined performance standards for the school system. The county typically funds in excess of the state's required local expenditure, which adds to the county's expenditure flexibility.

As with most local governments, spending growth will likely be near to slightly ahead of revenue growth as a result of moderate increases in the cost of services and a growing population in the region.

The county maintains solid flexibility in their main expenditures; primarily in non-mandated services and paygo capital that the county uses to supplement its five-year capital improvement plan (CIP; the county spent $2 million or 1.3% of general fund spending for paygo spending in fiscal 2015). The county has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. Fixed carrying costs are moderate at 10% of governmental fund spending, primarily driven by debt service.

Long-Term Liability Burden

The county's overall long-term liability burden is modest, with debt, including some overlapping debt for partner projects like the regional jail, equaling a low 3.3% of personal income. Direct debt levels are expected to remain fairly low with modest debt issuance anticipated over the next few years offset by rapid amortization. The fiscal 2017-2021 CIP totals $86 million (about 2% of personal income), with the majority of projects focused in four categories: schools, public safety, parks and recreation, and library facilities. Cash funding is slated for $12.3 million over the course of the plan, consistent with the county's history of solid paygo capital financing and bond financing less than the CIP anticipates.

All full-time, salaried, permanent employees of the county participate in the Virginia Retirement System (VRS), an agent multiple-employer defined benefit pension plan administered by the Commonwealth. The county's portion of the plan is well-funded at 92.3% as of June 30, 2014 using a 7% return on investment assumption and the net pension liability is minimal at $7.4 million or less than 2% of personal income. The county pays the full contractually required payment, which is based on an actuary's determined rate.

The county provides an implicit rate subsidy for retirees' other post-employment benefits (OPEB) and the outstanding net liability is negligible as a percent of personal income.

Operating Performance

The county maintains healthy fund balance levels that combine with a high level of inherent budget flexibility to create an exceptionally strong capacity to address revenue stress stemming from a moderate economic downturn. Fitch believes the county has the ability to spend a good portion of its reserves in a downturn and still maintain a fund balance above the safety margin expected for a 'aaa' financial resilience assessment given the low historical revenue volatility.

Budget management is sound. The county typically outperforms its conservative budgets and often funds pensions above the actuarially required contribution level in order to increase funded levels.

Fiscal 2016 year-end estimates show property taxes coming in ahead of budget and a $1.1 million use of fund balance that was slightly below the $1.2 million use in the original budget. Unrestricted fund balance is estimated to remain healthy at approximately $20 million or a strong 13% of spending. The fiscal 2017 adopted budget includes general fund spending that is a $6.2 million (3.6%) increase over the previous year based on new public safety hires and larger education spending for health and pension benefits and compensation increases. The budget also includes draft multi-year forecasts for the first time that significantly reduce the use of reserves to balance budgets.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Evette Caze
Director
+1-212-908-0376
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com