Fitch Upgrades Rockingham County, VA's IDR to 'AA+' on Criteria Change; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded Rockingham County, VA's Issuer Default Rating (IDR) to 'AA+' from 'AA'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The upgrade reflects application of Fitch's revised tax-supported rating criteria for U.S. state and local governments, which was released on April 18. The county's positive credit features include a solid revenue framework, low long-term liability burden, and outstanding gap-closing capacity. The 'AA+' IDR also reflects the county's moderate growth prospects and ample financial flexibility, including sizable reserves and broad budgetary tools.

Economic Resource Base

Located in the heart of the Shenandoah Valley, the county is the third largest in Virginia in land area with 854 square miles and had an estimated 2015 population of 78,593; the population has been stable, growing at a CAGR of less than 1% since 2010.

Revenue Framework: 'aa' factor assessment

Revenues have been climbing at a pace in line with U.S. GDP growth, and moderate growth is anticipated over the near term. The county has the independent legal ability to increase property tax revenues in an unlimited amount.

Expenditure Framework: 'aa' factor assessment

Fitch expects the natural pace of spending growth to generally track revenue growth. Sound expenditure flexibility is due to the county's ability to adjust its labor costs if needed, as well as modest carrying costs.

Long-Term Liability Burden: 'aaa' factor assessment

The county's overall debt and pension liability is low as a percentage of personal income at approximately 4%. Given the county's lack of borrowing plans and fairly rapid amortization rate the overall liability burden should decline over the intermediate term.

Operating Performance: 'aaa' factor assessment

Fitch believes the county's overall financial resilience is more than adequate for a 'aaa' financial resilience assessment, with the county expected to maintain healthy reserves and a high level of budgetary flexibility through a typical economic cycle.

RATING SENSITIVITIES

Continued Strong Financial Operations: The rating is sensitive to shifts in fundamental credit characteristics, including the county's strong financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The largest employment sector is manufacturing. The manufacturing base has remained stable and major companies include Cargill (poultry processing), R.R. Donnelly (book printing), Merck (pharmaceuticals) and MillerCoors (brewery). Merck recently announced a $168 million expansion within the county to produce vaccines and MillerCoors announced a $60 million expansion of its brewery within the county. Higher education also has a major presence and adds stability within the area through James Madison University, located just outside the county's boundaries.

Unemployment continues to track below regional, state and national averages.

Revenue Framework

The county relies on property taxes, which comprised 87% of general fund revenues in fiscal 2016.

The county's general fund revenue growth has trended above the rate of inflation on a compound average annual (CAGR) basis over the 10 years ended in fiscal 2016 at nearly 4%. However, assessed value has increased at a slower pace of 2.5% for the same time period. The difference in the growth rates are adjustments made to the real estate tax rates during this period. Also, the county implemented a food and beverage tax of 4% in 2010 that boosted the revenue total. Revenue growth prospects appear moderately positive over the next several years based on the recently announced economic activity.

There is no legal limit to the property tax rate or levy, providing the county with significant independent revenue raising flexibility.

Expenditure Framework

The county's largest spending areas are education and public safety, which make up about 47% and 23% of general fund spending, respectively.

Fitch expects the natural pace of spending growth to remain generally in line with revenue growth, as projected modest population gains should result in manageable increases in expenditure demands.

Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consumed a moderate 12% of fiscal 2016 governmental spending. The county has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. The county's spending flexibility as it relates to education is a function of minimum funding levels prescribed by state standards, which are applicable to all Virginia municipalities; however, the county currently funds 123% of the requirement.

Long-Term Liability Burden

The county's overall liability burden is modest at about 3% of personal income, driven almost entirely by $82 million of direct debt. The county's five-year debt issuance plans totals $70 million for major renovations to school buildings, starting with a planned $26 million borrowing in the fall of 2017. The county is scheduled to repay more than 70% of outstanding principal over the next 10 years. As such, even after the additional debt issuance the overall liability burden should remain low.

County employees participate in the state-administered Virginia Retirement System, an agent multi-employer defined benefit pension plan. The county makes annual payments as determined by the state that equal its annual required contribution. The June 30, 2015, net pension liability of $13 million represented less than 1% of personal income. When the net pension liability of the school board is included, the total overall liability increases significantly to about 7% of personal income.

The county funds its OPEB obligation on a pay-as-you-go basis. As of July 1, 2015, the net OPEB liability totaled $4.9 million or a very low 0.2% of personal income.

Operating Performance

Given the county's superior inherent budget flexibility (in the form of control over revenues and spending capacity), Fitch expects the county to maintain a high level of fundamental financial flexibility through a typical economic cycle. Reserves would be expected to remain above the county's 15% target, a level of financial cushion comfortably higher than that required for a 'aaa' financial resilience assessment. The unrestricted general fund balance of $27 million at fiscal 2016 year-end was a healthy 23% of spending.

The county demonstrated its financial resilience and strong budget management through the most recent recession by reducing its workforce through layoffs, reducing capital spending, and freezing positions. Fitch expects the county would make similar operational changes as needed during a future economic downturn.

The county's fiscal 2017 budget increased approximately 6% above the FY 2016 budget and includes a 2 cent tax rate increase and a $4.7 million fund balance appropriation. The major drivers for this increase include a 2% pay increase across all departments, a $1.5 million increase to schools for technology, and $4.3 million for maintenance items. Given the county's history of positive actual results relative to budget, Fitch expects a similar performance for fiscal 2017.

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/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016700

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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
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@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
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com