News Column

Fitch Upgrades King George County, VA's Implied GOs to 'AA'; Outlook to Stable

February 18, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the following King George County, Virginia (the county) ratings:

--Implied general obligation (GOs) to 'AA' from 'AA-'.

In addition, Fitch upgrades the following ratings:

--$1.5 millionKing George County Economic Development Authority (EDA) (formerly the King George County Industrial Development Authority) lease revenue bonds, series 2004 to 'AA-' from 'A+'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The lease revenue bonds are secured by lease payments subject to annual appropriation by the county. Essential government assets are subject to a lien.

KEY RATING DRIVERS

STABLE FINANCIAL AND ECONOMIC PERFORMANCE DRIVE UPGRADE: The implied GO upgrade to 'AA' reflects the county's strong fiscal discipline and economic stability as evidenced by the maintenance of high liquidity and reserve levels, prudent investment in capital improvements, and strong economic and employment metrics despite the challenges posed by sequestration.

MODERATELY CONCENTRATED ECONOMIC BASE: A specialized military base anchors the county's stable but somewhat concentrated economy and employment base. The county benefits from strong socio-economic metrics and a relatively stable tax base.

AMPLE RESERVES AND LIQUIDITY: Strong financial management has produced exceptionally high liquidity and healthy reserves, well-above the county's conservative policy level, despite the recent use of fund balance for capital improvements.

MODERATE DEBT BURDEN: Debt and carrying costs are currently manageable, and are expected to remain so, as the county has no intermediate-term debt plans. Pension and other post-employment benefit (OPEB) contributions do not represent cost pressures.

APPROPRIATION RISK FOR LEASE REVENUE BONDS: The rating on the lease revenue bonds reflects the county's underlying credit quality, the appropriation risk included in the bond provisions, and the inclusion of essential government assets under a lien.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's economic performance. Federal budget cuts could negatively affect the regional economy given the preponderance of direct and indirect federally funded employment. However, Fitch considers this unlikely given the specialization and essentiality of the county's defense activity to military operations.

CREDIT PROFILE

The county is located east of Fredericksburg, VA approximately 63 miles from Washington D.C. and Richmond, VA. The county is home to Naval Support Facility Dahlgren (Dahlgren), a multi-unit, highly specialized military installation. The resident population of 24,500 grew rapidly over the past decade; growth has tracked regional and national averages in recent years.

RESILIENT ECONOMY WITH MILITARY CONCENTRATION

The stable yet somewhat limited economy has performed well throughout the economic downturn. Dahlgren's presence remains a major driver for the local economy, employing around 370 military and 4,100 civilian personnel. This figure is further amplified by an additional 4,200 contract employees tied to operations at Dahlgren. Federal personnel constitute approximately one fourth of county employment. Fitch considers the specialized nature of Dahlgren's commands, which focus on training for naval weaponry, an indicator of its continued essentiality to military operations. Dahlgren experienced limited effects from sequestration, with a period of eight furlough days for civilian employees and minimal impact on contract and project activity.

The limited and somewhat concentrated nature of the economy is reflected in the employment base impact of Northrop Grumman Corporation (Issuer Default Rating [IDR] 'BBB+', Negative Outlook) and Lockheed Martin Corporation (IDR 'A-', Stable Outlook). Both firms are among the county's top employers, despite a combined total of fewer than 750 employees. Approximately 55% of the county's labor force out-commutes to employment opportunities in adjacent counties and the city of Fredericksburg (GO bonds rated 'AA+' Stable Outlook).

SOLID SOCIO-ECONOMIC INDICATORS

The regional employment base has supported aggressive population growth. Population grew rapidly at an average annual rate of 3.4% from the 2000 to 2010 census, well above the nation's 0.9%. Growth has moderated somewhat in recent years, falling in line with regional and national averages. Although county employment fell a small 2.2% at the beginning of the recession, it has subsequently remained flat or increased annually. The November 2013 5.5% unemployment rate is below the nation's although above the state's, which is consistent with the pattern of the past few years. The majority of wealth indices indicate average incomes above regional and national levels, with exceptionally low poverty levels.

Assessed value has also remained relatively stable over the past few years, with a decline of 4% expected in fiscal 2014 as a result of a four-year reassessment cycle. The county anticipates no further declines in future years, as the housing market has stabilized and begun to rebound, though the county has consistently demonstrated its willingness to increase the regionally low tax rate to offset declining revenues.

STRONG FINANCIAL MANAGEMENT

Reserves and liquidity have consistently remained at robust levels. For the past three years, the county has exceeded its conservative reserve policy equal to 15% of the general government operating budget, inclusive of transfers and school spending. Fitch views positively the county's efforts to maintain an independent utilities fund, which, prior to fiscal 2013, received a subsidy from the general fund. The fund was self-supporting in fiscal 2013 and is on track to maintain independent operations through fiscal 2014.

The county concluded fiscal 2013 with an unrestricted fund balance equal to $18.8 million, or a high 46% of spending. The county allocated $4.3 million of fund balance in fiscal 2013 to be used for the construction of a gas pipeline, which the county pursued as an opportunity to spur economic development in its recently established industrial park.

FISCAL 2014 BUDGET PICTURE

The $35.1 million fiscal 2014 budget reflects 5.4% growth from the prior year, and is balanced with a modest use of fund balance (approximately $100 thousand) for capital projects. This is attributable in part to projected increases in sales tax revenues from greater retail activity at the new King George Gateway Shopping Center, a retail development that recently opened within the county.

The county reports that revenues to date are in-line with the budget. Fitch believes that the limited nature of previously implemented spending reductions affords the county flexibility should it be required to generate expenditure savings.

POSSIBLE ONE TIME USES OF RESERVES MAY RESULT IN STILL SOUND LEVELS

The county has used reserves for capital investment since the onset of the economic downturn, as evidenced by spending for economic development purposes in recent years. Fitch views positively the county's use of fund balance for these purposes, given the value of new economic growth and the county's still-robust reserve levels. Management has stated its commitment to maintain reserves above policy levels. Fitch views positively the county's history of conservative budgeting and prudent fiscal stewardship, and expects these to buttress the county's financial profile in future years.

DECLINING DEBT AND OTHER LONG-TERM LIABILITIES

Overall debt levels are moderate at $2,750 on a per capita basis and 2.2% of market value. Amortization is below average at 46.8% of principal retired within 10 years. The county has no intentions of issuing debt to finance its modest $21 million fiscal 2014 to fiscal 2018 capital improvement plan. Debt services costs are manageable at 12.3% of governmental spending. Approximately 70% of debt service costs are due to school debt.

Pension and OPEB contributions do not stress financial operations. County employees participate in the state-administered Virginia Retirement System (VRS). For fiscal 2013 the county's contribution totaled $865 thousand or a low 1.8% of spending. The county's portion of the VRS plan is adequately funded at 76%, using an assumed 7% investment rate of return, which matches Fitch's assumption. Costs are expected to remain modest, given the size and funding status of the plan. County employees are ineligible for OPEB. Though school retirees receive an implicit healthcare subsidy, the low cost of this benefit is not expected to affect county finances.

LEASE REVENUE BONDS SUBJECT TO APPROPRIATION

The bonds are secured by lease rental payments, subject to annual appropriation, made by the county to the lessor, the EDA. The EDA assigned and transferred its rights to a trustee, which can take possession of and re-let the leased property in the event of non-appropriation or default. A high school is the collateral under the lease.

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.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

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

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. Local Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820934

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

or

Primary Analyst

George M. Stimola, +1-212-908-0770

Analyst

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Evette Caze, +1-212-908-0376

Director

or

Committee Chairperson

Douglas Offerman, +1-212-908-0889

Senior Director

Source: Fitch Ratings


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