News Column

Fitch Rates Spotsylvania County, VA's GOs 'AA+'/Rev Bonds 'AA'; Outlook Stable

August 7, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings to Spotsylvania County, Virginia's (the county) general obligation (GO) bonds and lease revenue bonds:

--Approximately $62.06 million GO public improvement and refunding bonds, series 2014 rated 'AA+';

--Approximately $31 million revenue and refunding bonds, series 2014 rated 'AA', issued by the Economic Development Authority (EDA) of the county.

The bonds will be sold via competitive sale during the week of August 11. GO bond proceeds will be used to refund the series 2004A and 2006 GO bonds for level debt service savings and to fund various school, transportation and public safety projects. Revenue bond proceeds will be used to advance refund the series 2005 lease revenue bonds and fund the acquisition of fire equipment and a public safety radio system.

In addition, Fitch affirms the following ratings:

--$191 million GO bonds at 'AA+';

--$70.3 million EDA public facilities revenue bonds, series 2011, 2012 and 2005 at 'AA';

The Rating Outlook is Stable.

SECURITY

The 2014 GO bonds are backed by the county's full faith and credit and unlimited ad valorem taxing ability.

The 2014 lease revenue bonds are limited obligations of the EDA of the county of Spotsylvania, VA, payable solely from payments to be made by the county to the trustee. Payments are subject to annual appropriation by the county board. The deed of trust includes a security interest in essential school and county facilities.

KEY RATING DRIVERS

SOLID FINANCIAL RESULTS: Strong financial performance is evidenced by the county's consistent maintenance of reserves above prudent policy levels.

ECONOMY TIED TO REGIONAL CENTERS: The local economy relies on the nearby job markets of Washington, D.C. and Richmond, where a large proportion of county residents commute for employment. Defense contracting and healthcare sectors continue to develop in the county, aided by growth initiatives and positive workforce characteristics. Economic indicators are positive.

LOW-RISK DEBT PROFILE: Debt levels are moderately low and amortization of outstanding principal is rapid. Future capital needs appear manageable. The county demonstrates a firm commitment to pay-go financing. Pension and OPEB burdens are modest.

APPROPRIATION RISK AND ESSENTIAL LEASED ASSETS: The 'AA' rating on the revenue bonds is one notch lower than the county's GO rating, reflecting risk to annual appropriation partially offset by a leasehold interest in essential educational assets.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The county is located in the northeastern section of Virginia approximately 55 miles north of Richmond and 55 miles south of Washington, D.C. The county's estimated 2012 population is 127,348, which is a 4% increase from 2010.

STRONG RESERVE LEVELS

Unrestricted general fund balance levels have historically remained sound and well above the county's fund balance policy, which stipulates maintenance of an unassigned fund balance equal to no less than 10% of the subsequent fiscal year's budgeted net operating revenue. Net operating revenue includes total general fund revenue plus total component unit (school board) general operating revenue. The county has traditionally used fund balance in excess of its 10% policy for capital expenditures.

Fiscal 2013 ended with a $6.9 million (2.5% of spending) use of fund balance for a general fund unrestricted fund balance of $53.9 million, equal to a healthy 19.6% of spending. The county transferred $7.6 million from the general fund to the capital projects fund during fiscal 2013. This follows three consecutive years of operating surpluses. In addition to a healthy reserve balance, the county retains the flexibility to raise revenues, as its $0.86 millage rate per $100 assessed value remains regionally competitive and expenditure cuts to date have been modest. Liquidity is sound when Fitch adjusts for property tax revenues that have been deferred.

ESTIMATED FISCAL 2014 RESULTS SHOW FUND BALANCE USE FOR CAPITAL

The adopted fiscal 2014 budget was 4.8% ($11.7 million) less than the prior year and included a modest $3 million fund balance appropriation and a two-cent reduction in the real property tax rate, which equalized tax revenues. Estimated results include a planned $9.8 million use of assigned fund balance (4.1% of spending) to fund school and county capital projects and other one-time expenses. Fitch expects reserve levels will remain healthy despite the draw.

ADOPTED FISCAL 2015 BUDGET

The 2015 budget is 2.6% higher than fiscal 2014 and provides $1 million for a 2% COLA, additional full-time positions, $8.4 million in capital spending and a $1.6 million increase in the transfer to the school system. The budget keeps the real property tax rate stable but increases the personal property tax rate to offset declines in vehicle values. The budget appropriates a modest $2.4 million (1% of general fund spending) of fund balance, which is similar to prior years. Given the county's history of strong financial performance, Fitch expects operations to remain positive and reserves to remain in compliance with policy.

Property taxes are the county's primary revenue source. Following a decline of 2.9% in 2012 and 20% in fiscal 2010, the county's tax base has begun to recover with a cumulative 4.6% increase in taxable assessed value in 2013 and 2014. Management is projecting a 1.6% increase in 2015, which is supported by recent permit activity and home value trends.

PROXIMITY TO WASHINGTON, D.C. AND RICHMOND

Located on the I-95 corridor, Spotsylvania County functions as a bedroom community for nearby Richmond, VA and Washington, D.C. Approximately 75% of county residents commute outside of the county for work despite the county's implementation of several initiatives to foster local employment opportunities.

Economic indicators for the county are positive. Per capita income levels are 12% higher than those of the nation, and median household income levels are 50% higher. As has been the historical norm, the county's unemployment rate (4.9% as of May 2014) remains below that of the state and nation. Over the last decade (2004-2013) average annual growth of the county's employment base has surpassed the state's and nation's.

CONTINUED DIVERSIFICATION OF LOCAL ECONOMY

The county has experienced growth in its employment base due to the county's economic incentives, availability of land, and skilled workforce. The county's target industries include healthcare, manufacturing, high-tech/IT/defense and tourism.

Spotsylvania Regional Medical Center is the county's largest private employer with 600 employees. The health care sector is the county's third fastest growing industry, reflected by 31 new health care establishments developed since the hospital opened in 2010. The county's fourth largest employer, defense contractor A-T Solutions, moved to the county in 2010 and continues to expand with the recent addition of 32 new jobs. Tourism continues to be a key industry within the county given the county's Civil War historic sites and battlefields. More than 5,000 total visitors came to the county in 2014 to participate in reenactments.

Growth is expected to be further spurred by the construction of a Virginia Railway Express Spotsylvania commuter rail station that will go directly into Washington, D.C.

MODERATELY LOW DEBT LEVELS

The county's debt profile is moderately low, with net overall debt equal to $2,439 per capita and 2.4% of market value (MV), below the county's 3%-4% policy. Debt service as a percentage of total governmental fund spending in fiscal 2013 was sizable at approximately 16%, although principal amortization is rapid at 71% in 10 years. Since the majority of the county's debt is school related, when total school spending is included, debt service as a percentage of spending is more affordable.

The county's capital needs appear manageable. The fiscal 2015-2019 capital improvement program (CIP) totals $167 million (a low 1.3% of MV). School projects represent the majority of the plan ($66 million), followed by government facilities ($39 million), transportation ($26 million) and other projects ($36 million). Approximately 73% of the CIP is funded through debt, with a sizeable portion (24%) funded from pay-go sources.

Fitch views the county's firm commitment to pay-go financing as a credit positive. The county has been steadily working towards fulfillment of its policy to transfer 5% of general fund revenues to the capital projects fund, increasing transfers by a quarter-percent every year until the policy is achieved.

LOW PENSION AND OTHER LONG-TERM LIABILITIES

Pension and other post-employment benefit (OPEB) contributions do not stress financial operations. County employees participate in the state-wide Virginia Retirement System, an agent multi-employer defined benefit plan. The county makes annual payments as determined by the state that equal its annual required contribution. The county's portion of the plan is funded at 75% reflecting the plan's assumed 7% investment return assumption. The fiscal 2013 $6.5 million ARC equaled a modest 2.6% of total governmental spending.

OPEB is currently funded on a pay-go basis, although the county did establish a reserve with $826,000 in fiscal 2015. The unfunded actuarially accrued liability ($51.9 million) represents less than 1% of MV. Despite the sizable debt service payments, carrying costs (debt service, OPEB and pension costs) are manageable at 18.7% of governmental fund spending.

The rating on the Spotsylvania County Economic Development Authority (VA) (Spotsylvania School Facilities Projects & Fire & Rescue Equipment) public facilities revenue & refunding bonds series 2013 is withdrawn since these bonds were privately placed.

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, and Virginia Employment Commission.

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:

U.S. Local Government Tax-Supported Rating Criteria

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

Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=846934

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

Primary Analyst

Evette Caze, +1-212-908-0376

Director

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Andrew DeStefano, +1-212-908-0284

Director

or

Committee Chairperson

Amy Laskey, +1-212-908-0568

Managing Director

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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