Fitch Affirms Hopewell, VA’s GOs at AA-; Outlook Stable
By Business Wire News
Fitch Ratings has affirmed the following ratings on Hopewell, Virginia (the city):
–$31.8 million general obligation bonds (GOs) at ‘AA-‘;
The Rating Outlook is Stable.
The bonds are backed by the city’s full faith, credit, and unlimited ad valorem taxing ability.
KEY RATING DRIVERS
HEALTHY FINANCIAL RESERVES: Reserves considered available for operations by Fitch have historically been sound, providing a healthy financial cushion to accommodate unforeseen spending needs or negative revenue variances. The city adequately reserves 10% of expenditures in a Rainy Day Reserve fund and does not expect notable use of the reserve in the foreseeable future.
DEBT TO REMAIN MODERATE: Overall debt ratios are expected to remain moderate based on limited debt plans and average amortization.
LIMITED ECONOMY: Economic indicators are weak, and unemployment is high relative to the state and nation. The tax base is concentrated with the top 10 taxpayers, which are mostly manufacturing companies and power cogeneration plants, accounting for one-third of taxable assessed value (TAV).
CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit characteristics, most notably the city’s strong financial management practices and healthy reserves.
Hopewell, with a 2014 estimated population of 22,163, lies on the James and Appomattox rivers and is 25 miles southeast of the commonwealth capital, Richmond.
RESERVE LEVELS REMAIN SOUND
Consistently healthy reserves exemplify the city’s strict adherence to its written fund balance policy of maintaining a Rainy Day Emergency Fund of at least 10% of operating expenditures and similarly met their unwritten target of keeping total fund balance above 15% of operating expenditures. The unrestricted fund balance was strong at $13.3 million or 30.3% of spending at fiscal year-end 2013, a robust $2.05 million year-over-year increase.
Audited 2014 financials are not yet available but management projects on a GAAP basis a small operating surplus before transfers due to operating revenues coming in ahead of budget, more than making up for over-budget expenditures. Management indicates a small use of fund balance largely for one-time capital needs is likely, though less than originally budgeted, with a year-end unrestricted fund balance above $12.5 million.
The fiscal 2015 proposed budget incorporates a fund balance appropriation due to one-time economic development projects. Fitch expects that city reserves will remain above their policy level and notes that trial balances support this assumption. Further multi-year budget projections are balanced with no appropriation of fund balance.
Property taxes are the largest source of general fund revenue, comprising 58% in fiscal 2013. Collections rates have improved but remain satisfactory at 97.6% in fiscal 2013. On-going revenues have been relatively flat since the great recession, while total revenues benefitted from two large one-time property tax settlements in 2010 and 2013. The current real estate tax rate (1.11 mills) is regionally competitive and grew by an average annual growth rate of 2.9% from 2010 to 2014 to fund debt service. Management is currently in discussion about future millage increases.
AFFORDABLE DEBT PROFILE
Overall debt levels are moderate at $2,744 per capita and 3.2% of market value, well within the city’s debt limit of 5%. Amortization is average at 51% of principal retired in 10 years. The city expects to fund its capital improvement plan through with cash and has no additional plans for additional issuance after a $2.5 million direct placement in fiscal 2015. Debt service as a percentage of governmental fund spending is average at 10.5% government spending.
The city’s employees participate in the Virginia Retirement System (VRS) through a defined benefit agent multiple-employer pension plan. The city consistently funds the annual required contribution to the VRS plans which consumes a modest 3.1% of spending. Hopewell’s portion of the agent plan is funded at 77.9% using the VRS’ conservative assumption of a 7% investment return. Management funds its other post-employment benefit (OPEB) requirement on a pay-go basis. The city’s OPEB costs for fiscal 2013 was low at $425,000 or 0.8%, and the OPEB UAAL represents less than 1% of market value.
Manufacturing is the most significant employment sector in Hopewell with top employers including Honeywell and Ashland, followed by the health care industry including John Randolph Hospital. Due to the large presence of manufacturing jobs, the city’s 8.6% unemployment rate (January 2015) is higher than both the commonwealth (5.2%) and the nation (4.9%). Wealth levels are well below average.
The tax base is highly concentrated in manufacturing and power cogeneration producers and the top 10 taxpayers represent a high 33% of TAV. They city’s TAV increased by 2.3% in fiscal 2014. TAV performance since 2008 has generally shown modest gains, with the exception of a relatively minor loss effective at the FY 2013 revaluation. The increase in 2014 and projected increase in 2015 is driven by recovering residential and commercial real estate markets. Fitch believes a modest recovery will continue based on residential and commercial building permits.
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.
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
U.S. Local Government Tax-Supported Rating Criteria
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Barbara Ruth Rosenberg
Elizabeth Fogerty, +1 212-908-0526