Fitch Rates Danville, Virginia’s GOs ‘AA-‘; Outlook Stable

NEW YORK

Fitch Ratings has assigned an ‘AA-‘ rating to the following general obligation (GO) bonds for the city of Danville, Virginia (the city):

–$10 million general obligation public improvement bonds series 2015A;

–$12 million general obligation public improvement refunding bonds series 2015B.

The proceeds will be used to finance various capital improvements and to refund certain outstanding bonds. The bonds will be sold via negotiated sale on July 15th.

In addition, Fitch affirms the following ratings for the city:

–$83 million in outstanding GO bonds at ‘AA-‘.

The Rating Outlook is Stable.

SECURITY

The bonds are direct and general obligations of the city for which the full faith and credit of the city will be pledged.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The city’s unrestricted reserves are very strong and liquidity is ample. Conservative budgeting and budgetary control contribute to a long trend of healthy finances. General fund operations rely on annual transfers from the utility funds.

MANUFACTURING BASED ECONOMY: The economic profile was once heavily dependent on textile and tobacco, but now has a diversity of manufacturing concerns as well as medical and education components.

BELOW AVERAGE WEALTH INDICATORS: Wealth and income levels, along with their rate of growth, remain well below state and national averages. Population and employment losses appear to be stabilizing, in part due to the city’s efforts to both improve educational attainment and attract new industry.

AFFORDABLE DEBT RATIOS: Fitch expects the debt burden to remain low due to moderate capital needs, coupled with significant pay-as-you-go and self-supporting enterprise financing.

LOW OTHER LONG TERM LIABILITIES: The city recently eliminated OPEB benefits and the pension system is well funded.

RATING SENSITIVITIES

FINANCIAL/DEBT PROFILE KEY STRENGTHS: The city’s consistent financial operating profile and very manageable long-term liabilities are key to credit health. A decline in the health of the utility funds and their ability to support general fund operations could cause negative rating pressure.

CREDIT PROFILE

The city of Danville is located adjacent to the Virginia-North Carolina border, about 45 minutes from Greensboro, NC. The 2014 population estimate of 42,912 declined from 53,000 in 1990, reflecting the decline of the textile industry. In recent years population is generally stable.

STRONG FINANCIAL POSITION

Conservative budgeting, strong budget control and adherence to well-articulated policies has led to a stable, strong financial position. The general fund closed fiscal 2014 with a $5 million operating surplus (5.3% of spending) and an unrestricted fund balance equal to a sizable 44% of spending. The unassigned fund balance consistently exceeds Danville’s goal of 20% of general fund revenues and budget stabilization reserve (assigned fund balance) of no more than 5%.

General fund operations rely on a diversity of revenue sources, led by property taxes (27.4%). The tax rate, which is not subject to a limit, has remained unchanged for over a decade. Sales, business and license, hotel and meals taxes contribute to total local taxes of 51.5% of revenues. After local taxes, intergovernmental revenues (17.9%) and utility transfers (14.7%) are the next largest revenue sources.

The city’s utilities department delivers water, wastewater, gas, electric and telecommunications services. Utility supported debt is rapidly retired at 75% in ten years, and most is backed by the city’s general obligation pledge. Per city policy, the transfers to the general fund approximate taxes that would be paid if the enterprises were run as a private utility. The transfer level is not permitted to decline although the city is currently reviewing that aspect of the policy.

The electric operations are the primary source of general fund transfers. The city buys its electric power through take or pay contracts with American Municipal Power (AMP), with contracts in four AMP projects: Fremont Energy Center (rated ‘A’/Stable Outlook by Fitch); Combined Hydroelectric Projects (rated ‘A’/Stable Outlook); Meldahl Hydroelectric Project (rated ‘A’/Stable Outlook); and Prairie State Energy Campus (rated ‘A’/Negative Outlook). The financial health of city’s utility funds does not pose concern at present. A substantial decline in the utility support that results in a weakening of the general fund’s health would be a credit negative.

CONTINUED FAVORABLE OPERATIONS EXPECTED

The fiscal 2015 general fund budget of $99 million is a 5% increase over the prior year and includes no new taxes or fees. The budget was balanced with a $3.1 million appropriation of reserves; however, officials are projecting $5.7 million operating surplus. The surplus was enabled, in part, by the elimination of OPEB benefits and release of $3 million from the OPEB trust which will be recorded in fiscal 2015 general fund revenue.

The fiscal 2016 proposed budget is 1.6% increase over the prior year budget and includes a draw on fund balance ($4.4 million or 4.1% of budgeted spending) as well as no property tax increase.

MANUFACTURING ECONOMY

Historically a textile and tobacco based economy, the city is still heavily manufacturing dependent but also has sizable medical, education and retail trade components. Manufacturing makes up 17% of the employment base, approximately double the national average. Goodyear accounts for a notable 12% of the employment. A number of industrial parks, fostered by high speed broadband access, are home to a diversity of companies. The city serves as a regional shopping hub.

The city’s active economic development efforts have resulted in several industrial and technology parks as well as the redevelopment of the river district. Efforts to build a more skilled workforce include the Institute for Advanced Learning and Research, an applied research and advanced learning facility; and a pre-K readiness program supported by the Danville Regional Foundation, whose original funding came from the sale of the city hospital.

The March 2015 unemployment rate of 7.7% has improved from a high of 13.7% in 2009. However, the rate still remains well above the state’s 4.5% rate and the improvement results from a labor force that declined more rapidly than the drop in employment. Wealth levels are weak at approximately 58 – 70% of the nation.

The city’s taxbase is without concentration as the top 10 taxpayers accounting for just 7.9% of total taxable assessed value (TAV). The city’s TAV ($2.7 billion) has been generally stable.

DEBT RATIOS EXPECTED TO REMAIN LOW

Overall debt levels are low at $1,057 per capita and 1.7% of TAV, which is well within the city’s 3% policy. This excludes GO debt of the city’s self-supporting utility system. Amortization of principal is above average at 71% within 10 years, including the new issuance. Debt service accounts for a low 1.9% of total governmental spending.

The city’s affordable general fund capital improvement plan for fiscal year 2016 – 2020 totals $84 million. Annual borrowing of $6 million is anticipated. The utility funds Five Year CIP represents an additional $62 million, and is largely funded through pay-go. Funding for the utility CIP should also be affordable given other financial commitments, including the transfers to the general fund.

CITY PENSION SYSTEM WELL FUNDED

The city’s pension liabilities pose minimal financial burden. The city contributes to its single-employer defined benefit pension plan and the Virginia Retirement System (an agent multi-employer plan). Funded ratios are 103% for the city plan and 79% for the city’s portion of VRS. The city moved from an automatic cost of living adjustment (COLA) to a bonus policy, whereby bonuses are awarded upon satisfaction of certain criteria. The unfunded actuarial liability of the city share of the VRS plan totals $4.6 million, which is very low relative to the market value of real property (.2%). Carrying costs including debt service and pensions consumed a very low 5% of fiscal 2014 total governmental spending.

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, RealEstate Business Intelligence, Virginia Economic Development Partnership.

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, and IHS Global Insight.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

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

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

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