Fitch Rates Hampton, VA’s GOs ‘AA+’; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned an ‘AA+’ rating to the following general obligation (GO) bonds of Hampton, Virginia (the city):
–$48.8 million GO public improvement bonds, series 2015A;
–$58.1 million GO public improvement refunding bonds, series 2015B.
The series 2015A bonds are being issued to fund various public improvements in the city. The series 2015B bonds are being issued to refund a portion of the city’s GO bonds and give the city upfront debt service savings without extending the final maturity. The bonds are expected to sell competitively on April 9, 2015.
In addition, Fitch affirms the following ratings:
–$236.1 million GO bonds at ‘AA+’ (prior to refunding).
A full list of bonds being affirmed follows the end of this release.
The Rating Outlook is Stable.
The bonds are general obligations of the city for the payment of which the city’s full faith and credit and unlimited taxing power are irrevocably pledged.
KEY RATING DRIVERS
STRONG OPERATIONS: The city has maintained strong reserve levels and sound liquidity metrics despite a pressured operating revenue environment. City management adheres to prudent fiscal policies and budgets conservatively.
DIVERSIFYING ECONOMY: Recent growth in healthcare, high-tech manufacturing, and retail has helped to diversify the local economy away from its historical concentration in military. The city’s population has been declining over the last decade and while employment has shown improvement, growth has trailed the nation. Wealth indicators are below the national average.
MODERATE DEBT: Fitch expects overall debt levels to remain moderate given the city’s affordable future debt plans and above average amortization of outstanding principal. Pension and other post-employment benefits (OPEB) liabilities do not represent large cost pressures.
MAINTENANCE OF STRONG PERFORMANCE: The rating is sensitive to shifts in fundamental credit characteristics including the city’s strong financial management practices. The Stable Outlook reflects Fitch’s expectation that such shifts are unlikely.
The city of Hampton, with a 2013 population of 136,699 down 0.5% since the 2010 census, is located in the Hampton Roads region of southeastern Virginia.
STRONG FINANCIAL RESERVES
Conservative budgeting practices coupled with expenditure controls support stable fund balance levels consistently exceeding city policy that unassigned fund balance shall be no less than 10% of general fund and school operating revenues.
Fiscal 2014 ended with a general fund operating surplus after transfers of $1.9 million, increasing unrestricted fund balance to $91.2 million or an ample 28.9% of spending. The city funds an increasingly large portion of pay-go capital, $16.9 million in fiscal 2014, and Fitch considers this commitment an area of financial flexibility. Cash and investments of $98.4 million cover liabilities by 3.3x.
The city increased its property tax rate in fiscal 2014 to $1.24 per $100 of taxable assessed value (TAV) to address several years of tax base and revenue declines. The rate increase provided the city with an additional $17.2 million in its property tax levy over the prior year. Annual property tax revenues had declined from $145.7 million in fiscal 2009 to $136.7 million in fiscal 2013. The tax base declines appear to be leveling off; fiscal 2015 TAV of $10.2 billion represents a 0.8% decline from fiscal 2014 and projections for fiscal 2016 show a very slight increase in TAV.
The fiscal 2015 budget was balanced with an $8 million appropriation of fund balance for capital and other one-time non-recurring expenses. Based on year-to-date results, the city expects to end the year without the use of fund balance which is consistent with the city’s history of conservative budgeting.
MANAGEABLE DEBT BURDEN, CARRYING COSTS
Total debt equals a moderate $3,501 per capita and 4.2% of market value, including $86.7 million of moral obligation bonds of entities to which the city lends some operational support. Debt backed by the city’s moral obligation is largely self-supporting; the city would face financial pressure should its proportionate share of these debt obligations increase. Annual carrying costs related to debt service, actuarially required pension contributions and OPEB paygo amounted to a moderate 15.5% of governmental fund spending in fiscal 2014. If the full annual burden of the moral obligation debt was included, carrying costs would rise to a moderately high 17.6% of spending. Debt principal is amortized at an above average 66% within 10 years.
The 2014-2020 capital improvement plan (CIP) includes $316.7 million in general government and school projects. Approximately one-third of the CIP is expected to be debt financed, including $48.1 million from the current issuance. Fitch does not believe that the city’s additional issuance plans will materially impact credit quality.
Contributions to the state-administered Virginia Retirement System (VRS) and the city-administered Hampton Employees’ Retirement System (HERS) totaled $19.5 million in fiscal 2014. The city’s HERS plan has an estimated funded ratio of 67% when adjusted by Fitch to a 7% rate of return. The city’s portion of the VRS has a funded ratio of 66%. The combined unfunded pension liability totals $233 million or 2% of market value when adjusted by Fitch to a 7% rate of return. The city funds 100% of actuarially required pension contributions.
The city’s unfunded OPEB liability is a low $73.7 million or 0.6% of market value. Contributions are made on a pay-as-you-go basis. In 2013 the city made significant changes to OPEB benefits for new hires, including increasing the required service time and offering new hires benefits at an explicit subsidy not to exceed $3,600 annually. These changes should reduce the city’s OPEB liability and contributions over time.
MILITARY CONCENTRATION BUT DIVERSIFYING
The military is a significant economic driver, as the city is the home to Langley Air Force Base, which serves as the Air Force’s Air Combat Command and employs roughly 9,000 active duty military and 3,000 civilian personnel.
The local economy continues to diversify with growth in aerospace technology, high-tech manufacturing, retail, and healthcare. NASA Langley Research Center in Hampton, with over 3,600 jobs, has recently embarked on a 15-year, $330-million reinvestment program. Hampton University’s Proton Therapy Institute (HUPTI), a research and cancer treatment center, is the nation’s eighth proton therapy facility and the only such facility in the commonwealth of Virginia.
The presence of the retail industry has similarly grown. Peninsula Town Center (PTC) and The Power Plant of Hampton Roads are mixed-use developments with over 900,000 square feet of retail, dining, and entertainment space. The city’s sales, meals and lodging tax revenues have increased due to activity at PTC and The Power Plant of Hampton Roads as well as the Hampton Roads Convention Center.
As of December 2014, the city’s unemployment rate of 5.8% was slightly above the national average of 5.4%. Per capita money income and median household income represent 90% and 96% of the nation respectively.
LIST OF BONDS COVERED BY RATING ACTION
Fitch affirms the ‘AA+’ rating on the following GO bonds of the city:
–$94.5 million GO public improvement & refunding bonds, series 2007;
–$1.4 million GO public improvement bonds, series 2005A;
–$54 million GO public improvement bonds, series 2010A;
–$36.8 million GO public improvement bonds, series 2013;
–$7.2 million GO public improvement direct pay BABs & recovery zone economic development bonds, series 2010B;
–$17.7 million GO public improvement refunding bonds (taxable), series 2012B;
–$24.4 million GO public improvement refunding bonds, series 2012A.
Fitch has withdrawn the rating on the city’s GO public improvement and refunding bonds, series 2010C as the bonds were not issued as originally proposed.
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, Underwriter, Bond Counsel, Underwriter Counsel, and Trustee.
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
Andrew Hoffman, +1-212-908-0527
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Evette Caze, +1-212-908-0376
Jessalynn Moro, +1-212-908-0608
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526