Fitch Rates Washington County, VA’s Revenue Bonds ‘AA-‘; Outlook Stable

NEW YORK

Fitch Ratings has assigned a rating of ‘AA-‘ to the following revenue bonds to be issued by the Industrial Development Authority (IDA) of Washington County, Virginia:

–$14.36 million public facilities lease revenue refunding bonds, series 2016.

The bonds are being issued to refund the IDA lease revenue bonds, series 2010 for significant debt service savings. The bonds will be priced via competitive sale the week of May 23.

In addition, Fitch has upgraded the county’s Issuer Default Rating (IDR) to ‘AA’ from ‘AA-‘. The upgrade reflects the application of Fitch’s revised ‘U.S. Tax-Supported Rating Criteria’, which was released on April 18, 2016.

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds are limited obligations of the IDA as conduit issuer and are payable from rental payments from the county to the trustee. Payments are equal to debt service and subject to annual appropriation by the county board.

KEY RATING DRIVERS

The ‘AA’ IDR reflects the county’s small long-term liability burden, strong control over revenues and spending, a willingness to raise revenues that has resulted in consistently sound reserves, and Fitch’s expectation for slow revenue growth in the absence of policy action based on the county’s somewhat narrow economy. The ‘AA-‘ lease revenue bonds rating is one notch below the IDR, reflecting the slightly higher degree of optionality associated with appropriation payments compared to the IDR.

Economic Resource Base: Located in southwest Virginia, Washington County (population 54,591 as of 2015 census estimates) is part of the greater Johnson City-Kingsport-Bristol, TN-VA combined statistical area (CSA), commonly known as the ‘Tri-Cities’ region. The economic resource base relies primarily on manufacturing jobs and those from the government sector. Taxable assessed values declined minimally during the recession and have returned to moderate expansion based on new construction and the county’s biennial reassessment schedule.

Revenue Framework: ‘aa’ factor assessment

Strong revenue growth over the last 10 years has reflected policy action by the county to increase revenues, among other factors. Fitch expects growth without revenue-raising measures to be slow going forward based on the nature of the county’s revenue system and the make-up of the economy. The county has independent legal ability to increase property taxes without limitation and has done so in the past as necessary.

Expenditure Framework: ‘aa’ factor assessment

Expenditures have grown along the lines of revenues and Fitch expects that trend to continue. The county’s expenditure control flexibility benefits from low carrying costs and the favorable workforce environment in Virginia.

Long-Term Liability Burden: ‘aaa’ factor assessment

The county has minimal debt, well-funded pensions and affordable future debt plans.

Operating Performance: ‘aaa’ factor assessment

The county is well positioned to address future downturns due to a combination of strong revenue and expenditure control and solid reserve levels. Minimal use of fund balance after the recession for nonrecurring purposes highlights the county’s ability to navigate fiscal stress without relying on significant use of the healthy financial cushion.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating is sensitive to the county continuing to maintain a solid financial position including strong reserves throughout the economic cycle.

IMPROVED REVENUE EXPECTATIONS: Developments that improve Fitch’s assessment of the county’s economic and revenue growth prospects would be a positive rating factor.

CREDIT PROFILE

The county’s employment sector is heavily manufacturing concentrated, with contributions from the government and retail sectors. Within the county, three of the 10 leading employers are manufacturers, including the fourth largest employer, Bristol Compressors International Inc. Other top employers include local retail, medical and education institutions as the county benefits from its position as a small regional retail and healthcare hub.

Socio-economic factors are mixed, with the unemployment rate historically behind the state, but better than the nation. Wealth metrics are well-below both state and national averages, though this is somewhat offset by the area’s lower cost of living.

Revenue Framework

Property tax revenues represent the largest source of the county’s general fund revenue at 57%, followed by an additional 18% from state sources earmarked for education. The county’s assessed values are well above pre-recession levels.

Revenues increased over the last decade at a faster pace than both inflation and national GDP; however, significant factors in this growth were increases in both the real estate tax rate (a 9% increase in fiscal 2012) and the personal property tax rate (a 10% increase in fiscal 2014).

There is no legal limit or cap to the property tax rate or levy, providing the county with significant revenue raising flexibility.

The county’s property tax rate remains low for the region, and the low sales tax rate provides local businesses with a lower cost environment than competition across the border in Tennessee.

Expenditure Framework

The county’s primary spending category is education (43%) followed by public safety (18%), which includes the county’s portion of the regional jail’s growing expenditures. School enrollment is down from where it was 10 years ago and historically tracks behind population growth; however, the county’s education spending has increased significantly over this period, primarily due to an increase in state required pension costs.

The county’s natural pace of expenditure growth has generally followed revenues.

Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments are a limited 7% of governmental spending. The favorable workforce environment in Virginia and the county’s significant education funding level above what the state mandates give management additional expenditure flexibility.

Long-Term Liability Burden

Overall debt combined with the unfunded pension liability is very low at 1.5% of county personal income and is primarily driven by the county’s direct debt. The county is in the process of preparing their first formal capital improvement plan, which will include the issuance of $10-$20 million of debt in the next five years for a courthouse project. Although this is a significant increase in debt for the county, which currently has $28 million in outstanding debt, Fitch expects debt levels to remain low. About 37% of the county’s debt is amortized in the next five years.

All full-time salaried county employees participate in the Virginia Retirement System, a defined benefit pension plan. The county’s contributions are actuarially calculated and were fully contributed in fiscal 2015. For the primary government, pension assets covered 85% of pension liabilities at the plan’s 7% discount rate as of June 30, 2015. The county’s net pension liability for the primary government is $6.5 million or a low 0.3% of personal income; these figures exclude pensions associated with the school board, a component unit of the county.

OPEB are offered to county employees as an implicit subsidy plus a minimal annual credit. The outstanding liability is less than $2 million and funded on a pay-go basis.

Operating Performance

The county increased available reserves to very healthy levels following the recession, in part by making use of the ability to adjust tax rates. To address a moderate economic downturn scenario, Fitch expects the county would adjust spending and raise taxes, as necessary, to maintain reserves above their formal policy target (12-15% of general and school fund revenues).

The county’s conservative budget management, with a focus on following prescribed formal debt and fund balance policies, historically led to fiscal year-end results that beat the budget. Favorable one-time revenues of about $12 million in fiscal 2010 from a change in property tax collection methods were regularly spent down through fiscal 2015 for capital projects, leading to several operating deficits over this period. The use of fund balance in fiscal 2015 was the final year these banked reserves were available.

The county reports that based on year-to-date fiscal 2016 results it should add to reserves or break-even, which has not been the case since fiscal 2012. The county is currently working to propose a fiscal 2017 budget that adds to reserves without the use of tax-raising measures.

Additional information is available at ‘www.fitchratings.com‘.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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