Fitch Upgrades Prince George County, VA’s GOs to ‘AA+’; Outlook Stable

NEW YORK

Fitch Ratings upgrades the rating on the following general obligation (GO) bonds of Prince George County, Virginia (the county):

–$14.99 million general obligation bonds to ‘AA+’ from ‘AA’.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the county for the payment of which the county’s full faith and credit and unlimited taxing power are irrevocably pledged.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The rating upgrade reflects the county’s strong financial profile including revenue and spending flexibility as well as robust reserves in the general fund.

ADEQUATE ECONOMIC BASE: Employment opportunities are somewhat diverse but are generally focused in retail and healthcare and anchored by the Department of Defense Fort Lee Combined Arms Support Command. The county’s unemployment rate remains above the state and national averages. Wealth indicators are below state but above the national averages.

LOW RISK DEBT PROFILE: Overall debt levels are low, amortization of principal is average, and county officials prudently analyze capital needs in the context of debt affordability guidelines. Pension and other post-employment benefit (OPEB) obligations do not represent significant cost pressures.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: The rating and outlook reflect the strength of the regional economy and the stability of Fort Lee as an economic anchor for the county, strong operating performance and low debt burden.

CREDIT PROFILE

The county is located along the James River, approximately 25 miles south of the state capital in Richmond (GO bonds rated ‘AA+’ with a Stable Outlook by Fitch), and has a population of 37,333. The county is home to Fort Lee, a major Army training center.

STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVE LEVELS

Financial operations historically have been characterized by maintenance of healthy reserves while funding approximately $1 million-$2 million (a quarter of the total annual capital budget) of pay-go capital annually, adherence to internal reserve policies, and a conservative approach to budget development.

During fiscal 2014, the county realized a modest $565,000 deficit after transfers (1.1% of 2014 spending), incorporating about $1.6 million of pay-go capital spending. The unrestricted fund balance totaled approximately $15.7 million or an ample 31.5% of general fund spending.

Estimated fiscal year-end 2015 results are positive. Management is projecting a $2.9 million operating surplus mostly due to positive variances in tax revenue. General operations are mostly funded by property taxes (62%). The property tax rate and levy are not subject to limitation providing ample revenue flexibility.

The fiscal 2016 adopted budget is approximately a 6.5% increase over the fiscal 2015 budget and includes a $1.6 million use of fund balance (3.2% of spending) and no revenue enhancements. Year-to-date operations are tracking positive relative to budget. The budgeted use of fund balance is greater than in prior years and management is currently reviewing options to increase revenue for fiscal 2017. The budget funds a salary adjustment for school and county employees, increases in healthcare costs, and school and county capital improvements and investments.

MILITARY CONCENTRATED YET STABLE ECONOMY

Fort Lee fuels the local economy and serves as the county’s largest employer. Following the 2005 BRAC mandates that designated Fort Lee as the Army Sustainment Center of Excellence – a focused training base for military supply, subsistence, maintenance, munitions, transportation and more — the base was modernized with a more than $1.2 billion budget. As of January 2015 the supported population (employees on base but not residents of the county) on post is 26,642.

High-end manufacturing supplements employment opportunities in technical design and aeronautics. Rolls-Royce North America Holdings Co. (Rolls-Royce; rated ‘A’, Negative Outlook by Fitch) continues to expand its an aero-design and manufacturing facility within the county. The Commonwealth Center for Advanced Manufacturing, a research and development facility shared by Rolls-Royce, other private industry partners, and several universities, is now operational and working to spur further development.

The larger population and economic base of the city of Richmond (population 217,853) provides a significant degree of diversity to the county’s otherwise concentrated economy. The county’s September 2015 unemployment rate declined to 5.2%, from 6.2% one year prior as employment continues to increase at a steady rate. The rate is in line with that of Richmond and the nation, though above the state. Wealth indicators for the county are mixed, with per capita money income lagging the Richmond MSA, the state and the nation. Median household income levels exceed those of the nation and MSA and approximate the state average.

LOW DEBT BURDEN; LIMITED LONG-TERM LIABILITIES

The county’s debt levels are modest at $1,302 per capita and 1.6%. Debt levels are not expected to increase materially in the next five years due to modest future debt plans (approximately $36.6 million, compared to $49.7 million currently outstanding) and the amortization rate of over 62% of outstanding principal within the next 10 years. Fiscal 2014 debt service totaled $7.2 million or an affordable 12.6% of governmental spending. All of the county’s debt is fixed-rate and secured by its GO pledge, as is common in Virginia.

Pension costs do not pressure county finances. Employees participate in the state-administered Virginia Retirement System (VRS), an agent multi-employer, defined benefit pension plan. Fiscal 2014 contributions equaled $2 million or a modest 3.6% of governmental spending and 100% of the required contribution. The funded ratio for the county’s portion of the plan is 72% as of 2014. The county also administers a small single employer defined benefit award pension program. During fiscal 2014, the county contributed the ARC and the plan is 77% funded with a small unfunded liability.

The county funds an OPEB plan for eligible county and school board employees on a pay-as-you-go basis. This amount for county employees equaled $94,000 in fiscal 2014, or a nominal 0.2% of governmental spending. Fitch does not consider OPEB liabilities to represent a significant cost pressure for the county. Overall carrying costs for pension, OPEB and debt service claim a below-average 16.2% of governmental fund spending.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996756

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996756

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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