NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to $65.8 million Virginia Public School Authority (VPSA) school technology and security notes, series I.
The bonds are expected to sell via competition on or about May 7, 2013.
In addition, Fitch affirms the 'AA+' rating on outstanding VPSA school financing bonds, school tax credit bonds, and school educational technology notes (collectively, the VPSA bonds).
The Rating Outlook is Stable.
SECURITY
VPSA's school educational technology and security notes are payable from appropriations from the commonwealth of Virginia's literary fund and, in the event of literary fund insufficiency, a 'sum sufficient' appropriation from the commonwealth's general fund. This appropriation support provides the basis for the rating.
The authority's school financing bonds and school tax credit bonds are secured by general obligation (GO) bond payments from participating localities that are pledged by the authority to the bonds. A sum-sufficient appropriation for any shortfalls in debt service that is available from the commonwealth's literary and general funds enhances credit quality and provides the basis for the rating.
KEY RATING DRIVERS
COMMONWEALTH APPROPRIATION OBLIGATION: The 'AA+' rating on the VPSA bonds, one notch below the commonwealth's 'AAA' GO rating, is based on the availability of a 'sum sufficient' appropriation for debt service deficiencies from the commonwealth's literary fund and, if necessary, the general fund.
CONSERVATIVE COMMONWEALTH FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue shortfall reserve. Revenue performance has improved considerably since the recession and deposits to the state's reserve fund are budgeted per policy during the current biennium.
DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. Reductions in government sector employment over the next few years are likely as the federal government contracts.
BELOW-AVERAGE DEBT LEVELS: Virginia's debt ratios are in the lower-moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant.
PENSION FUNDING REFORMS: The funded status of Virginia's retirement system has declined in recent years, due in part to an underfunding of actuarially required contributions to the system. The commonwealth has adopted a series of pension reforms that are expected to result in increased contributions to the system and limit further growth in the state's pension liabilities in the coming years.
RATING SENSITIVITIES
The rating on the bonds is sensitive to changes in the commonwealth's GO rating, to which it is linked.
CREDIT PROFILE
VPSA note proceeds from the current offering will be used to make grants primarily to school division of cities, towns, and counties of the commonwealth for school technology and security projects. The series I bonds are being issued pursuant to two separate, but similar note resolutions, which both include appropriations from Virginia's literary fund and, if those are not adequate, a 'sum sufficient' appropriation from the commonwealth's general fund. The appropriation, which the governor must request from the general assembly pursuant to statute, provides the primary source of security. Additional strength derives from Virginia's fundamental credit strengths and the state commitment to education.
COMMONWEALTH FINANCES
The commonwealth's 'AAA' rating reflects its substantial economic resources, conservative approach to financial operations which includes periodic revenue forecast updates, and lower-moderate debt levels. Economic and revenue performance has improved since the start of the 2010 - 2012 biennium, which spanned fiscal years 2011 and 2012 and began July 1, 2010. The mid-biennium budget amendments, adopted in May 2011, allocated approximately $480 million in additionally forecast biennium revenues toward health and human services, higher education, and K-12 education. Revenue overperformance continued through fiscal 2012, and combined with spending that was ultimately below budgeted levels, the commonwealth closed the 2010 - 2012 biennium on June 30, 2012 with a surplus of $448.5 million.
Given this revenue over performance, $133 million has been set aside to fund a deposit due to the revenue stabilization fund in fiscal 2013, while an additional deposit of $245 million is reserved for deposit in fiscal 2014. Following these deposits, the rainy day balance is expected to more than double in size from its current level to total $689 million at the close of fiscal 2014.
Additionally, Fitch notes that $30 million is programmed for deposit in a Federal Action Contingency Fund (FACT; to address the risk of federal deficit reduction) with a further appropriation of $30 million contingent on attainment of a budget surplus during the current 2012 - 2014 biennium (which began on July 1, 2012 and spans fiscal years 2013 and 2014). Assuming $60 million is ultimately set aside in the FACT fund, when combined with the expected $689 million in the revenue stabilization fund, the commonwealth is projected to have approximately $750 million, representing approximately 4.4% of expected fiscal 2014 revenues, in reserve funds by the close of the 2012 - 2014 biennium.
The amended budget for the 2012 - 2014 biennium provides for general fund spending of $35.1 billion over the two-year period, reflecting growth of 10.4% over amended 2010 - 2012 budgeted biennial spending. Revenue growth of 3.6% and 3.9% is reasonably projected for fiscal years 2013 and 2014, respectively. The amended budget includes the aforementioned reserve deposits as well as an early deposit of $50 million towards the required FY 2015 contribution; increased funding for the state's retirement system to partly address contribution savings taken during the downturn; growing Medicaid funding requirements; as well as additional support for K-12 education and higher education including $59 million to fund 2% raises for public school teachers; and $45 million to restore local aid reductions.
Through March 2013 (three-fourths of the way through fiscal year 2013), general fund revenues are up 4.4% year-over-year, and 4.0% when adjusted for the continuing phase-out of an accelerated sales tax collection that was implemented as a budget balancing measure in the downturn. Both percentages exceed the current state forecasts of 3.6% and 3.4%, respectively. Fitch anticipates federal sequestration will negatively affect the commonwealth's general fund revenues, primarily sales and income tax collections, given the state's exposure to federal government and government-related employment. While the full extent of any decline is unclear, Virginia maintains sound, and growing, reserve levels to offset revenue volatility.
BROAD ECONOMIC BASE
The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 by 3.2% and 0.1% in 2010, though this performance was less severe than national declines of 4.4% and 0.7% for 2009 and 2010, respectively. Virginia employment bottomed out in mid-2010, and 1.2% and 1.1% growth was recorded in 2011 and 2012, respectively. As of March 2013, year-over-year growth was 0.9%, below the 1.5% growth for the nation over the same period. Some employment losses associated with expected Federal government contraction are expected in the near to medium term given the significant federal and related private sector presence in the northern part of the state. While Fitch will continue to monitor the effects of this contraction, the agency believes the strength of the state's economy will allow it to absorb anticipated losses without significantly weakening Virginia's credit profile.
Unemployment has historically been well below the national rate, and the 5.3% rate for February 2013 represents just 70% of the U.S. rate for the same month. Personal income growth in Virginia has been strong through most of the last decade, typically exceeding that of the nation. After a 2.8% decline in 2009 (comparing favorably with the national decline of 4.8%), personal income grew for the next three years. 4.1% growth in 2010 and 5.4% in 2011 exceeded U.S. growth, while 3.2% growth in 2012 slightly trailed national 3.5% growth. Personal income per capita, at $47,082, equaled 110.3% of the U.S. average in 2012, ranking eighth among the states.
WELL-MANAGED DEBT PROFILE
The commonwealth's debt ratios are in the lower moderate range and have grown slightly over the past fiscal year. As of June 30, 2012, net tax-supported debt totaled approximately $10.8 billion, equal to 2.8% of 2012 personal income. GO debt constitutes approximately 17% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Capital needs for higher education and transportation improvements remain large, and planned transportation borrowing is being expedited.
TRANSPORTATION FUNDING CHANGES
During the 2013 legislative session, the general assembly adopted HB 2313, eliminating Virginia's fixed per-gallon motor fuels tax and replacing it primarily with various percentage-based consumption tax changes. The commonwealth projects the bill will add up to $3.5 billion in new transportation funding over the next five years and eliminate reliance on capital construction funds for basic roadway maintenance. Specifics include a new percentage-based sales tax on motor fuels, a larger share of an increased general sales and use tax, an increased tax on motor vehicle sales, and a registration fee surcharge for hybrid, alternative fuel and electric vehicles. The bill also increases the existing general sales and use tax allocation to education funding. These changes will affect both general fund and transportation-related funding, and Fitch will assess the credit effects as they are implemented.
PENSION LIABILITIES
On a combined basis, the burden of the state's net tax-supported debt and unfunded pension obligations equals 4.7% of 2012 personal income, below the median for U.S. states rated by Fitch. The adjusted calculation includes only the state's portion of the total liability to the Virginia Retirement System. The system-wide funding of the Virginia Retirement System has declined in recent years in part due to underfunding of contributions, and the June 30, 2011 funded ratio was 69.9%, down from 84% funded on June 30, 2009. As of 2011, the system utilizes a 7% investment return assumption, in line with Fitch's standard adjustments to pension system liability calculations for other governments. While certain pension reforms were adopted in 2010, additional reforms addressing required contribution levels and various plan design changes have been adopted which are expected to limit further growth in the state's pension liabilities in the coming years.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from the Underwriter and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Considerations for 2010
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500988
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789730
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