NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'AA+' to the following general obligation (GO) bonds to be issued by Roanoke, Virginia (the city):
--$13.8 million GO public improvement bonds, series 2014A (tax-exempt);
--$7.2 million taxable GO public improvement refunding bonds, series 2014B.
Proceeds of the series 2014A bonds will be used to fund various city and school capital projects. Proceeds of the series 2014B (taxable) bonds will be used to advance refund GO bonds, series 2008A and 2010A. The bonds are scheduled to be sold competitively on Feb. 19, 2014.
In addition, Fitch affirms the 'AA+' rating on approximately $170.7 million of outstanding GO bonds of the city.
The Rating Outlook is Stable.
SECURITY
The bonds will be general obligations of the city, secured by the irrevocable pledge of the city's full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: Reserve levels have increased following a series of positive operating results from fiscal years 2009-2013. The city targets a 10% set-aside for cash flow and emergency purposes, which Fitch believes provides an adequate cushion at the current rating given the city's other credit characteristics.
ECONOMIC HUB FOR WESTERN VIRGINIA: Roanoke is a regional economic hub, with a diverse economy that leverages the city's employment sector strengths in health care and transportation. Growing opportunities in biomedical research lend additional employment and income stability.
BELOW AVERAGE SOCIOECONOMIC PROFILE: Per capita and median household income is below state and national averages, reflective of the relatively low cost of living in the region. The city's poverty rate is also above average.
AFFORDABLE DEBT POSITION: Debt levels are moderate, and servicing costs affordable. Additional capital needs and issuance plans are not expected to impact the debt profile, given the rapid rate at which existing obligations are amortized.
PENSION CONCERNS: Fitch considers the unfunded liability for pension benefits to be a concern given the annual contribution requirement consumes an increasing share of operating resources due to the city formalizing the cost of living adjustments, which previously have been provided on an ad hoc basis.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and ability to reduce long-term liabilities over time.
CREDIT PROFILE
Roanoke is located in rural western Virginia along Interstate 81, at the southern end of the Shenandoah Valley and approximately 170 miles west of Richmond. The city has a stable population of approximately 97,469, making it the largest city in the commonwealth west of the state capital.
STABLE OPERATIONS AND RESERVES GUIDED BY PRUDENT POLICIES
The city concluded fiscal 2013 with a modest net surplus (after transfers) in the general fund of $538,000 (or 0.21% of total general fund spending of $232.6 million). Fiscal 2013 was the fifth consecutive year a net surplus was recorded. The year-end unrestricted fund balance improved to $27.6 million or 10.9% of spending during this period. Adopted fiscal policies target a 10% fund balance reserve.
Policy requires the city to adopt a balanced budget excluding the use of one-time measures or existing fund balance. The fiscal 2014 budget, which totals $260 million or a 2.8% increase from the fiscal 2013 budget, is performing slightly below target based on mid-year results presented by management. The city expects close to break-even operations at year-end, which appears reasonable given year-to-date results and historical trends.
The general fund budget is supported by a diverse resource mix led by property taxes at 41% of total revenue. Property taxes are generally very stable and derived from a diverse tax base with excellent collection rates.
Total taxable assessed value increased by 0.14% in fiscal 2013. Looking ahead, the assessed value of real estate is projected to decline slightly in fiscal 2014 and 2015 by 0.8% and 0.2% respectively. The city's tax rate and levy is not subject to statutory or charter limitation or cap, affording the city the ability to offset AV declines and maintain revenue stability. The tax rate has been flat or has declined each year since at least fiscal 2002, and at $1.19 per $100 of AV is slightly higher than several city/county rates in the region.
The remainder of discretionary general fund revenue is largely derived from a mix of broad-based taxes including sales tax (7.6%), utility tax (4%), business license tax (5%), food and beverage tax (5%) and telecommunications tax (3%). The city has independent rate setting authority with respect to the majority of these sources, which affords additional financial flexibility.
The city's revenue forecasting has proved fairly accurate in recent fiscal periods, even though these revenues can be volatile given their consumption-based nature. The continued maintenance of solid reserve levels offers a cushion in the event of an unanticipated decline in collections.
WESTERN VIRGINIA ECONOMIC ANCHOR
Roanoke serves as the regional retail, transportation, manufacturing, and healthcare hub, a position bolstered by its location within the crossroads of major highway and rail systems and complemented by its airport.
As the regional center for economic activity, employment opportunities are fairly diverse and the city's unemployment rate continues to track below that of the U.S. at 6.2% in November 2013. The Roanoke region is fairly mature, and growth expectations are modest.
Income levels for city residents trail those of the state by a good margin. A low regional cost of living may offset this risk to a degree. The city's low income has not detracted from its retail base, which is anchored by a regional mall and benefits from a significant student population of more than approximately 91,000 within a 60-mile radius of the city.
The city's largest employment sector, health care and social assistance, comprises 18% of employment and is anchored by Carilion Clinic. Carilion, which is headquartered in Roanoke, is also the city's largest taxpayer (at 2.6% of total AV) and private sector employer (over 6,000 employees).
The 703-bed Carilion Roanoke Memorial Hospital is one of the largest hospitals in the state and recently received a $105 million renovation adding a new emergency department, labor and delivery unit, and children's hospital. Carilion recently partnered with Virginia Tech to open a new $59 million school of medicine and research institute, Virginia Tech Carilion (VTC). VTC has experienced strong demand since enrolling its inaugural class in fall 2010 and there are plans to steadily expand the current scope of research.
AFFORDABLE DEBT LEVELS
Debt is presently affordable, and expected to remain so going forward. Outstanding debt equals 2.5% of market value or $2,165 per capita, ratios considered moderate by Fitch.
The 2014 - 2018 capital improvement program (CIP) totals $124 million or 1.4% of market value. The CIP will be largely financed with additional debt. Fitch does not expect any impact on credit quality from the additional borrowing given the city's aggressive retirement of outstanding obligations. The city is scheduled to repay more than 75% of outstanding principal over the next 10 years.
Pension and retiree health costs consume a manageable share of city resources (approximately 7.7% of governmental spending).
City employees participate in one of two different pension plans and may participate in a deferred compensation plan.
The City of Roanoke Pension Plan was 67% funded as of the June 30, 2013 valuation date, a notable decline from higher levels in prior years due to the inclusion of cost of living increases in the valuation. Using Fitch's more conservative 7% return rate, the plan was estimated at a weaker 62% funded ratio. Roanoke's Virginia Retirement System (VRS) funded ratio is adequate at 76.6%. The city contributed $9.2 million to the Roanoke plan for fiscal 2013 equal to 100% of its annual required contribution (ARC) and approximately 3.2% of total governmental spending. Future projections show a significant increase to the ARC which will put pressure on annual spending and a corresponding reduction of ARC funding to 88% beginning fiscal 2015. The city's projections show a return to full ARC funding by 2019. The city's contribution to VRS was a modest $1.1 million or less than 1% of spending.
The city paid $1.2 million towards OPEB contributions in fiscal 2013 which accounted for 109% of the ARC or less than 1% of spending. Total carrying costs for debt service, pensions and OPEB are affordable at 15.5% of total governmental spending but will increase over the near term due to rising pension costs.
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, Virginia Employment Commission.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819722
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