NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following Arlington County, Virginia general obligation (GO) bonds:
--$55.2 million GO public improvement bonds series 2016;
--$91.3 million GO refunding bonds series 2016.
The bonds will be sold via negotiated sale the week of April 18. Bond proceeds will be used to pay the cost of various public improvements for the County and the refunding bonds will be used to refund certain bonds outstanding.
In addition, Fitch affirms the following ratings:
--$1.03 billion of outstanding GO bonds at 'AAA',
--$58.6 million of outstanding 2013 Industrial Development Authority (IDA) revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are general obligations of Arlington County for which the full faith and credit and unlimited taxing power of the county are pledged.
The revenue bonds issued by the Arlington County IDA are limited obligations of the authority payable solely from payments to be made by the county to the trustee, subject to annual appropriation by the county board.
KEY RATING DRIVERS
OUTSTANDING FINANCIAL PERFORMANCE: Conservative budgeting, timely tax increases, and closely monitored expenditure controls consistently produce surplus operating results leading to solid reserve levels and liquidity.
GOVERNMENT-DOMINATED EMPLOYMENT BASE: The significant presence of the federal government continues to support very strong employment and income metrics in the county. The tax base likewise remains robust and growing, despite BRAC-related vacancies which continue to hamper the commercial real estate market.
WELL-MANAGED LONG-TERM OBLIGATIONS: Debt levels are expected to remain moderate given prudent planning and adherence to conservative debt policies. The county's pension plan is nearly fully funded and the county continues to contribute the full actuarial determined payment for other post-retirement benefits (OPEB).
APPROPRIATION RISK: The 'AA' rating on the IDA revenue bonds incorporates the general creditworthiness of the county; the rating is notched down from the GO rating reflecting appropriation risk and the absence of a security interest in essential governmental facilities.
RATING SENSITIVITIES
CONTINUED STRONG FINANCIAL POSITION: The rating is sensitive to the County's stable financial performance and the maintenance of adequate reserves and continued adherence to its financial and debt policies. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Arlington County is located in the northern section of Virginia across the Potomac River from Washington, D.C., and encompasses a land area of 25.8 square miles. As of 2014 the population is estimated at 226,908.
AMPLE RESERVE LEVELS
The county's financial profile remains sound and well managed. The fiscal 2015 unrestricted fund balance was $197.8 million or a sound 16.9% of expenditures and transfers out. The committed fund balance includes the county's 5% operating reserve, which may only be used to meet critical and unanticipated spending needs. Fitch expects a certain amount of variability in the county's committed and assigned portion of the fund balance as a result of expenditures associated with pay-go capital, affordable housing, and budget contingencies, but expects reserves to remain healthy and above policy levels.
The county maintains additional reserves ($30.0 million or 2.0% of budget fiscal 2016 expenditures) outside of the general fund that could be used if needed. While Fitch recognizes these reserves as additional flexibility, the county does not have an internal policy in place that requires a minimum reserve level for all the additional reserves to be maintained and therefore reserves may be more subject to fluctuation than general fund reserves that are governed by a policy.
MODEST SURPLUS OPERATIONS ANTICIPATED FOR FISCAL 2016
The 2016 general fund budget is 3.0% over the FY 2015 adopted budget. The budget maintains the current tax rate and reflects an increase in spending mostly due to additional funding to the schools, and increases in economic development and the establishment of an internal auditor. Year-to-date operating results are positive relative to budget according to management.
The proposed fiscal 2017 expenditure budget is less than a 3.0% increase over the adopted 2016 budget. The budget maintains the current tax rate with an option for a half cent decrease and funds a 3.0% increase to the schools, and additional funds for economic development and workforce investment.
Multiyear projections show modest operating deficits beginning in fiscal 2018, although the County historically outperforms its forecasts.
SOLID REVENUE-RAISING FLEXIBILITY
The county is not subject to any limitation on its property tax rate or levy. Typical of Virginia counties, property taxes produced approximately 67% of fiscal 2015 general fund revenue. Property tax revenues increased annually between fiscal 2010 and 2014, reflecting increasing taxable assessed values and timely tax rate enhancements during slow tax-base growth years, demonstrating solid fiscal management. While the average tax bill is higher than in neighboring communities, total tax collections remain near 100%.
EXTENSIVE ECONOMY
Arlington County is located at the center of the Washington D.C. metro area and has consistently exhibited very strong economic characteristics. The presence of the federal government remains key to the region's overall stability, attracting a large number of private sector contractors. A healthy retail base, government employers outside the defense sector and a significant tourism component add breadth to the county's economy.
The high-paying employment base is supported by a local workforce that is among the most educated and highly skilled in the nation. Wealth indicators are very strong and income growth rates measure favorably when compared to the region and nation. Unemployment remains low, at 2.7% in January 2016.
Job relocation to outside of the county and increased vacancies associated with the 2005 military base realignment and closure are anticipated to continue over the near term but Fitch continues to believe the county will be able to absorb these losses with a focused strategy to repurpose existing office.
The county's tax base has recovered since its relatively mild dip during the recession, with healthy growth averaging 5.1% annually between 2010 and 2015. Year-to-date estimates indicate positive growth to continue through 2016. The county incorporates 2 to 3% annual tax base growth into its long-range plans under a moderate forecast scenario, which Fitch believes is sustainable.
SOUND DEBT PROFILE
Formally adopted conservative debt management guidelines that include a detailed debt capacity analysis serve as the financial framework for the county's capital initiatives. Fitch expects the county's debt ratios to remain moderate. The moderately high debt per capita of $4,467 is offset by the strong wealth and economic activity of the county, as evidenced by the low debt as a percent of market value ratio of 1.4%. Rapid amortization of 73% of principal retired within 10 years enhances the debt profile.
The proposed fiscal 2015 - 2024 CIP totals $3.2 billion, including self-supporting utility projects. Transportation and metro projects ($1.6 billion) are the major cost drivers. Pay-as-you-go capital financing is slated to provide about 15% of the funding for general government projects, with the balance funded by debt issuance and state/federal funding. The county is in the midst of updating its CIP and expects the FY 2017-2026 to be generally in line with the current CIP. The county projects compliance with its prudent debt policies throughout the course of the CIP. The debt burden is expected to remain modest given rapid amortization and projected tax base growth.
WELL-FUNDED LONG-TERM LIABILITIES EXPECTED TO REMAIN AFFORDABLE
Long-term liabilities are well managed. The county consistently funds 100% of the actuarially determined contribution (ADC) for its single-employer, defined benefit plan. The plan covers substantially all employees with the exception of teachers who participate in the Virginia Retirement System (VRS).
The county's plan was well funded as of June 30, 2015, estimated at over 98.5% using Fitch's more conservative 7% discount rate. On a reported basis the plan is 99.0% funded and uses a discount rate that was recently lowered to 7.25%. Arlington County Schools participate in the VRS. Although the county does not have a direct obligation to fund the schools pension costs, the County is obligated to fund a portion of the school budget thus an increase in pension costs could have an indirect impact on the county budget.
The system-wide funding level of the VRS declined in recent years in part due to underfunding of actuarially-based contributions (partially used as a budget balancing measure by the commonwealth), but recovered more recently with the exclusion of 2009 investment losses from the smoothing formula, improved investment gains, and increased annual funding. As of the June 30, 2015 valuation from VRS the funded ratio on a reported basis was 70.9%, down from 84% funded on June 30, 2009, but up from a trough of 65.1% on June 30, 2013. Importantly, the commonwealth anticipates phasing back in full actuarially-determined contribution (ADC) payments by fiscal 2019.
The county also provides OPEBs to its retirees. For fiscal 2014 the county funded 105% of the OPEB ARC. According to the latest actuarial valuation (July 1, 2014) the funded ratio was 29.4%. Fitch views even this moderate level of OPEB pre-funding positively. The UAAL associated with OPEB totals $180.5 million or a low 0.2% of market value. Carrying costs for debt service, pension ARC and actual OPEB spending totaled a low 10.5% of fiscal 2015 governmental fund spending.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and
Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the second quarter of 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, Lumesis, IHS, and Zillow Group
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001840
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001840
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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