NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Arlington County, VA general obligation (GO) bonds at 'AAA':
--$1.25 billion in GO public improvement and refunding bonds.
In addition, Fitch has affirmed Arlington County's Issuer Default Rating (IDR) at 'AAA'.
Fitch has also upgraded to 'AA+' from 'AA' the rating on the following debt obligations issued by the Industrial Development Authority (IDA):
--$58.6 million in revenue and refunding bonds (county projects) series 2013 A and series 2013B.
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. The bonds are not further secured by a deed of trust.
KEY RATING DRIVERS
The 'AAA' IDR and GO rating reflects the county's strong economic resource base which underpins the county's strong financial results. The county's strong revenue and expenditure flexibility, evidenced by its conservative budgeting and close monitoring of expenditures have consistently produced surplus results leading to solid reserve levels and liquidity. Debt levels are expected to remain moderate and manageable 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.
The upgrade of the IDA revenue bonds to 'AA+' reflects the application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18, 2016. The revised criteria include more focused consideration of project factors in ratings for appropriation-backed debt; the series 2013A and series 2013B bonds do not contain any of the risks that Fitch identifies for a rating more than one notch below the IDR.
Economic Resource Base
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 with an estimated 2014 population of 226,908. The local economy remains strong, due to the presence of the federal government, which attracts a large number of private contractors and a highly skilled and educated workforce. Wealth levels are above average and have grown faster than the region's and the nation's. County unemployment remains low at 2.7% in March 2016, when compared to the state and the nation.
Revenue Framework: 'aaa' factor assessment
The county has strong revenue flexibility due to its unlimited ability to increase property taxes. Revenue growth prospects are favorable due to historical growth trends and ongoing redevelopment projects. Property tax revenues have increased annually, reflecting a combination of timely tax rate increases during slow tax base growth years and increasing assessed values. The county's tax rate is below other counties in the region.
Expenditure Framework: 'aa' factor assessment
The county's pace of spending is relatively in line with revenue growth. The county maintains strong expenditure flexibility, aided by the absence of collective bargaining and low carrying costs.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch expects long term liabilities to remain low given manageable debt plans, rapid amortization and lack of unfunded pension liabilities.
Operating Performance: 'aaa' factor assessment
The county has demonstrated strong financial management through conservative budgeting, timely tax rate increases and closely monitored expenditures. Operations have generally produced surpluses, leading to the maintenance of reserves, which Fitch expects would continue through an economic downturn.
RATING SENSITIVITIES
Continued Strong Financial Position: The 'AAA' rating is sensitive to the county's stable financial performance, the maintenance of adequate reserves and strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Arlington County is located at the center of the Washington D.C. metro area and has consistently exhibited very strong economic characteristics. The local economy is anchored by the presence of the federal government, although a healthy retail base and government employers outside the defense sector and a significant tourism component add breadth to the county's economy. The impact of the 2005 military base realignment and closures remain but Fitch believes that the county will be able to absorb these losses with a focused strategy to repurpose existing offices. Commercial vacancy rates have shown improvement, demonstrating the county's redevelopment efforts and positive employment trends.
Revenue Framework
Property taxes are 67% of county general fund revenues, providing stability. The county's tax base growth has been largely positive, experiencing a mild dip during the recession (-6.4% in fiscal 2010) and has since rebounded with positive annual growth, with fiscal 2016 total assessed value exceeding pre-recessionary levels. Management estimates indicate growth to continue through 2017, driven by residential and commercial construction rather than reappraisals.
General fund revenue growth has been strong, exceeding the national GDP and inflation, a trend that Fitch expects to continue. Growth prospects are positive, given ongoing development. The county benefits from broad revenue raising ability, as it is not subject to any limitation on its property tax rate or levy.
Expenditure Framework
The county maintains healthy expenditure flexibility with low fixed carrying costs. Fitch expects the pace of spending growth, over time to be in line with to marginally above revenue growth.
Education is the county's largest expenditure item, as the county provides an elevated share of school funding relative to other local governments in the state. The county has the legal ability manage workforce costs given the absence of collective bargaining. Carrying costs (total debt service, actuarially determined pension payment and OPEB actual contributions) are low at 10.5% of government spending in fiscal 2015.
Long-Term Liability Burden
The county's overall debt burden is equal to a low 5.3% of personal income. The county has virtually no unfunded pension liability. Debt amortization is rapid with 64% of principal scheduled to be repaid within 10 years. The county's proposed 2017-2026 capital improvement plan (CIP) totals $3.3 billion, including self-supporting utility and transportation projects. Pay-as-you-go financing is estimated to provide 12% of funding with the balance funded by a combination of debt issuance and federal funding. The county projects compliance with its prudent debt policies. Fitch expects these policies along with rapid debt amortization and projected tax base growth to keep the debt burden modest.
The county provides a single employer defined benefit plan for its employees with the exception of teachers who participate in the Virginia Retirement System. The county consistently funds 100% of the actuarially determined contribution. The County's plan was well funded as of June 20, 2015, estimated at over 96% using Fitch's more conservative 7% discount rate. On a reported basis, the plan is 99% funded and uses a discount rate that was recently lowered to 7.25%.
Operating Performance
Fitch's scenario analysis highlight's the county's strong financial resilience, including solid reserves, low revenue volatility, and budget flexibility, Fitch expects the county would maintain reserves at a level that Fitch considers adequate for a 'aaa' financial resilience assessment in the event of a moderate economic downturn.
The county's financial profile remains sound and well managed. The county was able to increase reserves following the recession through a combination of conservative budgeting, implementing a hiring freeze, maintaining vacant positions and applying timely rate increases.
The county's general fund results for fiscal 2015 show a $32.8 million decline in fund balance (2.8% of spending). These results were attributable to a timing issue, as non-recurring grants and revenues were received in fiscal 2014, but associated spending occurred in fiscal 2015. The fiscal 2015 unrestricted fund balance was $197.8 million, equal to 16.9% of expenditures and transfers out. The committed fund balance includes the county's 5% operating reserve (by policy) which may be used to meet critical and unanticipated spending needs. Fitch anticipates 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-as-you-go capital and affordable housing budget contingencies, but expects reserves to remain healthy and above the 5% policy levels.
Fiscal 2016 general fund budget is 3.0% over the prior year's budget. The 2016 budget maintains the current tax rate and reflects an increase in spending mostly due to additional funding to schools and increases in economic development and the establishment of an internal auditor. Year-to-date operating results are positive relative to budget, per county management. Fitch anticipates about break-even results.
The adopted fiscal 2017 budget is less than a 3.0% increase over the 2016 budget. The 2017 budget includes a half cent property tax rate decrease and funds a 3.3% increase to schools and additional funds for economic development and workforce investment. The budget also incorporates a minimal use of reserves, originally set aside for business and professional license tax (BPOL) liabilities. Due to lower than anticipated BPOL refunds, the county was able to release $2.5 million in reserves for one-time uses. Multiyear projections show modest operating deficits beginning in fiscal 2018, although the county historically outperforms its forecasts.
The county also maintains additional reserves ($30.0 million or 2.0% of the 2016 budget) 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 that establishes a minimum reserve requirement for additional reserves. Therefore, these additional reserves may be subject to more fluctuation than general fund reserves that are governed by a policy.
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005272
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005272
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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