NEW YORK & BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Virginia College Building Authority (VCBA) bonds:
--$73.695 million educational facilities revenue bonds (public higher education financing program), series 2013A;
--$12.41 million educational facilities federally taxable revenue refunding bonds (public higher education financing program), series 2013B.
The bonds are expected to sell via competition on or about Oct. 23, 2013.
In addition, Fitch affirms the 'AAA' ratings on the Commonwealth of Virginia's $1.7 billion in outstanding general obligation (GO) bonds. Fitch also affirms the 'AA+' ratings on the commonwealth's appropriation-backed debt as detailed at the end of this release.
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations of the authority, secured by payments due pursuant to loan agreements with participating higher education institutional borrowers. Further, the bonds include an intercept provision whereby in the event of a missed loan payment by a borrower, the state controller makes debt service payments from commonwealth appropriations to that borrower, which serves as the basis for the rating.
KEY RATING DRIVERS
ABILITY TO INTERCEPT COMMONWEALTH-APPROPRIATED FUNDS: The rating reflects provisions allowing the Commonwealth of Virginia to intercept commonwealth-appropriated funds to borrowing higher education institutions, as well as substantially all of the revenues generated locally at each, in the event of non-payment under loan agreements with the authority.
CONSERVATIVE COMMONWEALTH FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue stabilization fund (RSF). Revenue performance has improved considerably since the recession and deposits to Virginia's reserve fund are budgeted per policy during the current biennium, including a prepayment towards deposits required in the next 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.
MODERATE DEBT LEVELS: Virginia's debt ratios are in the moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant and issuance has accelerated in recent years.
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. Unfunded liabilities as a percentage of personal income remain below average for U.S. states rated by Fitch. 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 commonwealth's pension liabilities over time.
RATING SENSITIVITIES
The rating on the bonds is sensitive to changes in the commonwealth's GO rating, to which it is linked. The GO rating is sensitive to shifts in fundamental credit characteristics, particularly the economy's ability to absorb federal austerity measures and the commonwealth's continued careful debt management.
CREDIT PROFILE
Under loan agreements, participating higher education institutions pledge their general revenues to make payments on institutional notes, which are paid directly to the trustee in amounts sufficient to pay debt service on the bonds. General revenues include virtually all of an institution's locally-generated revenues not otherwise committed, including tuition and fees, as well as general and non-general fund commonwealth appropriations.
The rating on the bonds is linked to that of the commonwealth as a result of the intercept provisions, which provide that if an institution fails to make payments on its note, the state comptroller is required, upon direction from the governor, to make an intercept payment immediately to the owners of the institutional note. Institutional note payments are due 15 days prior to the semiannual debt service on the bonds, providing ample time for the intercept payments to be made. The intercept payments are made from any appropriation of general revenues available to a given institution, which is extremely broad, providing multiple levels of coverage at the time payments are required. The higher education system in Virginia has wide commonwealth support.
The series 2013A and B bonds, as well as earlier series, are issued under a 1997 master indenture. Each note is issued separately by each institution to the authority, pursuant to separate loan agreements. These are the 21st and 22nd series of bonds to be issued under the program.
COMMONWEALTH FINANCES REMAIN SOUND
The commonwealth's 'AAA' rating reflects its substantial fiscal resources, conservative approach to financial operations which includes periodic revenue forecast updates, and low-to-moderate debt levels. Economic and revenue performance has improved since the start of the 2010-2012 biennium, which began July 1, 2010, and continued through fiscal 2013 (the midway point of the 2012-2014 biennium). Revenue over-performance through fiscal 2012, combined with below-budget spending, allowed the commonwealth to close the 2010-2012 biennium on June 30, 2012 with a surplus of $448.5 million.
The commonwealth made a $133 million RSF deposit in fiscal 2013, and an additional $245 million deposit is budgeted for fiscal 2014. Both deposits are required under constitutional provisions to dedicate a portion of annual tax revenue growth to the RSF. The legislature and governor also enacted a further $95 million prepayment towards RSF deposits required in the next biennium. Based on unaudited fiscal 2013 results, a $243 million deposit will be due in fiscal 2015. Following these deposits, the rainy day balance is expected to increase substantially from its current level of $440 million to $688 million as of June 30, 2014 (the end of the current biennium), and $938 million at the close of fiscal 2015.
Additionally, Fitch notes that $30 million is programmed for deposit to a Federal Action Contingency Fund (FACT), a second, statutory reserve established to address the risk of federal deficit reduction, with a further appropriation of $30 million contingent on attainment of a budget surplus during the 2012-2014 biennium. Assuming $60 million is ultimately set aside in the FACT fund, when combined with the expected $688 million in the RSF, the commonwealth is projected to have accumulated $748 million, representing approximately 4.4% of forecasted fiscal 2014 revenues, in reserves 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 projected for fiscal years 2013 and 2014, respectively, a forecast which Fitch believes to be reasonable. The amended budget includes the aforementioned reserve deposits; increased funding for the commonwealth'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.
Preliminary unaudited results for fiscal 2013 indicate a strong general fund surplus of $585 million, generated through a combination of revenues and expenditures performing ahead of budget. Revenues increased 4.8% year-over-year (yoy), versus the official 3.6% forecast. Income tax revenues were a key driver with individual and fiduciary income taxes up 6.9% yoy. Income acceleration associated with the recent federal tax rate increase likely played a significant role as growth in nonwitholding revenues accounted for the entire over-performance relative to forecast. Sales and use tax revenues were also up 3.2% yoy, and total tax revenues increased 5.2% from fiscal 2012. Fitch anticipates federal sequestration, as well as the recent federal shutdown, will negatively affect the commonwealth's general fund revenues, primarily sales and income tax collections, given the commonwealth'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 any near-term effect on revenues.
BROAD ECONOMIC BASE
The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 and 2010 by 3.2% and 0.1%, respectively, 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 August 2013, yoy employment growth was 0.8%, below the 1.7% growth rate for the nation. Yoy employment losses in federal government employment associated with federal contraction began in April with a 0.2% decline, and have accelerated every month since then. Fitch will continue to monitor the effects of this contraction, although the agency believes the strength of the commonwealth'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 5.8% rate for August 2013 represents just 79% 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 0.7% decline in 2009 (comparing favorably with the national decline of 2.9%), personal income grew for the next three years. Growth in 2010 of 3.1% and 6.1% in 2011 met or exceeded U.S. growth, while 3.7% growth in 2012 slightly trailed national growth of 4.2%. Quarterly data through 2Q'13 indicate personal income growth continues to slightly lag the national trend. Personal income per capita growth also lagged the national rate in 2012, but remains high at $48,377 or 110.6% of the U.S. average in 2012. Virginia ranks 10th among the states on this metric.
WELL-MANAGED DEBT PROFILE
The commonwealth's debt ratios are in the moderate range and have grown slightly over the past fiscal year. As of June 30, 2013, net tax-supported debt totaled approximately $10.8 billion (preliminary, unaudited basis), 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. VCBA's public higher education financing program bonds, as well as certain other appropriation-linked debt, are excluded from Fitch's calculation of state debt due to their track record of self-support. Capital needs for higher education and transportation improvements remain large with substantial authorized but unissued balances outstanding, and planned transportation borrowing is being expedited.
PENSION LIABILITIES UNDER CONTROL
On a combined basis, the burden of the commonwealth's net tax-supported debt and unfunded pension obligations equals 4.6% of 2012 personal income, below the median of 7% for U.S. states rated by Fitch. The adjusted calculation includes the commonwealth's portion of the total liability of the Virginia Retirement System (VRS) covering only commonwealth employees, and the full liability for several much smaller systems where the commonwealth is the sole employer. The system-wide funding of the VRS declined in recent years in part due to underfunding of contributions (partially used as a budget balancing measure), 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. In recent years, the commonwealth enacted pension reforms addressing required contribution levels and various plan design changes, all expected to limit further growth in the commonwealth's pension liabilities in the coming years. Importantly, the commonwealth anticipates phasing back in full actuarially required contributions by fiscal 2019. Funded ratios could weaken until then, though Fitch does not anticipate material reductions, absent significant investment market declines.
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 statute 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 statute 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 any credit effects as they are implemented.
As noted earlier in this release, Fitch also affirms the 'AA+' ratings and Stable Outlook on the following Commonwealth appropriation-backed credits:
--$2.5 billion VA Public Building Authority - Public Facilities Revenue Bonds;
--$3.4 billion VA Public School Authority - School Financing Bonds and School Educational Technology Notes;
--$1.7 billion VA College Building Authority - Public Higher Education Financing Program Bonds;
--$2.7 billion VA College Building Authority - 21st Century College & Equipment Program Bonds;
--$228.8 million VA Port Authority - Commonwealth Port Fund Revenue Bonds;
--$11.42 million Big Stone Gap Redevelopment and Housing Authority - Correctional Facilities Lease Revenue Bonds;
--$34.9 million Virginia Biotechnology Research Partnership Authority - Commonwealth of VA Lease Revenue Bonds;
--$74.8 million Fairfax County Economic Development Authority- Commonwealth of VA Lease Revenue Bonds.
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 the Underwriter and IHS Global Insight.
Applicable Criteria and Related Research:
--'Rating Guidelines for State Credit Enhancement Programs' (Apr. 18, 2013);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880
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=805632
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