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Fitch Affirms Virginia's $1.7B GOs at 'AAA'; Outlook Stable
Posted January 30, 2012
We Recommend...
NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' rating on the Commonwealth of Virginia's $1.7 billion outstanding general obligation (GO) bonds. Additionally, Fitch affirms the 'AA+' ratings on the commonwealth's appropriation debt as detailed at the end of this release.
The Rating Outlook is Stable.
SECURITY
The bonds represent general obligations of the commonwealth, with full faith and credit pledged.
KEY RATING DRIVERS
--CONSERVATIVE FINANCIAL MANAGEMENT: 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 expected 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. Some reductions in government sector employment over the next few years are a risk 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 and additional reforms have recently been proposed.
CREDIT PROFILE
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. While the national recession affected state revenues, resulting in downward forecast revisions totaling approximately $6.6 billion since the initial introduction of the 2008-2010 biennium budget in December 2007, Virginia has promptly and repeatedly implemented balancing measures.
Economic and revenue performance has improved since the start of the fiscal 2010-2012 biennium, which 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. Fiscal 2011 ended with a budget surplus of $545 million, resulting largely from revenues coming in $311 million ahead of the upwardly revised forecast and $234 million in spending below budgeted levels. Given the revenue overperformance, $133 million has been set aside to fund a deposit due to the revenue stabilization fund in fiscal 2013, while an additional deposit of $166 million is reserved for fiscal 2014. Following these deposits, the rainy day balance is expected to double in size to total $609 million at the close of fiscal 2014. Revenue performance for fiscal 2012 through December 2011 is slightly below recently revised estimates.
The executive budget for the 2012-2014 (spanning fiscal years 2013 and 2014) biennium proposes general fund spending of $34.5 billion over the two-year period, reflecting growth of 8.4% over adjusted 2010-2012 biennial spending. Revenue growth of 3.3% and 4.5% is reasonably projected for fiscal years 2013 and 2014, respectively. The proposed budget includes the aforementioned reserve deposits, higher funding of the state's retirement systems to address contribution savings taken during the downturn, increased Medicaid funding, as well as additional support for K-12 education and higher education. The budget also reflects restricted inflationary growth in certain aspects of K-12 education and the Medicaid program. The budget assumes the biennium will close with an ending balance of $31.4 million, and combined with $50 million set aside in a Federal Action Contingency Fund (to address the risk of federal austerity) and the expected $609 million in the revenue stabilization fund, the commonwealth will have $690 million, or approximately 4% of expected fiscal 2014 revenues, in reserve funds.
The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 by 3.2% and 0.4% in 2010, though this performance was less severe than national declines of 4.4% and 0.8% for 2009 and 2010, respectively. Virginia employment bottomed out in mid 2010, and growth has been recorded through 2011. As of December 2011, year-over-year growth was 1%, compared with 1.3% growth for the nation over the same period. Some employment losses associated with expected Federal government contraction is expected given the significant presence in the northern part of the state.
Unemployment has historically been well below the national rate, and the 6.2% rate for December 2011 represents just 73% 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; 2009 saw a decline of 2.2%, comparing favorably with the national decline of 4.3% for the year, while growth of 3.7% for 2010 was on par with U.S. growth. At $44,762, personal income per capita equaled 111% of the U.S. average in 2010, ranking seventh among the states.
The commonwealth's debt ratios are in the lower moderate range and have grown slightly over the past fiscal year. As of June 30, 2011, net tax-supported debt totaled approximately $9.3 billion, equal to 2.6% of 2010 personal income. GO debt constitutes approximately 19% 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. 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%, a figure which reflects a 7% investment return assumption which Fitch views as conservative. While certain pension reforms were adopted in 2010, additional reforms have been proposed which should further limit growth in the state's pension liabilities in the coming years.
As noted earlier in this release, Fitch also affirms the 'AA+' ratings and Stable Outlook on the following
Commonwealth appropriation-backed credits:
--VA Public Building Authority - Public Facilities Revenue Bonds;
--VA Public School Authority - School Financing Bonds;
--VA Public School Authority - School Educational Technology Notes;
--VA College Building Authority - Public Higher Education Financing Program Bonds;
--VA College Building Authority - 21st Century College & Equipment Program Bonds;
--VA Port Authority - Commonwealth Port Fund Revenue Bonds;
--Big Stone Gap Redevelopment and Housing Authority - Correctional Facilities Lease Revenue Bonds;
--Norfolk Industrial Development Authority - Commonwealth of VA Lease Revenue Bonds;
--Virginia Biotechnology Research Partnership Authority - Commonwealth of VA Lease Revenue Bonds;
--Fairfax County Economic Development Authority- Commonwealth of VA Lease Revenue Bonds.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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. 15, 2011;
--'U.S. State Government Tax-Supported Rating Criteria', Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/report...
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/report...
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