Fitch Rates Suffolk, VA General Obligation Bonds 'AAA'
OREANDA-NEWS. Fitch Ratings has assigned 'AAA' ratings to the following Suffolk, VA bonds:
--approximately $79.42 million series 2016 GO and refunding bonds.
Fitch has affirmed the following ratings at 'AAA':
--$198.39 million in outstanding GO Bonds
--Long-Term Issuer Default Rating (IDR)
The outlook is stable.
SECURITY
The bonds are general obligations of the city, secured by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
The 'AAA' IDR and GO rating reflect the city's expanding economy and growth prospects, low long-term liability burden, strong financial management, healthy reserves, and broad budgetary tools.
Economic Resource Base
Located in the western part of the Hampton Roads region of southeastern Virginia, Suffolk is the largest city by area in the state and one of the fastest growing with a current estimated population close to 90,000. The city's economy has been gaining jobs at a healthy pace and is predominately made up of the defense, healthcare and distribution sectors.
Revenue Framework: 'aaa' factor assessment
Revenues have been rising at a pace above both the rates of inflation and GDP growth. The city has the independent legal ability to raise property tax revenues in an unlimited amount.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected to remain in line with, to marginally above, revenue growth. Moderate carrying costs and broad flexibility to manage labor-related costs allow the city solid leeway to adjust spending.
Long-Term Liability Burden: 'aaa' factor assessment
The combined burden of debt and unfunded pension liabilities is low in relation to personal income and should remain relatively stable over time based on future capital and issuance plans and the strong funded position of the city component of the Virginia Retirement System (VRS).
Operating Performance: 'aaa' factor assessment
The city's combination of general fund balance and superior budget flexibility position it to comfortably manage through economic downturns without diminishing its overall financial flexibility.
RATING SENSITIVITIES
MAINTENANCE OF STRONG FINANCIAL PROFILE: The rating assumes the city's continued strong financial flexibility. A material reduction in one or more components of flexibility could result in a negative rating action.
CREDIT PROFILE
The city of Suffolk is one of seven cities that form the Norfolk-Virginia-Beach-Newport News metropolitan statistical area, also known as the Hampton Roads region. The city is home to several retail distribution centers, medical facilities and military installations. The city has also experienced strong population growth during the last several years. Population expansion and economic diversification are expected to continue based on continued business investment and strong momentum in property tax revenue increases.
Revenue Framework
Property tax revenues make up approximately 60% of total general fund revenue, followed by state shared sales tax, comprising just under 14% of revenues.
Fitch believes future revenue growth is likely to be in line with historical performance -- above the rate of inflation and national GDP -- based on the revenue streams' demonstrated ability to capture solid economic trends.
The city's property tax rate remains the third lowest tax rate among major cities in the region. Lack of a legal cap on the property tax rate or levy provides the city with high legal revenue raising flexibility.
Expenditure Framework
The city's expenditures are primarily composed of public safety and education. These costs comprise approximately 64% of total general fund expenditures. Virginia public schools are largely funded by a mix of state and local aid contributions. The ability to determine the amount of local contributions is determined by the city council, and based on the state determined performance standards for the school system.
Expectations for continued population growth and moderate increases in the cost of services should lead the pace of spending growth to be more or less aligned with revenues over time.
The city has solid flexibility to adjust major expenditure items. Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consume approximately 16% of governmental spending. The city has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining.
Long-Term Liability Burden
Overall debt and unfunded pension liabilities are approximately 8% of the city's personal income and are primarily driven by the debt. Fitch expects the liability burden to remain consistent with an 'aaa' assessment because population and income growth are likely to be aligned with additional debt needs and full actuarially-based funding should limit growth in net pension liabilities.
Full-time salaried city employees participate in the VRS, a defined benefit pension plan. The city's contributions to VRS are actuarially calculated. For the primary government, the fiduciary net position of the plan covered approximately 84% of the total pension liability at the plan's 7% discount rate as of June 30, 2015.
Operating Performance
Reserves are strong given inherent budget flexibility and low revenue volatility. Fitch expects the city would adjust spending and utilize the strong reserves as necessary, to retain financial flexibility when needed. Fiscal 2015 performance ended with a small general fund deficit but unrestricted general fund reserves remained over 30% of spending.
The city has exercised strong budget management at time of economic recovery. In preparation for the next potential downturn the city has enhanced its reserve policy, increasing it to 12% of general fund spending from 10%. Unaudited fiscal 2016 results indicate a surplus that will further increase reserve levels. The fiscal 2017 budget is balanced, without the inclusion of projected income from new construction. It is anticipated that fiscal 2017 will end with a budget surplus, much like previous years.
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