OREANDA-NEWS. April 22, 2016. Fitch Ratings has assigned a 'AA+' rating to the following Lynchburg, VA general obligation (GO) bonds:

--\\$49.6 million public improvement and refunding bonds series 2016.

The bonds are expected to sell on April 27 via competitive bid. The proceeds of the bonds will be used to finance the costs of various public improvement projects of and for the city and to refund and defease certain outstanding GO bonds of the city.

In addition, Fitch assigns an Issuer Default Rating (IDR) of 'AA+' to the city and affirms the following ratings:

--\\$205.2 million outstanding GO bonds at 'AA+'.

The assignment of the IDR reflects application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18, 2016.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

The rating reflects the city's strong control of revenues and expenditures and strong budget management which produced healthy reserves. The city's long-term liability burden is manageable.

Economic Resource Base
The city of Lynchburg is located along the James River in central Virginia, roughly 50 miles east of Roanoke. The city has exhibited steady growth in population at an average annual rate of 1.5% since the 2000 U.S. Census which is faster than the state and the nation; the 2014 population is estimated at 79,047.

Revenue Framework: 'aaa' factor assessment
The city's revenue stream is diverse and its largest source, property tax, has no legal limit. General fund revenues have historically grown on par with the national economy and Fitch expects that they will continue on this path.

Expenditure Framework: 'aa' factor assessment
The city proactively manages budgets and maintains ample cost cutting ability.

Long-Term Liability Burden: 'aa' factor assessment
The liability burden is moderate and expected to remain so. The city's liabilities are primarily in the form of direct debt, which is manageable due to prudent debt policies including the wide use of pay-as-you-go capital funding.

Operating Performance: 'aaa' factor assessment
The city's healthy financial reserves are well in excess of their 10% policy and, in conjunction with the city's superior ability to adjust revenues and spending, leave the city very well positioned to address cyclical declines.

RATING SENSITIVITIES

CHANGE IN FUNDAMENTAL FACTORS: A reduction of the long-term liability burden would result in a positive rating consideration while an unexpected material change in the city's solid fiscal profile would be a negative factor.

CREDIT PROFILE

DIVERSIFYING ECONOMY

Lynchburg's historically strong manufacturing and distribution base remains important to the local economy, although the city has expanded to become a regional hub for higher education, health services, industrial engineering, and retail activity. Education and health are the largest employment sectors in the city which includes five higher education institutions.

Growth potential for the higher education sector is promising with the largest institution, Liberty University. The large number of students in the city contributes to the below average wealth levels; median household income is 76% of the nation and just 61% of the state. The individual poverty rate is high at 25%.

REVENUE FRAMEWORK

The city's positive revenue framework assessment benefits from its diverse revenue stream which includes a mix of property, sales and meals taxes and other non-tax revenue. Property taxes are the most significant source of general fund revenue at 42% and have grown on pace with total general fund revenues producing year-over-year increases in all but the first year since the recession began.

General fund revenues have grown ahead of inflation and on par with national GDP over the last ten years without significant policy action. There is no limit to the property tax rate in the commonwealth of Virginia.

EXPENDITURE FRAMEWORK

The city maintains healthy expenditure flexibility with moderate spending associated with fixed carrying costs. School spending is the largest expenditure item for the city with enrollment numbers tracking similar to population growth.

Spending is increasing generally along the lines of revenue growth and economic expansion.

The city maintains a significant level of expenditure flexibility due to the favorable workforce environment that prohibits labor contracts and gives management independent control of compensation and work rules. Carrying costs associated with debt service, actuarially determined pension payments and OPEB actual contributions total a manageable 13.6% of governmental spending.

LONG-TERM LIABILITY BURDEN

The city's overall liability burden is moderate at 12.5% of personal income, primarily driven by debt, but also includes the unfunded portion of the pension.

Debt levels are moderately low with overall debt totaling 3.3% of full market value. Debt amortization is average with 53% scheduled for retirement within 10 years. Debt levels are not expected to increase in the near term as minimal new debt issuance is planned in the five year capital improvement plan (CIP) through 2020 for government and school projects and includes significant pay-as-you-go funding.

All city employees participate in the Virginia Retirement System (VRS), an agent and cost-sharing multiple employer-defined benefit pension plan administered by the commonwealth. The city's portion of the VRS is funded at 69% based on the most recent actuarially reports which assume a 7% investment return rate. The city is required to make full actuarially determined contributions.

OPERATING PERFORMANCE

The city maintains a healthy financial cushion (30% of general fund expenditures and transfers out at fiscal 2015 year-end) that is well in excess of the city's unassigned fund balance policy, which requires reserves of no less than 10% of general fund revenue.

The city's financial resilience comes from a combination of expenditure cutting and revenue raising flexibility and maintaining a strong reserve cushion. An unaddressed moderate economic decline scenario shows an operating reserve cushion that Fitch judges to be consistent with an 'aaa' financial resilience assessment. Moreover, Fitch expects that in the event of such an actual revenue decline of this magnitude the city would maintain reserves at a significantly higher level through active expenditure management.

The city practices conservative budgeting and added to reserves throughout the recession without postponing capital spending. Fiscal 2015's use of reserves for one-time capital spending was the first since fiscal 2007. Fitch expects the city to maintain reserves above its fund balance policy.