OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following Virginia College Building Authority (VCBA) bonds:

--\$470.045 million VCBA educational facility revenue bonds (21st century college and equipment programs) series 2015A;
--\$168.125 million VCBA educational facility revenue refunding bonds (21st century college and equipment programs) series 2015B;
--\$6.78 million VCBA educational facility revenue bonds (federally taxable) (21st century college and equipment programs) series 2015C.

The bonds are expected to sell via negotiation on or about March 25, 2015.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the authority, payable from funds appropriated by the commonwealth's General Assembly.

KEY RATING DRIVERS

COMMONWEALTH APPROPRIATION OBLIGATION: Debt service is funded from direct payments made by the commonwealth of Virginia pursuant to a payment agreement, subject only to legislative appropriations, resulting in a rating one notch below Virginia's 'AAA' general obligation (GO) rating.

CONSERVATIVE FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue stabilization fund (RSF). The commonwealth has consistently made prompt adjustments to respond to fiscal uncertainties.

DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. As anticipated, federal government contraction weakened economic growth trends though Fitch still views Virginia's economic profile as strong.

MODERATE LIABILITY 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. While the funded status of Virginia's retirement system declined in recent years, due in part to an underfunding of actuarial contributions to the system, unfunded liabilities as a percentage of personal income remain below average for U.S. states.

RATING SENSITIVITIES

GO-LINKAGE FOR APPROPRIATION BONDS: The rating on the bonds is sensitive to changes in the commonwealth's GO rating, to which it is linked.

CREDIT PROFILE

The bonds are payable under a 1996 master indenture from amounts appropriated by the Virginia General Assembly, pursuant to a payment agreement, and will finance capital projects for the commonwealth's public higher education institutions. The projects have been legislatively approved and involve central commonwealth agencies, including the authority and the commonwealth's treasury board, which approves all bond issues payable from commonwealth appropriations. The higher education system has broad state support.

COMMONWEALTH'S STRONG CREDIT QUALITY
Virginia's 'AAA' GO rating reflects its solid fiscal resources, conservative approach to financial operations which includes periodic revenue forecast updates, strong fundamental economic profile, and moderate liability levels. Economic and revenue performance underperformed notably in fiscal 2014 compared to earlier forecast expectations, the result of both the continuing timing impact of 2013 federal tax law changes on state tax filers and the commonwealth's exposure to ongoing federal contraction. Virginia addressed the resulting \$438 million revenue gap in fiscal 2014 largely through use of ending fund balances.

The commonwealth left its RSF untapped in fiscal 2014, and instead made its constitutionally required deposit of \$244.6 million, bringing its balance to \$687.5 million (inclusive of projected interest earnings).

The revenue shortfall created a substantial gap for the current biennium (beginning on July 1, 2014) which the commonwealth has begun addressing with a mix of one-time and recurring measures, which the administration and legislative leadership agreed upon in bills enacted during a legislative special session in the fall of 2014. In December, the governor proposed a final set of mid-biennial budget changes detailing the remaining steps to close the budget gap. Measures include fund sweeps, certain one-time revenue items, and recurring expense reductions. The most significant savings are from a \$216 million reduction in the Medicaid program over the biennium, which the administration attributes largely to benefits from prior year policy changes including an increasing shift to managed care programs. Expansion of Medicaid under the federal Affordable Care Act remains a gubernatorial priority, but the proposed budget does not rely on anticipated savings to achieve balance and legislative opposition would not delay adoption of the budget.

Earlier this month, the commonwealth reported strong revenue results with general fund receipts through January of \$9.9 billion up 5.3% year-over-year (yoy), versus the 3.1% growth in the December revenue forecast. As a result, the final mid-session revenue reforecast released earlier this month added \$474 million to the current biennium, including \$245 million this year.

The legislature passed a final set of budget amendments they sent to the Governor at the end of February. Proposals include modest raises for state employees and teachers, partial restoration of local aid cuts, increased pension funding, and an early deposit to Virginia's RSF. Considering the collaborative fiscal management steps taken by the administration and legislature since last year's revenue shortfall, Fitch views positively the smoother enactment process for this year's budget proposal compared to last year's.

ECONOMIC GROWTH SLOWING
Fitch anticipates ongoing federal contraction to remain a headwind to economic and revenue growth in the commonwealth. Virginia's November economic forecast assumes continued below-national trends growth in employment and income due to ongoing effects of federal contraction, particularly in defense spending, to which Virginia is particularly exposed. For fiscal 2015, the December revenue forecast update assumes a modest 2.9% growth in personal income tax withholding revenues, reflecting this persistent drag. February's positive revenue re-forecast indicates actual revenues are out-performing the conservative December forecast.

Overall, Virginia's economic profile remains strong with a diverse mix of industries and high wealth levels and Fitch expects the commonwealth to absorb the negative effects of federal contraction and maintain economic growth, albeit reduced from prior years. Government and professional and business services are the leading industrial sectors, accounting for 18.9% and 17.5% of the December 2014 employment base (three month moving average basis), versus 15.7% and 13.7% for the U.S. respectively. Virginia's recent employment growth rates lag the national trend with annual growth of 1.1% and 0.7% in 2012 and 2013, respectively, versus a national rate of 1.7% in both years. The commonwealth's December employment increased a weak 0.8% versus 2.3% for the nation. December marked Virginia's belated return to pre-recession peak employment - the nation exceeded its pre-recession peak last summer. The commonwealth's unemployment rate (4.8%) remains below the national rate (5.6%) but the spread narrowed over the past year.

Virginia's above-average per capita personal income and below average poverty rate reflects its high wealth levels, though the rate of personal income growth in recent years trails national and regional trends. Federal contraction could be a driving factor here as multiple federal agencies and contractors based in Virginia, including the Department of Defense, implemented the first round of federal sequestration beginning in March 2013 primarily through furloughs, resulting in reduced personal income for employees.

Despite the pressures related to federal contraction, the commonwealth maintains other fundamental economic strengths that should support continued growth. High-tech employment (as defined by the federal Bureau of Labor Statistics) remains robust in Virginia. Between 2003 and 2013, average annual growth of 2.5% in the commonwealth significantly outpaced the national trend of just 1%. Virginia's educational attainment levels are significantly ahead of the national average with 34.7% of those 25 and older with a bachelor's degree versus 28.5% nationally. Population growth has been above average in Virginia at 4.1% since 2010 versus 3.3% for the U.S.

WELL-MANAGED DEBT PROFILE
The commonwealth's debt ratios are in the moderate range and have grown in recent years, but remain manageable. As of June 30, 2014, net tax-supported debt totaled approximately \$11.2 billion (calculated by Fitch to include GO bonds, certain appropriation linked debt, federal transportation grant supported debt, and various capital leases and notes), equal to 2.8% of 2013 personal income. GO debt constitutes only approximately 14.9% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Certain appropriation-linked debt is excluded from Fitch's calculation of state debt due to a track record of self-support. Capital needs for higher education and transportation improvements remain large with substantial authorized but unissued bonds.

Virginia's debt management practices should allow it to absorb continued issuance to meet capital demands without meaningfully changing debt ratios. The commonwealth manages its debt burden primarily through its Debt Capacity Advisory Committee, which provides annual guidance to the legislature and governor on Virginia's debt burden and ability to absorb additional issuance. The most recent report (issued in December 2014) projects additional capacity for authorization and issuance of \$459 million in both fiscal 2015 and 2016, above the more than \$4 billion already authorized but not yet issued.

PENSION LIABILITIES UNDER CONTROL
On a combined basis, the burden of the commonwealth's net tax-supported debt and unfunded pension obligations equals 4.8% of 2013 personal income, below the median of 6.1% for U.S. states (as of Fitch's May 2014 report 'Pension Pressures Continue: 2014 State Pension Update'). The adjusted calculation includes the commonwealth's portion of the total unfunded 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), but recovered more recently with the exclusion of 2009 investment losses from the smoothing formula, recent strong investment gains, and increased annual funding. As of the June 30, 2014 valuation the funded ratio on a reported basis was 67.9%, down from 84% funded on June 30, 2009 but up from a trough of 65.1% on June 30, 2013. Reported unfunded actuarial accrued liabilities attributable to the commonwealth for its direct employees improved to \$8.3 billion at June 30, 2014 from \$8.8 billion the prior year. Under the new GASB 67 standard for pension systems, VRS reports a 74.1% ratio of pension assets to liabilities at June 30, 2014 for its state employees plan, with a net pension liability of \$6.8 billion attributable to the commonwealth for its direct employees.

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-determined contribution (ADEC) payments by fiscal 2019. Recent investment over-performance is forecast to result in ratio improvement even with statutory underfunding, although this assumes continued 7% investment gains. Positively, the fiscal 2015-2016 biennial budget maintains the phase-in for full ADEC payments to approximately 80% despite the budgetary pressures noted earlier. One of the budget proposals currently under consideration uses the positive revenue revision to accelerate that to 90% for the current biennium.

Virginia's unfunded other post-employment benefits (OPEB) liabilities remain very manageable. On a reported basis, the commonwealth's \$5.4 billion in total unfunded OPEB liabilities as of June 30, 2013 represented only 1.3% of personal income, in line with June 30, 2012 results. After adjusting for the portion directly attributable to the commonwealth, Fitch estimates Virginia's direct unfunded OPEB liabilities as of June 30, 2012 (the most recent year with attributed data) at approximately \$3 billion, or just 0.8% of personal income.