OREANDA-NEWS. Fitch Ratings assigns an 'AAA' rating to the following Commonwealth of Virginia general obligation (GO) bonds:

--\$63.205 million GO bonds series 2015A;
--\$215.065 million GO refunding bonds series 2015B.

The bonds are expected to sell via competition on or about April 15, 2015.

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: 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

STABLE CREDIT CHARACTERISTICS: The rating is sensitive to shifts in the state's fundamental credit characteristics including the commonwealth's history of timely and prudent action to address budgetary challenges as demonstrated in the response to last year's revenue shortfall.

CREDIT PROFILE
The series 2015A and B bonds will be used to finance capital projects at various Virginia colleges and universities and to refund certain outstanding GO bonds. The new money issuance is part of a larger set of legislative authorizations for \$802 million in bonds for higher education capital projects.

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.

Earlier this month, the commonwealth reported strong revenue results with general fund receipts through February of \$10.8 billion up 6.6% year-over-year (yoy), versus the 4.7% growth in the mid-session revenue forecast adopted in February. The mid-session reforecast added \$474 million to the current biennium versus the December 2014 revenue forecast, including \$245 million this year.

The legislature passed a final set of budget amendments they sent to the Governor at the end of February, and the Governor recently signed the bill into law with no vetoes. Provisions 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.