OREANDA-NEWS. Fitch Ratings affirms its ratings on Norfolk, Virginia's (the city) general obligation (GO) bonds as follows:

--\\$746.3 million outstanding GO bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY
The bonds are general obligations of the city to which the city has pledged its full faith and credit and unlimited taxing power for payment.

KEY RATING DRIVERS

SIGNIFICANT MILITARY PRESENCE: Norfolk's maritime assets, including the world's largest naval station and an active deep-water harbor, lend economic stability to the city and region.

ONGOING ECONOMIC DIVERSIFICATION: The city continues to focus its economic development efforts on downtown and neighborhood revitalization to diversify the economy and help offset the sizable proportion of tax-exempt property.

SOUND FINANCIAL PERFORMANCE: Timely expenditure reductions and realistic revenue forecasting have resulted in favorable operations and healthy reserve levels.

MODERATE LONG-TERM LIABILITY BURDEN: The city's overall tax-supported debt burden is expected to remain average due to manageable future capital needs. Amortization of outstanding principal is also average. Pension and other post-employment benefit (OPEB) contributions are affordable.

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong economy. Federal budget cuts could result in a softening of the regional economy given the preponderance of direct and indirect federally funded employment. However, Fitch does not currently expect the impact to alter the credit fundamentals.

CREDIT PROFILE
The city of Norfolk is located in the Hampton Roads region of Virginia, along the Atlantic Ocean. The city covers 66 square miles. Despite some fluctuations, the estimated 2014 population of 245,428 is a 5% increase since 2000.

FINANCIAL RESERVES REMAIN SOUND

Financial operations are sound and benefit from well-conceived fiscal policies. Fiscal 2014 ended with a modest deficit (after transfers) of \\$6 million (1% of spending) due to one-time capital spending. The city was able to replenish the majority of the nearly \\$19.6 million general fund balance appropriated to balance the fiscal 2014 budget with expenditure reductions and controlled discretionary spending.

The unrestricted general fund balance totaled \\$85 million for fiscal 2014, or a healthy 14.2% of spending. The city has an unassigned general fund balance policy of 5%, a risk management reserve policy of \\$5 million in the event of major unanticipated workers compensation or general liability claims and an economic downturn reserve policy of \\$5 million. Each of the reserves are funded at \\$4 million currently.
PRELIMINARY FISCAL 2015 RESULTS FAVORABLE

The 2015 budget included a 3% increase (\\$22 million) in expenditures on a budget basis year-over-year (YoY). The budget also included a \\$6.37 million appropriated fund balance, a notable decline from the year prior due to increased revenues and cost savings. Higher budgeted spending mainly funded additional support to the public school system and salary and benefit increases. Preliminary year-to-date results show that revenues ended 0.3% under budget and expenditures were 2.5% below budget, producing an \\$18 million positive budget variance. City management has not determined if the surplus will be added to fund balance or if it will be used for one-time spending.

Property taxes represent approximately 43% of general fund revenue. After three consecutive years of declining taxable assessed valuation (TAV) through fiscal 2013 (7.9% cumulative decline), the city experienced a cumulative 1.4% between fiscal 2014 and 2015 and 1.8% growth is projected for fiscal 2016. The city's 2016 real estate tax rate of \\$1.15 per \\$100 of TAV, which was last increased during fiscal 2014, is average relative to neighboring cities within the Hampton Roads region and is not subject to any limitation as to rate or levy amount.

The fiscal 2016 budget reflects a 1% decline YoY and includes a \\$2.8 million fund balance appropriation. Given the city's history of strong management and revenue and expenditure flexibility, Fitch expects the city to maintain similar operating trends.

MILITARY CONCENTRATION BUT DIVERSIFYING

As home of the world's largest naval complexes, Norfolk's economy and employment are centered on defense-related activity. Hampton Roads has about 138,068 active-duty and civilian Navy military personnel, 51% of whom are assigned to Norfolk. While federal employment accounts for just 11% of employment, this figure does not take into account employment by federal contractors. Despite the notable military presence within the city, the city has not been affected by sequestration to date. The unemployment rate as of June 2015 was 6.2%, a decline from 6.6% a year prior, reflecting annual employment growth.

Somewhat offsetting the historical military concentration are recent retail, commercial, and tourism growth, which are viewed favorably by Fitch. The construction and development of a \\$75 million new Simon premium outlet center which is expected to open in January 2017 is underway. Also, a new \\$147 million Hilton hotel/conference center is being constructed and is also expected to open in May 2017 and will create 500 construction and 250 permanent jobs. This growth is reflected in a record year in building permit value.

Other notable employment sectors include healthcare and retail (24% of metropolitan employment), anchored by Sentara Healthcare, and Old Dominion University. Employment growth for the city is forecast to be modest at 1.2% annually through 2022 according to the Virginia Employment Commission.

MANAGEABLE DEBT OBLIGATIONS

Overall net debt levels are affordable at \\$2,516 per capita and 3% of market value, well within the city's 3.5% policy limit. These metrics exclude self-supporting GOs issued on behalf of the city's utility systems. The city's exposure to variable-rate debt is approximately 5% of total GO debt outstanding, and the city has no swap exposure. Debt service equaled approximately \\$76.8 million (an affordable 10% of total governmental spending) in fiscal 2014.

The \\$190.3 million fiscal 2016 - 2020 capital improvement plan will be 84% debt-funded. Major projects include neighborhood improvement projects and school renovations. Fitch does not believe that the city's additional issuance plans will materially impact credit quality.

Pension contributions consume a manageable share of total governmental spending (approximately 5.4%), and the city-administered pension plan is funded at 84.5% as of June 30, 2014; the city uses a conservative 7% discount rate and has a practice of fully funding its actuarial contributions. OPEB costs are also reasonable, and the city funds costs on a pay-go basis.