Fitch Affirms Prince George County, VA's GOs and IDR at 'AA+'; Outlook Stable
March 23, 2017
Fitch Ratings-New York-15 March 2017: Fitch Ratings has affirmed the following Prince George County, VA ratings:
- Issue Default Rating (IDR) at 'AA+';
- $12.7 million general obligation (GO) bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are general obligations of the county for payment of which the county's full faith and credit and unlimited taxing power are irrevocably pledged.
KEY RATING DRIVERS
The county's 'AA+' IDR and GO rating reflects the county's solid revenue framework, superior financial resiliency, low long-term liability burden, and sound expenditure framework. The rating also reflects the significance of Fort Lee to the local economy.
Economic Resource Base
The county is located along the James River, approximately 25 miles south of the City of Richmond (IDR 'AA='/Outlook Stable). With a 2015 population of 37,862 the county's population has increased by an average annual rate of 1% since 2010.
Revenue Framework: 'aa' factor assessment
Fitch expects revenue growth to approximate the rate of inflation going forward. The county enjoys strong revenue flexibility given the independent legal ability to increase property taxes without limitation.
Expenditure Framework: 'aa' factor assessment
Fitch expects the natural pace of spending growth to generally track revenue growth. Moderate carrying costs and broad flexibility to manage labor-related costs will allow the county the ability to adjust spending.
Long-Term Liability Burden: 'aaa' factor assessment
The county's overall debt and pension liability is low. Future debt needs are substantial but given the rapid amortization of debt the liability burden is expected to remain within the 'aaa' assessment.
Operating Performance: 'aaa' factor assessment
Fitch expects the county to maintain a high level of fundamental financial flexibility throughout economic cycles based on it expenditure and revenue flexibility and conservative fund balance policy.
Revenue Expectations: The rating assumes the county's continued positive albeit slow economic and revenue growth prospects.
Fort Lee fuels the local economy and serves as the county's largest employer at over a third of the employment base. Within the past decade, Fort Lee has experienced enormous growth as a result of the 2005 Base Realignment and Closure mandates and its designation as the Army Sustainment Center of Excellence - a focused training base for military supply, subsistence, maintenance, munitions, transportation and more. Those decisions sparked a massive base modernization mission with a budget of more than $1.2 billion. In addition to new training facilities, administrative areas, dining facilities and barracks, Fort Lee has experienced phenomenal growth among its support facilities for military families. Daily base population is approximately 29,000.
Currently, there is a modest pipeline of economic development project underway within the county that is expected to support the sixth consecutive year of employment growth. Unemployment is below the national average.
The county relies mostly on property tax revenues, which were 62% of general fund revenues in fiscal 2016. Intergovernmental revenues
(mostly state aid) account for 21% of revenues.
Fitch expects long-term revenue growth to trend in line with inflation, given recent assessed value growth. Historically, general fund revenue growth has generally trended above the rate of inflation.
The 'aa' revenue framework assessment is also supported by the lack of legal limitation on the property tax rate and levy, providing the county with significant revenue-raising authority.
The county's largest expenditure is education at roughly 38% of general fund expenditures, followed by public safety at 28%. Virginia public schools are largely funded by a mix of state and local aid contributions.
Fitch expects the natural pace of spending growth to remain generally in line with to marginally above revenue growth as modest population and student enrollment growth should result in limited increases in expenditure demands.
Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consume a moderate 16% of governmental spending. The county has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. However, the county's spending flexibility as it relates to education is limited to a minimum funding level according to state standards, which are applicable to all Virginia municipalities; the county funds education above the requirement, with that increment representing about 2% of the budget. The county has a unique funding agreement with the school board through a formula that provides a percentage of the county's top five revenue sources to schools; for fiscal 2016, schools received 43%. Notably, the county has funded amounts below and in excess of the funding.
Long-Term Liability Burden
Overall net debt plus the county's unfunded pension liability is low at about 4% of personal income. Debt of $47 million makes up the majority of the liability. The county's 10-year $144.5 million capital improvement plan (CIP) through 2026 is 99% debt funded. The majority of the plan funds the replacement of a high school ($103 million) in 2025 and $20 million for a radio replacement is 2018. While the CIP totals three times the amount of debt outstanding, Fitch expects the liability burden to remain low given 84% of principal is retired within 10 years, and the current liability burden is modest.
A spring 2017 debt issuance is planned with up to $18 million in debt financed projects. The radio project is the largest component of the plan.
The county participates in the statewide Virginia Retirement System (VRS), an agent multiple-employer defined benefit pension plan. The county's portions of the plan, for county general employees and the school board's non-professional employees, report a minimal net pension liability at just under $179 million, or about 1% of personal income. The contractually required payment is actuarially determined. The county also provides a length of service awards program for the county's volunteer fire companies and emergency crew. The net pension liability was a modest $396,028 as of Jan. 1, 2016.
The school board is a component unit of the county and reports a net pension liability for teachers at $52 million, or an additional 4% of personal income.
The county provides limited OPEB through an implicit subsidy and the outstanding net liability is minimal relative to personal income. The county funds the liability on a pay-go basis.
Given the county's superior inherent budget flexibility in the form of control over revenues and spending capacity, Fitch expects the county to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the county's 15% target throughout the economic cycle - a level of financial cushion higher than is sufficient for a 'aaa' financial resilience assessment. The unrestricted general fund balance of $19.5 million in fiscal 2016 was a high 36.4% of spending.
During the height of the recession county management eliminated non-essential spending while maintaining existing service levels. Fitch expects the county to make similar operational changes as needed during a future economic downturn.
The fiscal 2017 adopted budget for the general fund is $52.2 million, an increase of $1.2 million, or 2.4% over the fiscal 2016 budget. The budget includes a 4 cent tax rate increase and no use of fund balance. The budget increase will mostly fund a 2% COLA for all county employees and additional mainly public safety personnel.
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
In addition to sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
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