OREANDA-NEWS. S&P Global Ratings assigned its 'AAA' long-term rating to the commonwealth of Virginia's series 2016A general obligation (GO) bonds and series 2016B GO refunding bonds. At the same time, we affirmed our 'AAA' rating on Virginia's GO debt outstanding, our 'AA+' rating on the state's appropriation-backed debt, and our 'AA' rating on the state's moral obligation debt. The outlook on all ratings is stable.

"The 'AAA' rating on Virginia's GO debt reflects our view of the commonwealth's strong and diverse economy, although growth rates have slowed in recent years tied to the effects of federal sequestration," said S&P Global Ratings credit analyst Carol Spain. Other factors include its: Strong financial policies and practices; Long history of proactive and conservative financial management despite structural misalignment over the past biennium; and Moderate debt levels that are expected to remain so based on the commonwealth's debt capacity model. The commonwealth will use bond proceeds to finance the costs of constructing and equipping revenue-producing capital projects at institutions of higher education and to refund certain maturities of series 2006A GO refunding bonds and series 2009A and 2009B GO bonds for net present value savings. It has pledged net revenues of certain facilities or systems of higher learning or executive branch agencies, and the bonds are secured by the commonwealth's full faith and credit. The rating reflects the strength of the GO pledge.

"The stable outlook reflects Virginia's proactive identification of revenue shortfalls and historically demonstrated active budget management to alleviate projected deficits," added Ms. Spain. It also reflects recent measures to increase pension funding and structural improvements in the 2016-2018 biennium budget, although we recognize that recent revenue shortfalls could tip the state into imbalance. In addition, the outlook incorporates the state's strong and diverse economy and unemployment rate that has remained consistently below U. S. levels despite recent deceleration following federal sequestration.

We have viewed the commonwealth's gap-closing measures in the 2014-2016 biennium as predominantly one-time in nature and therefore a weakness, in our view, but we believe this is partly mitigated by the commonwealth's conservative approach to re-estimating its revenue. Virginia again has identified a budget gap for the current biennium, and it has yet to identify a response. If the commonwealth can't make sufficient adjustments to structurally balance the budget, in our view, this would signify a trend of imbalance and weakened budget management practices, which could negatively pressure the rating. Additionally, if the state chooses to significantly use reserves to address the projected budget gap, we would consider this action out of step with the current economic cycle and a reversal of the commonwealth's past practices of building reserves during periods of economic growth. In our opinion, depleted reserves could weaken its ability to respond to economic and financial downturns and be an indication of weaker credit quality.

While Virginia's overall economic performance held up better than that of many states during the Great Recession, sequestration and changes in federal spending created a drag on the commonwealth's economic growth in recent years, and economic forecasts indicate medium-term growth rates more in line with U. S. averages. Should recent revenue shortfalls indicate long-term changes to the structural make-up of the state's economy, management's ability to adjust to slower growth, whether through revisions to forecasts or sustainable budget adjustments, will be critical to maintenance of the rating.