OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following Colonial Heights, VA (the city) general obligation bonds (GOs):

--$11.1 million GO bonds, series 2016.

The bonds are expected to sell competitively on Oct. 4, 2016. Proceeds of the bonds will be used by the city to finance certain school improvements and public safety equipment.

In addition, Fitch upgrades the city's Issuer Default Rating (IDR) and approximately $38.6 million of outstanding GO bonds to 'AA+' from 'AA'.

SECURITY

The bonds are payable from a general obligation pledge of the city, to which the full faith and credit and unlimited taxing power of the city are irrevocably pledged.

KEY RATING DRIVERS

The rating upgrade reflects application of Fitch's revised criteria for U. S. state and local governments, which was released on April 18. The revised criteria highlight the city's stable economic base, supporting historically strong operating performance and a solid revenue framework, coupled with conservative liability management, and supports the 'AA+' IDR.

Economic Resource Base

Colonial Heights is located in the Richmond metropolitan area of southeastern Virginia. As of 2015, the city's population was 17,820; growth has averaged less than 1% annually since 2000.

Revenue Framework: 'aaa' factor assessment

Revenues have been rising at a pace below U. S. GDP growth but above inflation, and the city enjoys strong revenue flexibility given the independent legal ability to increase property taxes without limitation.

Expenditure Framework: 'aa' factor assessment

The city's expenditure flexibility is somewhat limited by the funding agreement with the school board that allocates a set percentage of revenues annually; however, carrying costs are moderate and the labor force is flexible.

Long-Term Liability Burden: 'aaa' factor assessment

The city's overall debt and pension liability burden is moderately low. Future debt needs are manageable, and amortization of direct debt is rapid (63% in 10 years).

Operating Performance: 'aaa' factor assessment

The city's historical operating performance demonstrates resiliency. Reserves remained at healthy levels during and after the recession. Given the city's revenue flexibility and strong reserves, the city is positioned to perform well in an economic downturn.

RATING SENSITIVITIES

Continued Strong Financial Operations: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

Stronger Revenue Growth Prospects: The city's general fund revenue growth over the past decade has performed below U. S. GDP. General fund revenue growth in line with or above U. S. GDP could put positive pressure on the rating.

CREDIT PROFILE

As the market center for the Tri Cities Region, Colonial Heights's retail sector is anchored by the Southpark Area. The city's strategic location near interstates 85 and 95 enables the retail trade sector to draw from beyond local residential communities. The city's retail sector also draws from nearby Fort Lee. The base is on the list for possible negative impact in the 2020 sequestration, although no near-term impacts are expected. Southpark Area, with over two million square feet of commercial retail space, is at near full occupancy according to city management. Southpark Mall is the city's largest taxpayer, representing 4.7% of the city's taxable value.

The city's employment base is dominated by retail at 28%. However, employment has continued to increase over the past four years and the unemployment rate as of July 2016 was 4.4%.

Revenue Framework

The revenue base is dominated by property taxes at about 41% of fiscal 2015 general fund revenues, sales taxes at 16%, and meals tax at 14%. Adjusting for some tax rate changes, Fitch estimates revenue performance over the past decade (FY2004 - FY2014) was modestly below GDP but slightly above inflation.

Property tax revenue increased during the last recession, reflecting a tax rate increase in fiscal 2008 and a relatively stable taxable base. The city's taxbase has continued to increase over the past decade except for a mild decline in 2012 and 2014 following its semi-annual reassessments. According to the July 2016 Zillow report, home values are 79% of peak levels; 2016 assessed value (AV) of $1.66 billion is 97% of the 2011 peak AV. While property tax revenues will increase during fiscal 2017 due to the approved tax rate increase, overall revenues are projected to increase organically due to home value appreciation and economic activity in the city.

The city's property tax rate remains competitive relative to neighboring similarly sized jurisdictions. Lack of a legal cap on the property tax rate or levy provides the city with high independent legal revenue raising flexibility.

Expenditure Framework

The city's expenditures are primarily composed of public safety and education. These costs comprise 37% and 21% of total general fund expenditures respectively. Virginia public schools are largely funded by a mix of state and local aid contributions.

The city has a unique funding agreement with the school board through a Memorandum of Understanding (MOU). The school board receives 50.73% of revenue generated by the real estate tax, personal property tax, sales tax, food and beverage tax, lodging tax, and business license tax. The remaining 49.27% of such revenues are allocated to the city portion of the city's overall operating budget.

Aside from the city's capital spending plans that are offset by the tax rate increase in fiscal 2017, Fitch expects spending growth to be aligned with revenue growth.

The city has ample flexibility to adjust major expenditure items. Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consume a low 10% of governmental spending. The city has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. However, the city'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 city is further limited by the MOU which, while providing some level of projections of future spending specifically designates a portion of revenues to education.

Long-Term Liability Burden

Overall debt and unfunded pension liabilities are approximately 8% of the city's personal income and are primarily driven by debt. Fitch expects the liability burden to remain consistent with the 'aaa' assessment because of limited future debt issuance plans and a 10-year principal amortization rate of 63%.

The adopted fiscal 2017 to 2020 five-year capital improvement plan (CIP) totals approximately $83 million, of which $38 million is for general fund related projects. Approximately half of the plan will be funded with general fund spending ($19 million) and half with grants. The projects included in the plan focus primarily on public works street improvements.

Full-time salaried city employees participate in the VRS, a defined benefit pension plan. The city's contributions to VRS are actuarially calculated. For the primary government, the fiduciary net position of the plan covered approximately 78% of the total pension liability at the plan's 7% discount rate as of June 30, 2015.

OPEB liabilities do not represent a significant cost pressure. In addition to city employees, the city pays OPEB benefits for school employees. As of the last valuation report (July 2015) the UAAL for city employees was reported at $3.25 million or less than 1% of personal income. The city pays for OPEB benefits on a pay-go basis.

Operating Performance

Given the moderate economic sensitivity of the city's revenues and its superior inherent budget flexibility in the form of control over revenues and spending capacity, Fitch expects the city to manage through economic downturns while maintaining a high level of fundamental financial flexibility. In addition, the city has historically maintained healthy reserve levels and continued to do so during the last recession. The unrestricted general fund balance of $9.3 million was a solid 17.8% of spending at year-end 2015, comfortably above the city's 12% fund balance policy.

The city proved its financial resilience and strong budget management through the most recent recession by reducing positions through attrition and vacancies, deferring capital spending and utilizing fund balance.

The fiscal 2016 budget was essentially flat compared to fiscal 2015 increasing just 1% (approximately $535,000). The balance included a $341,058 use of fund balance and kept the tax rate stable. Year-to-date results are positive primarily reflecting $1.5 million in land sale proceeds. The city plans to designate the proceeds for future capital projects.

The fiscal 2017 $55.1 million general fund budget is a 3% increase ($1.7 million) over 2016. The budget increase mainly funds a 2% salary increase for city employees and a $500,000 increase in capital spending. The budget includes a 6-cent real property tax increase which will be used to fund school capital improvements and a public safety radio project. The budget does not include a fund balance appropriation.