OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following city of Virginia Beach, VA (the city) general obligation (GO) bonds:

--\$58,000,000 GO public improvement bonds series 2015A;
--\$65,000,000 GO public improvement refunding bonds series 2015B.

The proceeds of the series 2015A bonds will be used to finance various city and school capital improvements. The series 2015B bonds are refunding a portion of the city's outstanding series 2007, 2008 and 2009 bonds for savings. The bonds are scheduled to sell competitively on April 7.

In addition, Fitch affirms the following ratings:

--\$641 million outstanding GO bonds at 'AAA';
--\$331 million outstanding Virginia Beach Development Authority (VBDA) revenue bonds at 'AA';

The Rating Outlook is Stable.

SECURITY

The GO bonds are backed by the full faith and credit and unlimited taxing authority of the city. The VBDA bonds are backed by annual payments to VBDA from the city pursuant to a support agreement, subject to annual appropriation. Bondholders have no security interest in the financed projects.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: Management's conservative budgeting practices, maintenance of very sound reserves within policy levels, and detailed financial monitoring and forecasting reinforce the city's strong financial flexibility.

RISING DEBT, RAPID AMORTIZATION: Prudent debt management policies and use of pay-as-you-go capital funding has kept levels moderate. Future debt plans are expected to increase ratios but they should remain moderate as debt amortization rates are rapid.

STRONG SOCIOECONOMIC INDICATORS: Wealth levels are above average and unemployment rates are low compared to the state and nation. The economy, although concentrated in the military and tourism sectors, continues to expand spurring positive performance in economically sensitive revenues.

MANAGEABLE POST-EMPLOYMENT RETIREMENT COSTS: The city's pension and other post-employment benefits (OPEB) costs are manageable and city pension funded levels are strong. Management prudently funds 100% of its OPEB required contributions.

VBDA REVENUE BONDS: The VBDA's 'AA' bond rating is notched down from the city's GO rating reflecting risk to annual appropriation and the absence of a security interest in the financed projects.

RATING SENSITIVITIES

FINANCIAL MANAGEMENT PRACTICES: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Virginia Beach covers the eastern border of Virginia south of the Delmarva Peninsula including the entire area from the Chesapeake Bay to the North Carolina border. It is the most populous city in the Commonwealth of Virginia with a 2013 census population of 448,479 (up 2.4% since 2010).

STRONG FINANCIAL MANAGEMENT PRACTICES

The city has a well-established history of strong financial management which has resulted in healthy unrestricted general fund balances and maintenance of unassigned fund balances within its 8% to 12% policy level. Operating margins are consistently positive, with reserve draw-downs in four of the last five fiscal years used to fund capital and other one-time projects.

FISCAL 2014 RESULTS REFLECT CAPITAL SPENDING

The city ended fiscal 2014 with a planned general fund balance drawdown to support pay-as-you-go capital spending but outperformed budgetary expectations. The fiscal 2014 budget included \$52 million in pay-as-you-go capital spending and an original budgeted use of \$33 million in fund balance. Due to positive expenditure variances only \$17 million of fund balance was drawn upon at fiscal year-end. The city's unrestricted fund balance declined to \$163 million from \$187 million in fiscal 2013, and totaled a still sound 16.4% of spending.

Property taxes accounted for 56% of general fund revenues. The more economically sensitive sales and consumption related taxes accounted for 23% of revenues. Revenues were down 1.3% from the original budget primarily due to lower than anticipated personal property taxes.

FISCAL 2015 BUDGET REFLECTS CONTINUED CAPITAL SPENDING

The total city and school fiscal 2015 budget of \$1.83 billion is up a modest 2.8% from the fiscal 2014 adjusted budget. The real estate tax was held flat but a small increase in the personal property tax rate of 30 cents to \$4.00 is projected to raise \$4.9 million (0.5% of city budget) for new public safety projects. This new rate still represents the lowest among the major cities in the region. Water and sewer charges were also raised modestly.

Notable expenditure increases were made for city and school salary adjustments, higher pension costs and an increase in debt service costs. Non-property-related taxes were conservatively budgeted as has been done historically. The pay-as-you-go capital portion of the budget has decreased by 6.8% (\$3.5 million) to \$48 million and is funded in part by the budgeted use of \$28 million of general fund balance.

Management has indicated to Fitch that fiscal year-to-date operating results are tracking generally positive and that unassigned fund balance will remain within policy levels.

Fitch considers the city's willingness to raise recurring revenues, and the inherent budget flexibility associated with robust pay-go funding, as credit positives. Fitch expects management to maintain fund balance within its policy levels and that the overall unrestricted fund balance will remain sound.

ECONOMY HIGHLIGHTED BY MILITARY AND TOURISM SECTORS

The city is located in the Hampton Roads region of Virginia and participates in a regional economy with a strong emphasis on naval activities. Military installations in Virginia Beach include the Oceana Naval Air Station, the east coast's master jet base, and the Joint Expeditionary Base Little Creek-Fort Story, the primary east coast base supporting overseas contingency operations. In total, the city's military bases have an annual payroll of \$2.5 billion for 34,480 military and civilian employees in 2014.

TOURISM-RELATED REVENUES CONTINUE TO IMPROVE

Tourism is also an economic mainstay of the region due to the city's beachfront location and year-round convention center events. In 2013 visitor spending was a record high \$1.31 billion (up 2.3% from 2012), generating \$108 million of city and state tax revenues, and supporting 12,257 jobs within the city (as reported by the U.S. Travel Association).

Visitor activity translates into additional revenue for the city, primarily in the form of hotel room and meal tax receipts. These revenues combined provided for 4.3% of general fund revenue in fiscal 2014 as well as debt service support for tourism-related improvements and support for the city's tourism advertising program. On a combined basis these revenues increased by 2.9% and 3.7% in fiscal 2014 and 2013, respectively, and have trended upward since fiscal 2010 after moderate declines during the recession. Sales taxes, which represent 5.8% of general fund revenue, have also trended upward since fiscal 2010 and are again expected to meet budget for the year.

DIVERSIFIED TAX BASE PROJECTING GROWTH

The city's tax base is diversified with the top 10 taxpayers representing a low 4.7% of total assessed value (AV) of \$53.7 billion for fiscal 2014. Fiscal 2015 real estate values are up 3.8%, the first increase since 2009 and fiscal 2016 real estate values are projected to increase 3%. This return to growth reflects the recent positive housing market trends and new economic development.

ABOVE-AVERAGE SOCIOECONOMIC INDICATORS

The city's 4.4% unemployment rate for December 2014 improved from 4.8% the prior year reflecting gains in employment which outpaced slight gains in labor force. The financial services, retail, and leisure and hospitality sectors contributed to the growth in 2014 employment. The city's rate continues to outperform that of the Commonwealth (4.5%) and the U.S. (5.4%).

Median household disposable income exceeds both Commonwealth and national levels at 102% and 123%, respectively, and per capita money income figures are 95% of Commonwealth and 113% of national levels.

MODERATE DEBT LEVELS

Prudent debt affordability policies and consistent use of pay-as-you-go capital financing have resulted in moderately low debt levels and significant debt capacity. The overall net debt burden equals \$2,290 on a per capita basis and a low 1.9% of fiscal 2014 market value.

The fiscal 2015 - 2020 capital improvement plan (CIP) totals \$1.1 billion. Utility projects total approximately \$335 million while schools and road improvements account for roughly \$220 million and \$162 million, respectively. Funding sources for the plan are evenly split between current resources (fund balance, state and federal sources and recurring revenue) and debt.

There is a potential for new future debt associated with infrastructure projects for a proposed new arena project and for new transportation initiatives, including light rail. These and other initiatives will be discussed in connection with the fiscal 2016 budget. Fitch expects debt ratios to increase but remain moderate as current debt amortizes at a rapid 74% over 10 years and the city has prudent debt policy limitations in place.

WELL-MANAGED LONG-TERM RETIREE OBLIGATIONS

The city participates in the state-wide Virginia Retirement System (VRS) in a separate cost-sharing pool and has historically paid its actuarially required contributions (ARC). The city employees' plan is 75% funded with an unfunded liability of \$424 million (0.8% of AV) as of June 30, 2014 and assumes a 7% investment rate of return.

The city's contribution towards its pensions in fiscal 2014 were \$53 million (excludes employee contributions), equivalent to 4% of total governmental spending. Fitch expects annual pension costs to grow in order to keep up with the unfunded liabilities.

The city continues to fund the required ARC with respect to its OPEB liability, which Fitch considers a prudent practice. Unfunded OPEB liabilities for the city and school board are modest at \$97.0 million (0.2% of AV). The city established a trust account for the city/schools OPEB liabilities and such account is funded with \$52.5 million as of Jan. 1, 2014.

Total carrying costs, calculated by dividing city debt service, pension contributions and OPEB costs by fiscal 2014 total governmental fund spending, equaled a relatively low 11.2%.