Fitch Rates Virginia Public School Auth's School Financing Bonds (1997 Resolution) Ser 2015 C 'AA '
OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the Virginia Public School Authority's (VPSA) school financing bonds (1997 resolution) series 2015 C.
The bonds are expected to sell via competition on or about Oct. 27, 2015.
In addition, Fitch affirms the 'AAA' ratings on the Commonwealth of Virginia's outstanding general obligation (GO) bonds. Fitch also affirms the 'AA+' ratings on the commonwealth's appropriation-backed debt as detailed at the end of this release.
The Rating Outlook is Stable.
VPSA school financing bonds are secured by general obligation (GO) bond payments from participating localities that are pledged by the authority to the bonds. A sum-sufficient appropriation for any shortfalls in debt service that is available from the commonwealth of Virginia's literary and general funds enhances credit quality and provides the basis for the rating.
KEY RATING DRIVERS
COMMONWEALTH APPROPRIATION OBLIGATION: The 'AA+' rating on the VPSA bonds, one notch below the commonwealth's 'AAA' GO rating, is based on the availability of a 'sum sufficient' appropriation for debt service deficiencies from the commonwealth's literary fund and, if necessary, the general fund.
CONSERVATIVE FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue stabilization fund (RSF). The commonwealth has consistently made prompt adjustments to respond to fiscal uncertainties.
DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. As anticipated, federal government contraction weakened economic growth trends, though Fitch still views Virginia's economic profile as strong.
MODERATE LIABILITY LEVELS: Virginia's debt ratios are in the moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant and issuance has accelerated in recent years. While the funded status of Virginia's retirement system declined in recent years, due in part to an underfunding of actuarial contributions to the system, unfunded liabilities as a percentage of personal income remain below average for U.S. states.
GO-LINKAGE FOR APPROPRIATION BONDS: The rating on the bonds is sensitive to changes in the commonwealth of Virginia's GO rating, to which it is linked.
STABLE CREDIT CHARACTERISTICS: The rating is sensitive to shifts in Virginia's fundamental credit characteristics including the commonwealth's history of timely and prudent action to address budgetary challenges as demonstrated in the response to last year's revenue shortfall.
COMMONWEALTH'S STRONG CREDIT QUALITY
Virginia's 'AAA' GO rating reflects its solid fiscal resources, conservative approach to financial operations which includes periodic revenue forecast updates, strong fundamental economic profile, and moderate liability levels. Revenue collections outperformed notably in fiscal 2015 compared to earlier forecast expectations, as the commonwealth rebounded from a significant shortfall in fiscal 2014. Preliminary results indicate a $553.3 million surplus for the fiscal year ended June 30, whereas last year Virginia faced a $438 million fiscal 2014 revenue gap which it addressed largely with ending fund balances.
The commonwealth left its RSF untapped in fiscal 2014, and instead made its constitutionally required deposit of $244.6 million, bringing its balance to $687.5 million (inclusive of projected interest earnings). The robust surplus in fiscal 2015 will lead to another estimated contribution to the rainy day fund of $478 million in fiscal 2017.
Fiscal 2015's strong preliminary budgetary results reflect aggressive actions the commonwealth took earlier in the year to address a budget gap triggered by the fiscal 2014 revenue shortfall, and revenue over-performance relative to the fiscal 2015 forecast. Budget measures included a mix of one-time and recurring measures, which the administration and legislative leadership agreed upon in bills enacted during a legislative special session in the fall of 2014. In December, the governor proposed a final set of mid-biennial budget changes detailing the remaining steps to close the budget gap. Measures include fund sweeps, certain one-time revenue items, and recurring expense reductions. The most significant savings are from a $216 million reduction in the Medicaid program over the biennium, which the administration attributes largely to benefits from prior year policy changes including an increasing shift to managed care programs.
Virginia reported robust preliminary fiscal 2015 year-over-year (yoy) revenue growth of 8.1% in general fund receipts, versus the 4.7% growth in the governor's February revenue forecast. During the course of the year, Virginia upgraded its revenue outlook several times as monthly revenues consistently out-performed expectations. Personal income tax receipts were a key driver with both non-withholding and withholding revenues well ahead of forecast. Virginia will use the budgetary gains to support modest pay raises for state employees and teachers, make partial restoration of local aid cuts, and increase pension contributions.
SLOWED ECONOMIC GROWTH
Fitch anticipates ongoing federal contraction to remain a headwind to economic and revenue growth in the commonwealth, but to a lesser degree. Virginia's November 2014 economic forecast assumed continued below-national-trends growth in employment and income due to ongoing effects of federal contraction, notably in defense spending, to which Virginia is particularly exposed. For fiscal 2015, the December revenue forecast update assumed modest 2.9% growth in personal income tax withholding revenues, reflecting this persistent drag. Actual revenues outperformed the conservative December forecast and even the governor's February 2015 re-forecast, indicating some modest economic acceleration in the latter portion of 2014 and into 2015.
Virginia's economic profile remains strong with a diverse mix of industries and high wealth levels, and Fitch expects the commonwealth to absorb the negative effects of federal contraction and maintain economic growth, albeit reduced from prior years. Government and professional and business services are the leading sectors, each accounting for 18% of the August 2015 employment base (three-month moving average basis), versus 14.9% and 14.0% for the U.S., respectively.
Virginia's recent employment growth rates lag the national trend with annual growth of 0.7% and 0.4% in 2013 and 2014, respectively, versus national rates of 1.7% and 1.9%. Virginia returned to its pre-recession peak employment in December 2014; the nation exceeded its pre-recession peak six months earlier. More recently, Virginia's growth has picked up but continues to trail national trends. As of August, the commonwealth's quarterly moving average employment increased an improved but still weak 1.2% yoy versus 2.1% for the nation. The commonwealth's May unemployment rate (4.5%) remains below the national rate (5.1%), but the spread narrowed slightly over the past year.
Virginia's above-average per capita personal income and below-average poverty rate reflects its high wealth levels, but the rate of personal income growth in recent years trails national and regional trends. Federal contraction could be a driving factor as multiple federal agencies and contractors based in Virginia, including the Department of Defense, implemented the first round of federal sequestration beginning in March 2013 (primarily through furloughs) resulting in reduced personal income for employees.
Despite the pressures related to federal contraction, the commonwealth maintains other fundamental economic strengths that should support continued growth. Population growth has been above average in Virginia at 4.1% since 2010 versus 3.3% for the U.S., and the commonwealth's labor force grew at twice the national rate between 2004 and 2014. Virginia's educational attainment levels are significantly ahead of the national average with 34.7% of those 25 and older with a bachelor's degree versus 28.5% nationally.
Related, high-tech employment (as defined by the federal Bureau of Labor Statistics) growth in Virginia exceeds the national rate but the gap is narrowing. Between 2004 and 2014, compound average annual growth of 1.3% in the commonwealth just slightly outpaced the national trend of 1.1%. Virginia's 10-year CAGR was 2.5% in 2013; Fitch attributes the sharp slowdown at least partially to federal sequestration.
WELL-MANAGED DEBT PROFILE
The commonwealth's debt ratios are in the moderate range and have grown in recent years, but remain manageable. At June 30, 2014 (the latest data provided by Virginia), net tax-supported debt totaled approximately $11.2 billion (calculated by Fitch to include GO bonds, certain appropriation linked debt, federal transportation grant supported debt, and various capital leases and notes), equal to 2.8% of 2014 personal income. GO debt constitutes only approximately 15% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Certain appropriation-linked debt is excluded from Fitch's calculation of state debt due to a track record of self-support. Capital needs for higher education and transportation improvements remain large with substantial authorized but unissued bonds.
Virginia's debt management practices should allow it to absorb continued issuance to meet capital demands without meaningfully changing debt ratios. The commonwealth manages its debt burden primarily through its Debt Capacity Advisory Committee, which provides annual guidance to the legislature and governor on Virginia's debt burden and ability to absorb additional issuance. The most recent report (issued in December 2014) projects additional capacity for authorization and issuance of $459 million in both fiscal 2015 and 2016, above the more than $4 billion already authorized but not yet issued.
PENSION LIABILITIES UNDER CONTROL
On a combined basis, the burden of the commonwealth's net tax-supported debt and unfunded pension obligations equals 4.8% of 2013 personal income, below the median of 6.1% for U.S. states (as of Fitch's May 2014 report 'Pension Pressures Continue: 2014 State Pension Update'). The adjusted calculation includes the commonwealth's portion of the total unfunded liability of the Virginia Retirement System (VRS) covering only commonwealth employees, and the full liability for several much smaller systems where the commonwealth is the sole employer.
The system-wide funding of the VRS declined in recent years in part due to underfunding of contributions (partially used as a budget balancing measure) but recovered more recently with the 2009 investment losses fully smoothed into actuarial valuations, recent strong investment gains, and increased annual contributions. As of the June 30, 2014 valuation the funded ratio on a reported basis was 67.9%, down from 84% funded on June 30, 2009 but up from a trough of 65.1% on June 30, 2013. Reported unfunded actuarial accrued liabilities attributable to the commonwealth for its direct employees improved to $8.3 billion at June 30, 2014 from $8.8 billion the prior year.
Under the new GASB 67 standard for pension systems, VRS reports a 74.1% ratio of pension assets to liabilities at June 30, 2014 for its state employees plan, with a net pension liability of $6.8 billion attributable to the commonwealth for its direct employees. As of 2011, the system utilizes a 7% investment return assumption, in line with Fitch's standard adjustments to pension system liability calculations for other governments.
In recent years, the commonwealth enacted pension reforms addressing required contribution levels and various plan design changes, all expected to limit further growth in the commonwealth's pension liabilities in the coming years. Importantly, the commonwealth anticipates phasing back in full actuarially-determined contribution (ADEC) payments by fiscal 2019. Recent investment over-performance is forecast to result in ratio improvement even with statutory underfunding, although this assumes continued 7% investment gains. Positively, a recent amendment to the fiscal 2015-2016 biennial budget accelerates the phase-in for full ADEC payments to approximately 90% based on the strong revenue growth noted earlier. The original budget provided for 80% of the ADEC.
Virginia's unfunded other post-employment benefits (OPEB) liabilities remain very manageable. On a reported basis, the commonwealth's $5.4 billion in total unfunded OPEB liabilities as of June 30, 2013 represented only 1.3% of personal income, in line with June 30, 2012 results. After adjusting for the portion directly attributable to the commonwealth, Fitch estimates Virginia's direct unfunded OPEB liabilities as of June 30, 2012 (the most recent year with attributed data) at approximately $3 billion, or just 0.8% of personal income.
As noted earlier in this release, Fitch also affirms the 'AA+' ratings and Stable Outlook on the following Commonwealth appropriation-backed credits:
--VA Public Building Authority - Public Facilities Revenue Bonds;
--VA Public School Authority - School Financing Bonds and School Educational Technology Notes;
--VA College Building Authority - Public Higher Education Financing Program Bonds;
--VA College Building Authority - 21st Century College & Equipment Program Bonds;
--VA Port Authority - Commonwealth Port Fund Revenue Bonds;
--Virginia Biotechnology Research Partnership Authority - Commonwealth of VA Lease Revenue Bonds;
--Fairfax County Economic Development Authority- Commonwealth of VA Lease Revenue Bonds.