Fitch Rates Loudoun County, VA's EDA $75.39MM Rev Bonds 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following bonds of the Loudoun County (the county), VA Economic Development Authority (EDA):
--$75.39 million Loudoun County Economic Development Authority, VA public facility lease revenue bonds (Loudoun County Roads and Public Facilities Project), series 2015.
Pursuant to Fitch policy, new rating assignments during the exposure draft period for U.S. State and Local Government Criteria will be analyzed under both the existing and proposed criteria approaches. If the results of the two approaches differ, Fitch assigns a rating based on the proposed criteria, because it more accurately reflects Fitch's current view. The rating assigned in this Rating Action Commentary (RAC) is based on the proposed criteria approach. Under this approach, Fitch no longer makes rating distinctions based on its assessment of the essentiality to the obligor of the assets being financed. With few exceptions, appropriation-backed bonds will generally be rated one notch below the obligor's unlimited tax general obligation (ULTGO) rating, reflecting the slightly higher degree of optionality associated with lease/appropriation payments compared to ULTGO bond payments. None of the exceptions apply to the rating assigned in this RAC.
Bond proceeds will be used to fund various public safety, road and landfill projects. The bonds are scheduled to sale on Oct. 27.
In addition, Fitch affirms the following rating:
--$993.48 million of outstanding GO bonds at 'AAA'.
The Rating Outlook is Stable.
The lease revenue bonds are limited obligations of the EDA as conduit issuer and are payable from lease rental payments from the county to the trustee. Payments are equal to debt service and subject to annual appropriation by the county board.
The GO bonds are payable from a pledge of the county's full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
HEALTHY FINANCIAL PROFILE: County management has implemented prudent financial policies largely yielding operating surpluses and maintenance of healthy reserve levels.
SOUND REVENUE FLEXIBILITY: The county's strong local economic activity has resulted in incremental increases in general fund revenue while reducing the property tax rate thus retaining additional financial flexibility.
ROBUST ECONOMY: The county's strong and diverse economic base benefits from its location near Washington, D.C., with high wealth levels, a highly educated labor pool and low unemployment.
MODERATE LONG-TERM LIABILITIES: Moderate debt ratios are expected to remain within the county's formal debt policy given its affordable capital improvement plan (CIP). Pension contributions are made in full and costs are expected to be manageable going forward.
SOUND CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the county's affordable debt profile, strong financial management practices, and diversified economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Located west of Washington, D.C., the county is among the fastest growing in the country. Population nearly doubled during the last decade and is expected to continue growing but at a slower rate as development related to Dulles International Airport (Dulles) and the nation's capital attract jobs to the county. The 2015 estimated population is 363,524. While the county maintains significant agricultural activity and open land in its western portion, the eastern portion has become increasingly developed.
DYNAMIC LOCAL ECONOMY
An established business base of federal contractors and high-tech companies leverage Loudoun's highly educated labor pool, technology infrastructure, and extensive transportation network anchored by Dulles. The county's wealth indicators are well above state and national averages, and unemployment remained low at 3.7% as of July 2015. Loudoun's median household income is more than double (230%) the national average and 91% higher than the state average.
The Metropolitan Washington Airports Authority (revenue bonds rated 'AA-'/Outlook Stable by Fitch) has completed phase I of the Silver Line Metrorail extension project. Phase II of the project will expand the Metrorail to Dulles with three stops in the eastern portion of the county. Funding for phase II includes approximately $273 million in county contributions. The county has issued $195 million in revenue bonds through the EDA and plans to issue an additional $58 million in fiscal 2017. Fitch believes that the phase II expansion will have a positive effect on the county's economy and transportation infrastructure.
STRONG FISCAL MANAGEMENT MARKED BY HEALTHY RESERVES
County finances are well-managed, adhering to long-standing policy guidelines, and include detailed planning for capital and operating needs. Fiscal 2014 concluded with a sixth consecutive net operating surplus (after transfers) of $3.2 million (0.3% of spending) and an unrestricted fund balance totaling $218.7 million or 18% of operating expenditures and transfers out. The county maintains additional reserves ($179 million or 15% of fiscal 2014 expenditures) outside of the general fund that could be used for general spending requirements, if needed. Preliminary results for fiscal 2015 show approximately a $43 million net change in general fund balance. Positive operating results reflect strong personal property tax growth and expenditure savings due to staff vacancies.
The committed portion of the unrestricted general fund balance includes a fiscal reserve equal to 10% of general fund operating revenues. The fiscal reserve is designed as a source of funding during major economic, natural, or national emergencies and the county does not view it as a source for funding recurring expenditures. It may be used in certain circumstances to offset revenue variances, though this has not been done to date. Replenishment of the reserve fund after a draw is to occur over a three-year period.
The adopted fiscal 2016 budget is approximately a 7% increase over fiscal 2015. The budget includes a 2.5 cent tax rate reduction which is the sixth consecutive reduction in the general fund rate reflecting strong tax base growth. The county generates the majority of its revenues from property taxes. There are no statutory or charter caps or restrictions on tax levy or tax rate growth and the county's tax rate is comparable to neighboring counties.
The majority of the increase in spending this year will fund the opening and construction of new schools, a 3% compensation increase for employees and additional public safety costs. While the budget does include a higher $48.2 million fund balance appropriation, Fitch expects at a minimum that reserves will remain in line with the county's reserve policy, which the agency views as satisfactory for the 'AAA' GO rating given the county's other credit strengths.
AFFORDABLE DEBT PROFILE
The overall debt burden is moderate at $3,863 per capita and 1.8% of market value. Pressure on the county's debt profile from the sizable $1.9 billion CIP is lessened to a degree by the wealth of the county's tax base and consistent tax base growth.
The debt guidelines restrict debt service to a manageable 10% of total governmental and education spending while ensuring rapid amortization of outstanding principal, currently at 71% within 10 years. Fitch calculates debt service spending as a manageable 10.4% of total governmental spending in fiscal 2014.
The fiscal 2015 - 2020 CIP totals $1.9 billion. The bulk of capital needs are to alleviate growth pressures within the county's well-regarded public school system and to fund various transportation projects, including the county's portion of the phase II Dulles rail expansion and the construction of three parking garages at the station stops. Projected debt financing totals over $1.18 billion through fiscal 2020. However, debt ratios are expected to remain moderate and under the county's 3% of market value policy.
LOW OTHER LONG-TERM LIABILITIES
Pension and other post-employment benefit (OPEB) contributions do not stress financial operations. County employees participate in the state-administered Virginia Retirement System (VRS), an agent multi-employer defined benefit plan. The county makes annual payments as determined by the state that equal its annual required contribution, which represented a modest 2% of total governmental spending in fiscal 2014. The county's portion of the plan is funded at 84% as of fiscal 2014 using the plan's assumed 7% investment return assumption. Loudoun County Schools participate in the VRS cost-sharing plan, which had a reported funded ratio of 67.9% as of June 30, 2014. Although the county does not have a direct obligation to fund the schools pension costs, an increase in costs could impact county operations.
The county also administers a defined benefit plan for volunteer fire and rescue personnel. The Loudoun County Board of Supervisors maintains the authority to establish and amend the benefit provisions of the plan. The 2014 contribution accounted for just 0.02% of total governmental spending and the plan is well-funded.
The county is fully funding its OPEB annual required contribution. Funding costs are modest at less than 1% of total governmental spending in fiscal 2014. As of July 2015, the OPEB liability was 45% funded.