Fitch Rates Roanoke, VA's GO Bonds 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a rating of 'AA+' to the following general obligation (GO) bonds to be issued by Roanoke, Virginia (the city):
--$34.2 million GO public improvement and refunding bonds series 2016.
Proceeds of the series 2016 bonds will be used to fund various public improvement projects and to refund and defease approximately $13.8 million in outstanding GO bonds for debt service savings. The bonds are scheduled to sale competitively on Feb. 23.
In addition, Fitch has affirmed the 'AA+' rating on approximately $194 million of outstanding GO bonds of the city.
The Rating Outlook is Stable.
The bonds are general obligations of the city, payable by the irrevocable pledge of the city's full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: Reserve levels have been very stable over the past six fiscal years. Fitch believes the city's reserve target provides an adequate cushion at the current rating given the city's other credit characteristics.
ECONOMIC HUB FOR WESTERN VIRGINIA: Roanoke is a regional economic hub, with a diverse economy that leverages the city's employment sector strengths. Growing biomedical research activities lend additional employment opportunities. Income levels are below average.
AFFORDABLE DEBT POSITION: Debt levels are moderate and servicing costs affordable. Additional capital needs and issuance plans are not expected to impact the debt profile, given the rapid rate at which existing obligations are amortized. Given the recent increase in employee pension contributions, costs to the city are expected to decline. OPEB costs are minimal and do not pressure spending.
The rating is sensitive to the city's ability to maintain strong financial management practices and reduce long-term liabilities over time.
Roanoke is located in rural western Virginia along Interstate 81, at the southern end of the Shenandoah Valley and approximately 170 miles west of Richmond. The city has a stable population of approximately 98,465.
STABLE OPERATIONS AND RESERVES GUIDED BY PRUDENT POLICIES
The city concluded fiscal 2015 with a modest net surplus (after transfers) in the general fund. Fiscal 2015 was the seventh consecutive year a net surplus was recorded, all of them modest except for a larger surplus in fiscal 2014. The year-end unrestricted fund balance improved slightly to $29.8 million or 11.3% of spending during this period. Adopted fiscal policies target a 10% unrestricted fund balance.
The fiscal 2016 $272 million budget is a 4.6% ($11.9 million) increase from fiscal 2015 and is balanced with a $0.03 per $100 of assessed value increase in the real estate tax rate, a 0.5% increase in the meals tax rate and an $8 increase to the motor vehicle license fee. The budget increase includes additional funding to the public schools, a 3% wage increase for city employees, fleet replacement and an increase in human services spending. Year-to-date operations are tracking positive relative to budget. General fund revenues are up 1.4% year-over-year while expenditures are up just 0.8%.
The general fund budget is supported by a diverse resource mix led by property taxes at 41% of total revenue. The city's tax rate and levy are not subject to a legal limit or cap, providing the city with significant revenue raising authority. Property taxes are generally very stable with excellent collection rates. Following a slight decline in taxable assessed value in 2014, values increased by about 1% in fiscal 2015. Similar minimal growth is projected for fiscal 2016 and 2017.
WESTERN VIRGINIA ECONOMIC ANCHOR
Roanoke serves as the regional retail, transportation, manufacturing, and healthcare hub, a position bolstered by its location within the crossroads of major highway and rail systems and complemented by its airport. After a $100 million investment from the Commonwealth for construction, Amtrak service is expected to begin in the city in 2017. Also, the city in partnership with the City of Salem is in the process of constructing a 50 mile fiber network which is projected to be operational in the spring of 2016 and is expected to attract new business.
As the regional center for economic activity, employment opportunities are fairly diverse and the city's unemployment rate continues to track below that of the U.S. at 4.3% in November 2015.
Income levels for city residents trail those of the state by a good margin. A low regional cost of living may offset this risk to a degree. The city's retail base is anchored by a regional mall. Retail sales have continued to increase annually over the past three years.
The city's largest employment sector, health care and social assistance, comprises 18% of employment and is anchored by Carilion Clinic. Carilion, which is headquartered in Roanoke, is the city's largest taxpayer (at 2.9% of total AV) and private sector employer (8,700 employees). Carilion continues to expand within the city and has recently purchased property which will result in a new hospital addition and parking garage. The Governor's budget includes funding for a $50 million expansion to the VA Tech Carilion Research Institute which is expected to bring more high paying jobs to the City.
AFFORDABLE DEBT LEVELS
Debt ratios are expected to remain moderate going forward. Outstanding debt including the bonds now offered equals 2.7% of market value or $2,363 per capita.
The 2016 - 2020 capital improvement program (CIP) totals $156 million or 2% of market value. The CIP will be largely financed with additional debt. Fitch does not expect much impact on the debt burden from the additional borrowing given the city's aggressive retirement of outstanding obligations. The city is scheduled to repay more than 72% of outstanding principal over the next 10 years.
Pension and retiree health costs consume a fairly small share of city resources. City employees participate in one of two pension plans and may also participate in a deferred compensation plan.
The City of Roanoke Pension Plan was 70% funded as of the June 30, 2015 valuation date, a slight improvement from prior declines due to the inclusion in the June 30 2013 valuation of cost of living increases. Using a more conservative 7% return rate, Fitch estimates the plan funded ratio at a weaker 65%. The city contributed $13.1 million to the Roanoke plan for fiscal 2015, equal to 100% of the contractually determined contribution (based on an actuarial calculation) and approximately 4.2% of total governmental spending. Effective July 1, 2015, all employees are required to contribute 5% of compensation toward the cost of their retirement benefit, a change that had previously been required by just employees hired after July 1, 2014. This modification is expected reduce the cost to the city.
The city's contribution to Virginia Retirement System (VRS), a multi-employer agent plan was a modest $1.5 million or less than 1% of spending. For Roanoke's portion of VRS, the funded ratio is adequate at 84% on an actuarial basis and 86% on a market value of assets basis as of June 30, 2015.
The city paid $1.3 million for OPEB in fiscal 2015 which accounted for 100% of the ARC and less than 1% of spending. Total carrying costs for debt service, pensions and OPEB are affordable at 14.5% of total governmental spending.