|[April 15, 2014]
Fitch Rates Virginia Public School Auth's School Financing Bonds (1997 Resolution) Ser 2014A&B 'AA+'
NEW YORK --(Business Wire)--
Fitch Ratings assigns an 'AA+' rating to the following Virginia Public
School Authority (VPSA) bonds:
--$51 million VPSA school financing bonds (1997 resolution) series 2014
--$213.4 million VPSA school financing bonds (1997 resolution) refunding
series 2014 B.
The bonds are expected to sell via competition on or about April 24,
In addition, Fitch affirms the 'AA+' rating on outstanding VPSA school
financing bonds, school tax credit bonds, and school education
technology notes (collectively, the VPSA bonds).
The Rating Outlook is Stable.
VPSA school financing bonds and school tax credit 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. The authority's
school education technology notes are also ultimately payable from
appropriations from the commonwealth's literary fund and, in the event
of literary fund insufficiency, a 'sum sufficient' appropriation from
the commonwealth's general fund.
KEY RATING DRIVERS
COMMONWEALTH APPROPRIATION OBLIGATION: The 'AA+' rating on the VPSA
bonds, one notch below the commonwealth's 'AAA' Fitch 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 COMMONWEALTH FINANCIAL MANAGEMENT: The commonwealth's
financial operations are conservatively managed with periodic revenue
forecast updates and a constitutional revenue stabilization fund (RSF).
Revenue performance has improved considerably since the recession and
deposits to Virginia's reserve fund are budgeted per policy during the
DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from
a diverse economy with relatively low unemployment and high wealth
levels. Reductions in government sector employment over the next few
years are likely as the federal government contracts.
MODERATE DEBT 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.
PENSION FUNDING REFORMS: The funded status of Virginia's retirement
system declined in recent years, due in part to an underfunding of
actuarially-calculated annual required contributions (ARC) to the
system. Unfunded liabilities as a percentage of personal income remain
below average for U.S. states rated by Fitch. The commonwealth has
adopted a series of pension reforms that are expected to result in
increased contributions to the system and limit further growth in the
commonwealth's pension liabilities over time.
The rating on the bonds is sensitive to changes in the commonwealth's GO
rating, to which it is linked.
The series 2014A and B bonds are being issued pursuant to the 1997
resolution, which includes a 'sum sufficient' appropriation from
available moneys of Virginia's literary fund and, if those are not
adequate, the commonwealth's general fund. The appropriation, which the
governor must request from the general assembly pursuant to statute,
provides credit enhancement to the local government loan repayments that
are the primary source of security. Additional strength derives from
state law providing for the withholding of state payments to local
governments in the event of a local loan payment default, along with
Virginia's fundamental credit strengths and the state commitment to
Under the 1997 resolution, the commonwealth uses VPSA bond proceeds to
purchase GO bonds issued by commonwealth localities for school capital
projects. Local repayments of principal and interest on the locally
issued GO bonds will be used to pay debt service on the VPSA school
financing bonds. No local government has defaulted in VPSA's history,
but in the event of a default, state law requires the intercept of state
payments due to the local unit until the default is cured. Local
payments are due approximately 15 days in advance of bond payments,
allowing time for implementation of the intercept. Finally, if required,
the sum-sufficient appropriation would be used.
COMMONWEALTH FINANCES REMAIN SOUND
Virginia's 'AAA' GO rating reflects its substantial fiscal resources,
conservative approach to financial operations which includes periodic
revenue forecast updates, and low-to-moderate debt levels. Economic and
revenue performance has improved since the start of the 2010-2012
biennium, which began July 1, 2010, and continued through fiscal 2013
(the midway point of the 2012-2014 biennium). Revenue over-performance
through fiscal 2012, combined with below-budget spending, allowed the
commonwealth to close the 2010-2012 biennium on June 30, 2012 with a
surplus of $448.5 million.
The commonwealth made a $133 million revenue stabilization fund (RSF)
deposit in fiscal 2013, and an additional $245 million deposit is
budgeted for fiscal 2014. Both deposits are required under
constituional provisions to dedicate a portion of annual tax revenue
growth to the RSF. The legislature and governor also enacted a further
$95 million prepayment towards RSF deposits required in the next
biennium. Based on unaudited fiscal 2013 results, a $243 million deposit
will be due in fiscal 2015. Following these deposits, the RSF balance is
expected to increase substantially from its current level of $440
million to $689 million as of June 30, 2014 (the end of the current
biennium), and to $939 million at the close of fiscal 2015.
Additionally, $30 million is programmed for deposit to a Federal Action
Contingency Fund (FACT) (a second, statutory reserve established to
address the risk of federal deficit reduction) with a further
appropriation of $30 million contingent on attainment of a budget
surplus during the 2012-2014 biennium. Assuming $60 million is
ultimately set aside in the FACT fund, when combined with the expected
$689 million in the RSF, the commonwealth is projected to have
accumulated $749 million in reserves (representing approximately 4.4% of
forecasted fiscal 2014 revenues) by the close of the 2012-2014 biennium.
Fiscal 2014 revenues collections are trailing the official (reflecting
the enacted budget) and updated forecast estimates, though March results
imply the gap is narrowing. In early February, the governor recommended
revising revenue estimates for fiscal 2014 and 2015 downwards by $125
million and $15 million respectively, from a December 2013 forecast. The
legislature enacted a 'caboose budget bill' for fiscal 2014 largely
reflecting the governor's recommended revenue forecast revisions. Fitch
does not view the reductions as a concern given their small magnitude
relative to Virginia's nearly $17 billion general fund revenues estimate
for fiscal 2014, as well as the commonwealth's solid financial cushion.
Through March, total general fund revenues were flat year-over-year
(YOY) versus 1.7% growth estimated in the official forecast and 1.0%
growth estimated in the February 2014 mid-biennium forecast. Through
February, general fund revenues had been trailing the prior year by
0.8%. All major general fund tax sources (personal income, sales and
corporate income) are falling short of mid-biennium forecast
expectations, with particular weakness in personal income (1.8% growth
versus 2.9% in the mid-biennium forecast) and corporate income tax
receipts (5.2% decline versus a 3.4% decline in the mid-biennium
The recent revenue weakness could reflect effects of federal
sequestration, as well as the recent federal shutdown, which Fitch
anticipated would negatively affect the commonwealth's general fund tax
revenues given the commonwealth's exposure to federal government and
government-related employment. Despite the recent enactment of a federal
budgetary framework, Fitch anticipates ongoing federal contraction to
continue. While the full extent of any decline is unclear, Virginia
maintains sound and growing reserve levels to offset any near-term
effect on revenues.
The legislature has yet to enact a new budget for the next biennium
beginning on July 1, though ample time remains to enact a timely one and
avoid any disruption in normal government operations. The key point of
contention appears to be the new governor's proposal to expand access to
health insurance under provisions of the Affordable Care Act. After the
legislature ended its 60-day session on March 8, the governor ordered
the legislature into special session to resolve the budget. Fitch
anticipates timely adoption of a final budget before the start of the
new biennium and will monitor the budget negotiation process.
BROAD ECONOMIC BASE
The commonwealth benefits from a diverse economic base and high wealth
levels. Employment declined in 2009 and 2010 by 3.2% and 0.1%,
respectively, though this performance was less severe than national
declines of 4.4% and 0.7% for 2009 and 2010, respectively. Virginia
recorded 1.1% and 0.7% growth in 2012 and 2013, respectively, trailing
the national growth rates of 1.7% in both years. February 2014 YOY
employment declined modestly (0.1%), well below the 1.6% growth rate for
the nation. YOY employment losses in federal government employment
associated with federal contraction began in June 2013 with a 0.4%
decline and remains negative, reaching a high of 3.1% decline in
February 2014. Fitch will continue to monitor the effects of this
contraction, although the agency believes the strength of the
commonwealth's economy will allow it to absorb anticipated losses
without significantly weakening Virginia's credit profile. Unemployment
has historically been well below the national rate, and the 4.9% rate
for February 2014 represents just 73% of the U.S. rate for the same
Personal income growth in Virginia has been consistent through most of
the last decade, though recently falling short of the national pace.
After a 0.7% decline in 2009 (less severe than the national decline of
2.9%), personal income grew for the next three years. Growth in 2010 of
3.1% and 6.1% in 2011 met or exceeded U.S. growth, while 3.7% growth in
2012 and 1.7% growth in 2013 trailed national growth of 4.2% and 2.6%,
respectively. Personal income per capita growth also lagged the national
rate in 2013, but remains high at $48,773 or 109.5% of the U.S. average
in 2013; Virginia ranks 10th among the states on this metric.
WELL-MANAGED DEBT PROFILE
The commonwealth's debt ratios are in the moderate range and have grown
slightly over the past fiscal year. As of June 30, 2013, net
tax-supported debt totaled approximately $10.7 billion, equal to 2.7% of
2012 personal income. GO debt constitutes approximately 16.4% of net
tax-supported debt, with the remainder principally represented by
various appropriation credits. Certain appropriation-linked debt, are
excluded from Fitch's calculation of state debt due to their track
record of self-support. Capital needs for higher education and
transportation improvements remain large with substantial authorized but
unissued balances outstanding.
PENSION LIABILITIES UNDER CONTROL
On a combined basis, the burden of the commonwealth's net tax-supported
debt and unfunded pension obligations equals 4.6% of 2012 personal
income, below the median of 7% for U.S. states rated by Fitch
(statistics as of Fitch's July 2013 State Pension Update report). The
adjusted calculation includes the commonwealth's portion of the total
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), and as
of the June 30, 2012 valuation the funded ratio on a reported basis was
65.8%, down from 84% funded on June 30, 2009. 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 ARC payments by fiscal 2019. Funded
ratios could weaken until then, though Fitch does not anticipate
material reductions, absent significant investment market declines.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from the Underwriter and IHS (News - Alert) Global Insight.
Applicable Criteria and Related Research:
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
[ InfoTech Spotlight's Homepage ]