Fitch Rates Arlington County, VA's GOs 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the following Arlington County, Virginia (the county) general obligation (GO) bonds:

--$90.49 million GO public improvement bonds, series 2015A,--$39.27 million GO refunding bonds, series 2015B.

The bonds will be sold via competitive sale the week of June 1.

In addition, Fitch affirms the following ratings:

--$892 million of outstanding GO bonds at 'AAA',--$61.6 million of outstanding 2013 Industrial Development Authority (IDA) revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are general obligations of Arlington County for which the full faith and credit and unlimited taxing power of the county are pledged.

The revenue bonds issued by the Arlington County IDA are limited obligations of the authority payable solely from payments to be made by the county to the trustee, subject to annual appropriation by the county board.

KEY RATING DRIVERS

OUTSTANDING FINANCIAL PERFORMANCE: Conservative budgeting, timely tax increases, and closely monitored expenditure controls consistently produce surplus operating results leading to solid reserve levels and liquidity.

GOVERNMENT-DOMINATED EMPLOYMENT BASE: The significant presence of the federal government served to insulate the region from economic downturns in the past; however, reductions due to the 2005 BRAC cuts create some uncertainty.

EXCEPTIONAL DEMOGRAPHIC INDICATORS: Very low unemployment, superior wealth levels, and one of the most highly educated labor forces in the nation support the economy.

WELL-MANAGED LONG-TERM OBLIGATIONS: Debt levels are expected to remain moderate given prudent planning and adherence to conservative debt policies. The county continues to fully fund obligations related to pension and other post-retirement benefits (OPEB).

APPROPRIATION RISK: The 'AA' rating on the IDA revenue bonds incorporates the general creditworthiness of the county, appropriation risk, and absence of security interest.

RATING SENSITIVITIES

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

CREDIT PROFILE

Arlington County is located in the northern section of Virginia across the Potomac River from Washington, D.C., and encompasses a land area of 25.8 square miles. As of 2014 the population is estimated at 226,908.

AMPLE RESERVE LEVELS

The county's financial profile remains sound and well managed. The fiscal 2014 unrestricted fund balance was $230.5 million or a sound 20.9% of expenditures and transfers out. The county maintains additional reserves ($29.7 million or 2.6% of budget fiscal 2016 expenditures) outside of the general fund that could be used if needed.

The committed fund balance includes the county's 5% operating reserve, which may only be used to meet critical and unanticipated spending needs. Fitch expects a certain amount of variability in the county's committed and assigned portion of the fund balance as a result of expenditures associated with pay-go capital, affordable housing, and budget contingencies, but expects reserves to remain healthy and above policy levels.

MODEST SURPLUS OPERATIONS ANTICIPATED FOR FISCAL 2015

The 2015 general fund expenditure budget is 4.2% over the FY 2014 adopted budget. The budget increase is mostly due to additional funding to the schools and increases in compensation. Year-to-date operating results are positive relative to budget.

The adopted fiscal 2016 expenditure budget is less than a 1% increase over the adopted 2015 budget. The budget maintains the current tax rate and funds a 3.1% increase to the schools, an increase in economic development and the establishment of an internal auditor.

Multiyear projections show modest operating deficits beginning in fiscal 2018. Based on prior performance, Fitch expects strong and positive operations.

SOLID REVENUE-RAISING FLEXIBILITY

The county is not subject to any limitation on its property tax rate or levy. Typical of Virginia counties, property taxes produced approximately 66% of fiscal 2014 general fund revenue. Property tax revenues increased annually between fiscal 2010 and 2014, reflecting increasing taxable assessed values and timely tax rate enhancements during slow tax-base growth years, demonstrating solid fiscal management. While the average tax bill is higher than in neighboring communities, this reflects above-average wealth levels within the county, although wealth levels are higher in other parts of the area.

EXTENSIVE ECONOMY

Arlington County is located at the center of the Washington D.C. metro area and has consistently exhibited very strong economic characteristics. The presence of the federal government remains key to the region's overall stability, attracting a large number of private sector contractors. A healthy retail base, government employers outside the defense sector and a significant tourism component add breadth to the county's economy.

The high-paying employment base is supported by a local workforce that is among the most educated and highly skilled in the nation. Wealth indicators are very strong and income growth rates measure favorably when compared to the region and nation. Unemployment remains low, at 3.1% in February 2015.

Job relocation to outside of the county and increased vacancies associated with the 2005 military base realignment and closure are anticipated to continue over the near term but Fitch continues to believe the county will be able to absorb these losses with a focused strategy to repurpose existing office.

The county's tax base has recovered since its relatively mild dip during the recession, with healthy growth averaging 5.4% annually between 2011 and 2014. The county incorporates 3% annual tax base growth into its long-range plans under a moderate forecast scenario, which Fitch believes is sustainable.

SOUND DEBT PROFILE

Formally adopted conservative debt management guidelines that include a detailed debt capacity analysis serve as the financial framework for the county's capital initiatives. Fitch expects the county's debt ratios to remain moderate. The moderately high debt per capita of $4,178 is offset by the strong wealth and economic activity, as evidenced by the low debt as a percent of market value ratio of 1.4%. Rapid amortization of 70% of principal retired within 10 years enhances the debt profile.

The proposed fiscal 2015-2024 CIP totals $3.2 billion, including self-supporting utility projects. Transportation and metro projects ($1.6 billion) are the major cost drivers. Pay-as-you-go capital financing is slated to provide about 15% of the funding for general government projects, with the balance funded by debt issuance and state/federal funding. The county projects compliance with its prudent debt policies throughout the course of the CIP. The debt burden is expected to remain modest given rapid amortization and projected tax base growth.

WELL-FUNDED LONG-TERM LIABILITIES EXPECTED TO REMAIN AFFORDABLE

Long-term liabilities are well managed. The county consistently funds 100% of the actuarial required contribution (ARC) for its single-employer, defined benefit plan. The plan covers substantially all employees with the exception of teachers who participate in the Virginia Retirement System (VRS).

The county's plan was well funded as of July 1, 2014, estimated at over 92% using Fitch's more conservative 7% discount rate. The adjusted unfunded actuarial accrued liability of $158 million (0.2% of taxable market value) is low. On a reported basis the plan is 94% funded and uses a discount rate that was recently lowered to 7.25%. Arlington County Schools participate in the VRS. Although the county does not have a direct obligation to fund the schools pension costs, an increase in costs could impact county operations. The system-wide funding level of the VRS declined in recent years in part due to underfunding of actuarially-based contributions (partially used as a budget balancing measure by the commonwealth), but recovered more recently with the exclusion of 2009 investment losses from the smoothing formula, recent strong investment gains, and increased annual funding. As of the June 30, 2014 valuation from VRS 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. Importantly, the commonwealth anticipates phasing back in full actuarially-determined contribution (ADEC) payments by fiscal 2019.

The county also provides OPEBs to its retirees. For fiscal 2014 the county funded 105% of the OPEB ARC. According to the latest actuarial valuation (July 1, 2013) the funded ratio was 22%. Fitch views even this moderate level of OPEB pre-funding positively. The UAAL associated with OPEB totals $205.7 million or a low 0.3% of market value. Carrying costs for debt service, pension ARC and OPEB totaled a low 11.2% of fiscal 2014 governmental fund spending.

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 Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Virginia Employment Commission.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984963

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150519006975/en/

Fitch Ratings
Primary Analyst
Evette Caze
Director
+1-212-908-0376
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan
Director
+1-212-908-0675
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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