TEXT-Fitch rates Portsmouth, Va. GOs 'AA'
Dec 4 - Fitch Ratings has assigned an 'AA' rating to the following general obligation (GO) bonds of Portsmouth, Virginia (the city): --Approximately $24.9 million GO public utility and refunding bonds, series 2012C. The bonds are expected to sell on Dec. 12th via negotiation. Bond proceeds will finance capital projects, as well as refinance outstanding series of GO bonds. In addition, Fitch affirms the following ratings: --$393 million outstanding GO bonds at 'AA'; --$50 million outstanding GO notes at 'AA'. The Rating Outlook is Stable. SECURITY The GO bonds and notes are general obligations secured by the full faith and credit and unlimited taxing power of the city. KEY RATING DRIVERS IMPROVING ECONOMIC PROFILE: Maritime activities, including military research and medical care, traditionally anchor the increasingly diverse local economy. SOUND FINANCIAL PERFORMANCE: Significant expenditure reductions and conservative revenue forecasting have resulted in balanced operations and ample reserve levels. MODERATE DEBT BURDEN: The city's overall tax-supported debt burden is expected to remain moderate due to manageable future capital needs. Amortization of outstanding principal is above average. BELOW-AVERAGE SOCIO-ECONOMIC INDICATORS: Wealth indicators are well below state and national averages. The unemployment rate currently exceeds that of the state but is on par with that of the U.S. PENSION AND OPEB CONCERNS: Unfunded liabilities for pension and other post-employment benefits (OPEB) are considered high, and annual contribution requirements consume an increasingly large share of operating resources. CREDIT PROFILE CONTINUED DIVERSIFICATION OF ECONOMY Portsmouth is located in the Hampton Roads region of Virginia on the Chesapeake Bay. The city is home to significant naval and port operations. The three largest employers for the city are the Norfolk Naval Shipyard, the Naval Hospital, and the U.S. Fifth District Coast Guard Command, which in total employ 18,500 or more than 2% of the Virginia Beach-Norfolk-Newport News metropolitan statistical area (MSA). The government sector accounts for nearly 22% of MSA employment, or 130% of the U.S. average. Fitch is not aware of major planned federal budget cuts that could adversely affect the city's naval operations. The planned redeployment of a nuclear-powered aircraft carrier to Naval Station Mayport has been delayed. In 2011, all container traffic shifted from the Portsmouth Marine Terminal (PMT), a general cargo facility that ranked seventh in the U.S. in total cargo value and tonnage, to the APM terminal in Portsmouth. The $450 million APM terminal opened in 2008 and is the largest private investment in Hampton Roads and the eighth largest on record in Virginia. The Craney Island, also in Portsmouth, has been chosen for the construction of a marine terminal, possibly operational in 2020, thus augmenting, in the long term, the city's role as a maritime hub. Maritime and naval activities have encouraged related industries, such as research and development initiatives like the Marine Science and Technology Center (MAST) Center. An $80 million research and education park, MAST is a joint development with the city of Suffolk. Currently, MAST is 80% leased, and plans are currently underway to construct a second MAST structure. Mixed-use development continues in the city, as does growth of the city's higher education sector through the development of Tidewater Community College. Economic indicators are below average. The September 2012 unemployment rate of 7.8% represents improvement from the year prior and remains above the state's 5.6% but on par with the nation's 7.6%. Wealth indicators are roughly 30% below those of the state and 15% below those of the nation. The city's population decline has moderated after slowly waning since the 1960s. RETURN TO STRUCTURAL BALANCE Liberal budgeting policies from fiscals 2005 through 2008 were evident in unrealistic forecasting practices that resulted in the use of one-time revenues to achieve balance. By the end of fiscal 2008, undesignated fund balance was well below policy levels of 15% of spending. A new management team implemented significant expenditure cuts in fiscal 2009 and restructured debt to address short-term cash flow requirements. Cost control measures have included elimination of personnel and vacancies, implementation of furloughs, reduction of pay-as-you-go capital funding, and reduction in OPEB contributions. These expenditure controls coupled with two millage rate increases resulted in structural balance from fiscal 2009 through the fiscal 2012/2013 biennial budget. There were no layoffs or furloughs in fiscal 2010 through 2012, and none are budgeted for fiscal 2013. Unaudited results for fiscal 2012 show a $3 million operating surplus (after transfers), marking the fourth year of successive surplus results. In addition, the city received a one-time remittance of unspent school funds in the amount of $10 million. Unrestricted fund balance increased to $61.9 million (a healthy 28.6% of spending). The adopted fiscal 2012-2013 biennial budget is structurally balanced with a 3-cent millage rate increase. Reserves are budgeted to remain in compliance with the policy floor (unassigned fund balance equal to 15% of revenue), and any reserves in excess of policy levels will be considered for one-time purposes. Use of $7.9 million (3.3% of budgeted spending) for capital investment and school funding in fiscal 2013 is anticipated. MANAGEABLE DEBT OBLIGATIONS Overall net debt levels are moderate at $3,753 per capita and at 3.9% of market value. Debt service equaled $23.1 million (a moderate 10.6% of spending) in fiscal 2012 (unaudited). These metrics exclude self-supporting GOs issued on behalf of the city's utility systems. The city has no exposure to variable-rate debt or derivative instruments. The tax-supported capital improvement plan (CIP) of $106 million for fiscal 2013 - 2017 equals 1.2% of market value. The CIP includes $27 million for municipal facilities. Half of the CIP's funding will be provided by planned annual GO and certificates of participation borrowing ($57 million). HEIGHTENED PENSION AND OPEB LIABILITIES Funded ratios of the city's two closed pension plans, Portsmouth Supplemental Retirement System (PSRS) and the Portsmouth Fire and Police Retirement System (FPRS), have been historically weak and have declined in recent years to 28% and 32% in fiscal 2012, respectively (using Fitch's adjusted return on investment of 7%). The city contributed 100% of the annual required contribution (ARC) to both closed plans in fiscal 2012. Yet, in fiscal 2010, the city did not meet the full ARC payment (84% for PSRS and 96% for FPRS). In fiscal 2012, the city contributed 100% of the ARC to its active pension plan, Virginia Retirement System (VRS), whose funding ratio was an adequate 77.8% as of fiscal 2010 based on a 7% investment return adjustment. ARC payments for all three plans totaled $28.2 million or 13% of spending; the city's closed plans' ARCs accounted for $19 million of this total. The general fund's burden is slightly less at $26 million or 12% of spending. The city has hired a consulting firm to strategize long-term funding plans for its two closed plans. For fiscal 2012, the city revised its discount rate assumption from 8% to a more conservative 7.25%, which Fitch views positively. This revision will likely to contribute to increased ARCs for both plans. Combined fiscal 2012 ARC requirements for pension and OPEB liabilities equal a substantial 22.1% of spending and debt service. Fitch will continue to monitor the city's ability to meet its long-term obligations without incurring undue pressures from its fixed cost burden. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in the Tax Supported Rating Criteria, this action was informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and Zillow.com. 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 U.S. Local Government Tax-Supported Rating Criteria
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