TEXT-Fitch affirms King George Count, Va. GOs at 'AA-'
Feb 28 - Fitch Ratings has affirmed the following King George County, Virginia (the county) ratings: --Implied general obligation (GOs) at 'AA-'. In addition, Fitch affirms the following ratings: --$2.2 million King George County Industrial Development Authority (IDA) lease revenue bonds, series 2004 at 'A+'. The Rating Outlook is revised to Positive from Stable. SECURITY The lease revenue bonds are secured by lease payments subject to annual appropriation by the city. Essential government assets are subject to a lien. KEY RATING DRIVERS CONSISTENT FINANCIAL AND ECONOMIC PERFORMANCE DRIVES POSITIVE OUTLOOK: The revision of the Outlook to Positive reflects the expectation that the county can maintain its strong degree of financial flexibility and its current economic profile despite risks arising from potential nation-wide defense cuts in 2013. MODERATELY CONCENTRATED ECONOMIC BASE: A specialized military base anchors the county's stable but somewhat limited economy. The county benefits from generally positive socio-economic metrics and relatively stable tax base. AMPLE RESERVES AND LIQUIDITY: Strong financial management has produced healthy reserves well-above the conservative policy level and high liquidity levels. The ability to reduce expenditures, if required, increases the county's flexibility. MODERATE DEBT BURDEN: Limited intermediate-term debt issuance will allow the county to maintain the current manageable debt position. Long-term obligations do not pressure the credit. APPROPRIATION RISK FOR LEASE REVENUE BONDS: The rating on the lease revenue bonds reflects the county's underlying credit quality, the appropriation risk included in the bond provisions, and the inclusion of essential government assets under a lien. RATING SENSITIVITIES MAINTENANCE OF FINANCIAL AND ECONOMIC PROFILE: A demonstrated ability to retain strong reserves, favorable employment metrics, and economic stability in the face of challenges posed by potential federal budget reductions could result in an upgrade. CREDIT PROFILE The county is located east of Fredericksburg, VA approximately 75 miles from Washington D.C. and Richmond, VA. Its population of 24,161 has expanded quite rapidly in the past decade, although the growth rate is expected to temper a bit. RESILIENT ECONOMY WITH MILITARY CONCENTRATION The stable yet somewhat limited economy has performed well throughout the economic downturn. The major employer, Dahlgren Division Naval Surface Warfare Center employs around 350 military and 4,670 civilian personnel. Fitch believes that the specialized nature of the center's commands, which focus on training for naval weaponry, bode well for its continued essentiality. Dahlgren has attracted a number of military concerns including Northrop Grumman Corporation (Issuer Default Rating 'BBB+', Stable Outlook) and Lockheed Martin Corporation (IDR 'A-', Stable Outlook). As an indication of the somewhat slender employment base, each firm is among the county's top employers despite the small number of employees (less than 500). Approximately 60% of the county's labor force out-commutes to employment opportunities in adjacent counties and the city of Fredericksburg (GO bonds rated 'AA+' Stable Outlook by Fitch). Were the upcoming sequestration to occur, Dahlgren may be significantly affected by a proposed one day a week furlough of civilian employees and a deferral of a couple of projects. Fitch will monitor how the economy fares under these or other reductions, should sequestration be implemented. The county's ability to absorb a sequestration with minimal impact would reflect a credit profile associated with a higher rating. SOLID SOCIO-ECONOMIC INDICATORS The regional employment base has supported rapid population growth. Population grew rapidly at an average annual rate of 3.4% from the 2000 to 2010 census, well above the nation's 0.9%. Growth is expected to moderate somewhat this decade. Although county employment fell a small 2.2% at the beginning of the recession, it has subsequently remained flat or increased annually. The December 2012 6.3% unemployment rate is below the nation's although above the state's, which is consistent with the pattern of the past few years. The majority of wealth indices indicate average incomes above regional and national levels. Assessed value has also remained relatively stable over the past few years, with only one year declining in the past decade, 5.6% in fiscal 2010. The county has demonstrated its willingness to increase the regionally low tax rate. The housing market has been reasonably steady since a drop when the economic downturn began. STRONG FINANCIAL FLEXIBILITY Reserves and liquidity have consistently remained at robust levels. For the past two years, the county has exceeded its conservative reserve policy equal to 15% of the general government operating budget. Fitch notes positively that the county has begun funding a newly established revenue stabilization fund, with the goal of 3% of the general government operating budget. In addition, the county anticipates that the utility fund will no longer rely on general fund subsidies, removing a potential pressure point from the general fund. The county concluded fiscal 2012 with an unrestricted fund balance (the sum of committed, assigned, and unassigned per GASB 54) equal to $23.1 million, or a high 60.2% of spending. The fiscal 2012 $810 thousand fund balance draw-down equaled a small 2.1% of spending and was below the year's level of pay-as-you-go capital funding. The net general fund support of the utility fund was low at about $130 thousand. INDICATIONS OF CONTINUED POSITIVE OPERATIONS The $33.3 million fiscal 2013 budget reflects 5% growth from the prior year. This is attributable in part to projected escalations in property tax collections, due to the higher tax rate, as well as increases in sales tax receipts. No funds are budgeted to support the utility enterprise. The county reports that revenues to date are in-line with the budget. Fitch believes that the limited nature of previously implemented spending reductions affords the county flexibility should it be required to generate expenditure savings. Current projections demonstrate a slight increase in fund balance at the conclusion of the fiscal year. Fitch considers the forecasts viable. POSSIBLE ONE TIME USES OF RESERVES MAY RESULT IN STILL SOUND LEVELS The county is considering the use of reserves to fund certain one-time and capital projects in the intermediate term. Management has stated its commitment to maintain reserves above policy levels. Fitch believes that the county's history of conservative budgeting and prudent fiscal stewardship will allow it to maintain a healthy financial profile. MODERATE DEBT BURDEN Overall debt levels are moderate at $2,908 on a per capita basis and 2.3% of market value. Amortization is below average at 42.5% of principal retired within 10 years. The county is contemplating using reserves and perhaps issuing debt to finance its modest $34.6 million fiscal 2013 to fiscal 2017 capital improvement plan. Debt services costs are high at 17.2% of governmental spending, exclusive of capital funds. A portion of the carrying costs service school debt, although not all school expenditures are included in the governmental spending. LIMITED OTHER LONG-TERM LIABILITIES Pension and other post-employment benefits (OPEB) contributions do not stress financial operations. County employees participate in the state-administered Virginia Retirement System (VRS). The county's annual payment, including contributions for school employees, equals a low 2.2% of governmental spending, exclusive of capital funds. The county's portion of the VRS plan is adequately funded at 76%, using an assumed 7% investment rate of return, which is Fitch's conservative assumption. The county will phase in the newly required 5% employee contribution rate over a five-year term. Fitch believes the county can absorb the incremental pay increases to offset the contributions without reducing its financial flexibility. County employees are ineligible for OPEB. School employees can receive OPEB benefits. The school funds roughly 35% of the low $108 thousand annual required contribution. LEASE REVENUE BONDS SUBJECT TO APPROPRIATION The bonds are secured by lease rental payments, subject to annual appropriation, made by the county to the lessor, the IDA. The IDA assigned and transferred its rights to a trustee, which can take possession of and re-let the leased property in the event of non-appropriation or default. A high school is the collateral under the lease. 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 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, and the National Association of Realtors. 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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