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
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.
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
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.
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
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
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