NEW YORK--()--Fitch Ratings assigns a rating of 'AA+' to the following general obligation (GO) bonds to be issued by Roanoke, Virginia (the city):
--$11,105,000 GO public improvement bonds, series 2013A (tax-exempt);
--$13,245,000 GO public improvement refunding bonds, series 2013B (tax-exempt);
--$7,695,000 taxable GO public improvement refunding bonds, series 2013C.
Proceeds of the series 2013A bonds will be used to fund various improvement projects. Proceeds of the series 2013B and series 2013C (taxable) bonds will be used to advance refund certain outstanding GO bonds of the city. The bonds are scheduled to be sold competitively on Feb. 12, 2013.
In addition, Fitch affirms the 'AA+' rating on approximately $164 million of outstanding GO bonds of the city.
The Rating Outlook is Stable.
The bonds will be general obligations of the city, secured by the irrevocable pledge of the city's full faith and credit and unlimited taxing authority.
STABLE FINANCIAL PROFILE: Reserve levels have increased following a series of positive operating results from fiscal years 2009-2012. The city targets a 10% set-aside for cash flow and emergency purposes, which Fitch believes provides an adequate cushion at the current rating given the city's other credit characteristics.
ECONOMIC HUB FOR WESTERN VIRGINIA: Roanoke is a regional economic hub, with a diverse economy that leverages the city's employment sector strengths in health care and transportation. Growing opportunities in biomedical research lend additional employment and income stability.
AFFORDABLE DEBT POSITION: Debt levels are moderate and servicing costs affordable. Additional capital needs and issuance plans are not expected to impact the debt profile, given the moderate rate at which existing obligations are amortized.
Roanoke is located in rural western Virginia along Interstate 81, at the southern end of the Shenandoah Valley and approximately 170 miles west of Richmond. The city has a stable population of approximately 97,000, making it the largest city in the commonwealth west of the state capital.
STABLE OPERATIONS AND RESERVES GUIDED BY PRUDENT POLICIES
The city concluded fiscal 2012 with a modest net surplus (after transfers) in the general fund of $170,000 (or 0.07% of total spending of $258 million). Fiscal 2012 was the fourth consecutive year a net surplus was recorded. During this period, the year-end unrestricted fund balance improved to $27 million or 10.5% of spending. Recently adopted fiscal policies target a 10% reserve for working capital/emergency purpose.
By policy the city adopts a balanced budget excluding the use of one-time measures or existing fund balance. The fiscal 2013 budget, which totals $252.9 million or a 2.28% decrease from fiscal 2012, is performing on target based on mid-year results presented by management. The city expects close to break-even operations at year-end at a minimum, which appears reasonable given year-to-date results.
The general fund budget is supported by a diverse resource mix led by property taxes at 40% of total revenue. Property taxes are generally very stable and derived from a diverse tax base with excellent collection rates.
For the first time in Roanoke's history, the assessed value (AV) of real estate, excluding new construction, declined in fiscal 2013 by 1.64%. Declines are projected to continue in fiscal 2014. The city's tax rate and levy is not subject to statutory or charter limitation or cap, affording the city the ability to offset AV declines and maintain revenue stability. The tax rate has been flat or has declined each year since at least fiscal 2002, and at $1.19 per $100 of AV is slightly higher compared to several city/county rates in the region.
The remainder of discretionary general fund revenue is largely derived from a mix of broad-based taxes including sales tax (7%), utility tax (4%), business license tax (5%), food and beverage tax (7%) and telecommunications tax (3%). The city has independent rate setting authority with respect to the majority of these sources, which affords additional financial flexibility.
Although these revenues are potentially volatile given their consumption-based nature, the city's revenue forecasting has proved fairly accurate in recent fiscal periods, and the continued maintenance of solid reserve levels offers a cushion in the event of an unanticipated decline in collections.
WESTERN VIRGINIA ECONOMIC ANCHOR
Roanoke serves as the regional retail, transportation, manufacturing, and healthcare hub, a position bolstered by its location within the crossroads of major highway and rail systems and complemented by its airport.
As the regional center for economic activity, employment opportunities are fairly diverse and the city's unemployment rate continues to track below that of the U.S. at 6.8% in November 2012. The Roanoke region is fairly mature, and growth expectations are modest. Annual average employment gains of roughly 1% are forecasted for the period 2013-2016 by Global Insight.
Income levels for city residents trail those of the state by a good margin. A low regional cost of living may offset this risk to a degree. The city's low income has not detracted from its retail base, which is anchored by a regional mall and benefits from a significant student population of more than 91,000 within a 60-mile radius of the city. Retail sales per capita are 160% of the state average.
The city's largest employment sector, health care and social assistance, comprises 17.4% of employment and is anchored by Carilion Health. Carilion, which is headquartered in Roanoke, is also the city's largest taxpayer (at 2.7% of total assessed value (AV)) and private sector employer (over 2,000 employees).
The 703-bed Carilion Roanoke Memorial Hospital is one of the largest hospitals in the state and recently received a $105 million renovation adding a new emergency department, labor and delivery unit, and children's hospital. Carilion recently partnered with Virginia Tech to open a new $59 million school of medicine and research, Virginia Tech Carilion (VTC). VTC has experienced strong demand since enrolling its inaugural class in fall 2010 and there are plans to steadily expand the current scope of research.
MATURE, STABLE TAX BASE
The city's tax base has been fairly stable, benefiting from the absence of speculative building during the housing boom. AV increased at a compound annual growth rate (CAGR) of 5.6% per year from fiscal 2000 - 2009. Recent success in land reuse and redevelopment, particularly for residential and retail purposes in the city's downtown area, played an important role in these results. Building activity has softened since the recession, slowing total assessed value growth to 2% from fiscal 2010 - 2012. Following the 1.2% real estate AV decline in fiscal 2013 a less than a 1% decline is projected for 2014.
AFFORDABLE DEBT LEVELS
Debt is presently affordable, and expected to remain so going forward. Debt servicing costs total $31.4 million in fiscal 2012 or approximately 11% of the combined general fund and debt service fund budgets. Outstanding debt equals 3.1% of market value or $2,711 per capita, ratios considered moderate by Fitch.
The 2013 - 2017 capital improvement program (CIP) totals $99 million or 0.9% of market value. The CIP will be largely financed with additional debt. Fitch does not expect any impact on credit quality from the additional borrowing given the city's aggressive retirement of outstanding obligations. The city is scheduled to repay more than 70% of outstanding principal over the next 10 years.
Pension and retiree health costs consume a manageable share of city resources (approximately 4% of governmental spending). Pension plans are satisfactorily funded. The city has adopted several pension reforms, effective fiscal 2014, to help sustain the financial health of its program going forward. The city does not have exposure to variable rate debt or derivative products.
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, National Association of Realtors, American Community Survey.
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