Fitch Ratings has assigned 'AA' rating to the following bonds of the Fairfax County (the county), VA Economic Development Authority (EDA):
--$49.2 million Fairfax County Economic Development Authority, VA transportation district improvement revenue bonds (Silver Line Phase I Project), series 2012.
The series 2012 bonds are being issued to provide funds to enable the County to meet its obligation to the Metropolitan Washington Airports Authority to fund a portion of the cost of the construction of an 11-mile expansion in Fairfax County (the 'Phase I Dulles Rail Project') of the regional mass transit system of the Washington Metropolitan Area Transit Authority. The bonds are expected to price via negotiation on September 25th.
In addition, Fitch affirms the following rating:
--$199.5 million transportation district improvement revenue bonds (silver line phase I project) series 2011 at 'AA'.
The Rating Outlook is Stable.
The bonds are limited obligations of the EDA payable primarily from proceeds of a limited ad valorem property tax (special tax revenues) levied by the county on all taxable property zoned for commercial or industrial use in the Phase I Dulles Transportation Improvement District (TID or district).
The county is not legally obligated to impose the special tax revenues. The obligation to collect and pay to the trustee the special tax revenues is contingent upon the levy and appropriation of such by the board of supervisors. Bondholders are additionally secured by a cash funded debt service reserve fund which is expected to equal to $17.36 million (or maximum annual debt service (MADS)) at issuance.
KEY RATING DRIVERS
HEALTHY COVERAGE PROJECTED: Fitch expects coverage to remain healthy, incorporating a tax rate well below the statutory ceiling. The county intends to set the tax rate at the lowest level necessary to achieve covenanted coverage. Fitch estimates coverage at the maximum rate at 2.6x MADS.
RESTRICTED USE OF REVENUE COLLECTIONS: Revenues are restricted to project financing, either through debt service payments, including retirement, or pay-as-you-go capital financing, which mitigates risk of appropriation for annual debt service payments.
STRONG LINK TO 'AAA' COUNTY GOVERNMENT: TID's commission is primarily composed of members of the Fairfax County's Board of Supervisors, (the county's general obligation bonds are rated 'AAA' with a Stable Outlook by Fitch). The county's superior financial management team will oversee the tax levy and collection process, as well as the debt service payments. These factors offset the district's role in requesting the imposition of a sufficient tax rate and the payment of debt service.
NO ADDITIONAL DEBT PLANNED: The proposed bonds fulfill the tax district's authorized funding commitment to phase I of the project.
STRONG UNDERLYING TAXBASE: The TID contains a significant portion of the county's deep commercial and industrial tax base. Assessed valuation (AV) trends have been historically strong and stand to benefit from metrorail expansion.
HIGH TAXPAYER CONCENTRATION: Risk to taxpayer concentration is of some concern, although Fitch notes the existence of ample taxing capacity under the statutory cap as an offset to the loss of a prominent property owner(s) and tax base decline. High cash reserves are maintained that could address unanticipated collection loss.
The TID was created in 2004 to provide $400 million of funding for the first phase of the Dulles Metrorail Project, which will extend the metrorail through the commercial heart of Fairfax County and ultimately, in the second phase, beyond Dulles Airport. Phase I construction is on-schedule and on-budget, with 99% of the project fully designed, 99% of utility relocation completed and 79% of construction finished. Service is scheduled to begin in late 2013/early 2014.
The TID encompasses approximately 23 miles in length and embodies about one-quarter of the county's commercial and industrial tax base, inclusive of Tysons Corner, with 37 million square feet of office, commercial, and retail space. Transit oriented development within the next 40 years is projected to double the area's available space, spurred by the location of five new metrorail stations within the TID.
The district includes 24 of Fairfax County's top 50 employers including six Fortune 500 companies Booz Allen Hamilton, Freddie Mac, Northrop Grumman, SAIC, Capital One, and Gannett.
SUFFICIENT COVERAGE BASED ON REASONABLE GROWTH ASSUMPTIONS
Projected debt service coverage is adequate at 1.4 times (x)-2x throughout the life of the bonds based on a 1.5% assumed rate of assessed value (AV) growth and a tax rate set at the current 22 cents per $100 of AV. Fitch believes the AV forecast to be reasonably conservative. Since fiscal 1984 AV growth within the current TID boundaries has averaged 4.7% per year. AV growth within the district was exceptionally strong from fiscal years 2005-2009, nearly doubling from $6.8 billion to $12.8 billion. District AV declined in aggregate more than 22% between 2009 and 2011 but has rebounded with growth of 1.7% in fiscal 2012 and 9.5% in fiscal 2013.
A strong pipeline of redevelopment activity exists with more than 17.3 million square feet (msf) of office and mixed-use projects under construction and an additional 28.2 msf of projects with final developing plan and rezoning application approval. No consideration of growth potential related to redevelopment/rezoning activity is given to the district's AV forecast.
AMPLE TAX CAPACITY
The current tax rate of 22 cents per $100 of AV may be increased up to the statutory cap of 40 cents. At the maximum 40 cent tax rate approximately $44.5 million of special tax revenue could be generated or 2.57x MADS based on fiscal 2013 AV of $11.1 billion and a 99.6% historical collection rate dating back to fiscal 2002.
HIGH TAXPAYER CONCENTRATION
There is a significant concentration among the district's 10 largest taxpayers, which represent 36.1% of assessed valuation, led by Macerich, owner of the Tysons Corner Mall, at 9.8%. Fitch believes this risk is offset by the current level of coverage and tax capacity noted above. Without increasing the current tax rate or the assessed value, the 2013 assessed value could sustain a 29% loss and maintain 1x coverage.
PROJECT AND TRUST AGREEMENT SUMMARY
Under a project agreement among the county, the EDA, and the district, the district agrees to request annually (following the receipt of a certified property valuation) that the county levy and collect from all commercial and industrial properties in the district special tax revenue in an amount sufficient to pay debt service on the bonds.
The county is not obligated to levy the special tax revenue, and the obligation of the county to pay any special tax revenue to the trustee is subject to appropriation. Special tax revenues are restricted to project financing and cannot be applied to any other general government purpose limiting risk to annual appropriation. Special tax revenues are levied, collected, and enforced in the same manner as general county property taxes. There is an acceptable timeframe from AV calculation (January to February) to determination of the tax rate (April 1).
The rate covenant includes a weak 1.2x senior lien debt service requirement, but permits available cash, exclusive of the debt service reserve fund, to account for up to 20% of total revenue in this calculation. There is a similar coverage threshold for additional bonds, but Fitch notes the issuance of any new money debt would require amendment of the project agreement. This practical limitation on additional parity debt somewhat offsets concerns about the weak legal provisions.
The revenue stabilization fund will equal MADs, although the balance may be released to the residual fund if coverage exceeds 150% for three consecutive fiscal years and the construction of Phase I is complete. The phase I district will be abolished once all debt incurred is paid in full.
ROBUST AND DYNAMIC REGIONAL ECONOMY
Fairfax County's economy continues to perform well, benefiting from its proximity to Washington D.C. and increased federal spending which has insulated the region from the worst of the recession. The county's unemployment rate remains well below the state and nation, at 4.3% as of June 2012, improving from a peak of 5.5% in early 2010. Solid gains have also been reported within the professional and business services, education and health, and leisure and hospitality sectors.
The strong local job market is complemented by one of the more highly educated labor forces in the nation, contributing to median household income two times the national average. The housing market has exhibited signs of price stabilization, and exposure to non-traditional mortgage products is below-average. An expansive multi-modal transportation system serves the region; however, there are significant infrastructure needs necessary to alleviate congestion and promote commerce and industry. Management has identified this as a long-term challenge but one that should be somewhat addressed with the completion of the Dulles Metrorail expansion project.
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.
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
Evette Caze, +1-212-908-0376
One State Street Plaza
New York, NY 10004
Michael Rinaldi, +1-212-908-0833
Amy Laskey, +1-212-908-0568
Elizabeth Fogerty, +1-212-908-0526