Fitch Ratings assigns a rating of 'AA+' to the following general obligation (GO) bonds to be issued by Roanoke, Virginia (the city):
--$7,345,000 GO public improvement bonds, series 2012A (tax-exempt);
--$5,855,000 taxable GO public improvement refunding bonds, series 2012B;
--$14,365,000 GO public improvement refunding bonds, series 2012C (tax-exempt).
The bonds are scheduled for competitive sale the week of February 27. The proceeds of the series 2012A Bonds will be used to pay the costs of various public improvement projects. The proceeds of the series 2012B bonds and the series 2012C bonds will be used to advance refund certain outstanding GO bonds for debt service savings.
In addition, Fitch affirms the 'AA+' rating on approximately $196 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.
KEY RATING DRIVERS
ECONOMIC HUB FOR WESTERN VA: 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 spearheaded by a joint partnership between Carilion Clinic and Virginia Polytechnic University (Virginia Tech) lend additional employment and income stability.
STABLE FINANCIAL PROFILE: Reserve levels are bolstered following consecutive surplus results from fiscal years 2009-2011. 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.
AFFORDABLE DEBT POSITION: Debt levels are moderate and servicing costs affordable relative to the operating budget. Additional capital needs and issuance plans are not expected to impact the debt profile given the rapid rate at which existing obligations are amortized.
FUTURE CHALLENGES: Roanoke is a mature community, and economic and tax base expansion opportunities are challenged by the scarcity of developable land. The city is projecting a modest tax base decline in fiscal 2013, the first time in recorded history. Revenue stability may be achieved through adjustment to the property tax rate, although political and economic considerations may serve as a practical impediment. A fairly sizeable and diverse but historically volatile manufacturing sector could stress future unemployment levels.
WESTERN VA ECONOMIC ANCHOR
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. 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 7.4% in November 2011. The Roanoke region is fairly mature, and growth expectations are modest. Annual employment gains of 1.3% and 1.8% are forecast for the period 2012-2016 by Global Insight and Property and Portfolio Research, respectively.
Income levels for city residents trail those of the wealthy 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 the sizeable 877,000 sq. ft. Valley View 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.
Manufacturing comprises a sizable 10% of total metropolitan area employment. Sector activity is somewhat diverse including automotive components and freight cars, construction materials, custom power transformers, and plastics, but is volatile nonetheless having declined more than 11% during the 2007 - 2009 calendar years. Modest growth in the sector has been reported since early 2010, allaying near-term concerns.
CARILION CLINIC EXPANSION AND INVESTMENT
Carilion Health anchors a sizeable and stable health service sector. Carilion, which is headquartered in Roanoke, is 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 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 which centers on human brain disorders, cancer and infectious diseases.
MATURE, STABLE TAX BASE
The city's tax base has been fairly stable, benefiting from the absence of speculative building during the housing boom. Assessed value (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 AV growth to less than 1% from fiscal 2010 - 2012, and AV is expected to decline modestly for the first time in the city's recorded history in fiscal 2013.
Fitch believes the tax base is likely to remain neutral to slightly positive over the short-term, noting good growth in residential sales prices year-over-year according to Zillow.com, a trend that may reflect the increase in high wage jobs associated with VTC. Office market occupancy rates are reported at close to 95% in the city, exceeding the regional occupancy rate by several percentage points.
STABLE OPERATIONS AND RESERVES GUIDED BY PRUDENT POLICIES
The city concluded fiscal 2011 with a net surplus (after transfers) in the general fund of $1.95 million (or 0.8% of total spending of $256 million). Fiscal 2011 was the third consecutive year a net surplus was recorded. During this period, the year-end unrestricted fund balance (the sum of the unassigned, assigned, and committed fund balance under GASB 54) improved to $26.9 million or 10.5% of spending from $19.7 million or 7.6% 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 2012 budget, which totals $258.7 million or a 2.1% increase from fiscal 2011, is performing on target based on mid-year results presented by management, as such the city expects close to break-even operations at year-end.
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.
Following real property tax base growth of 4% to 9% per annum from fiscal 2001 - 2007 the city is projecting a decline of 1.2% in fiscal 2013. 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 assessed value (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%), occupational tax (5%), food and beverage tax (6%) and telecommunications tax (3%). The city essentially has no independent rate setting authority with respect to these sources. 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.
AFFORDABLE DEBT LEVELS EXPECTED
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 2012 - 2016 capital improvement program (CIP) totals $79.6 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 due to 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 5% of annual spending). Pension plans are satisfactorily funded. The city expects to adopt several pension reforms 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, Zillow.com, National Association of Realtors, and Property and Portfolio Research.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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