Fitch Rates Norfolk, VA’s GO Bonds ‘AA+’; Outlook Stable [Professional Services Close – Up]

Fitch Ratings assigns an 'AA+' rating to the following general obligation (GO) bonds of the city of Norfolk, Virginia (the city):

--$132.766 million GO capital improvement and refunding bonds, series 2013A (Tax-Exempt);

--$80.33 million GO refunding bonds, series 2013B;

--$2.47 million GO qualified energy conservation bonds, series 2013C (taxable).

The proceeds of the 2013 Bonds will be used to finance capital projects, and to refund certain outstanding bond anticipation notes, parking system revenue bonds and GO bonds of the city. The bonds will be sold via negotiation the week of October 21.

In addition, Fitch affirms the following ratings:

--$687.9 million of outstanding GOs, at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city, to which the city has pledged its full faith and credit and unlimited taxing power for payment.

KEY RATING DRIVERS

SIGNIFICANT MILITARY PRESENCE: Norfolk's maritime assets, including the world's largest naval stations and an active deepwater harbor, lend economic stability to the city and region.

ONGOING ECONOMIC DIVERSIFICATION: The city continues to focus its economic development efforts on downtown and neighborhood revitalization to diversify the economy and help offset the sizable proportion of tax-exempt property.

SOUND FINANCIAL PERFORMANCE: Timely expenditure reductions and realistic revenue forecasting have resulted in favorable operations and healthy reserve levels.

AVERAGE DEBT BURDEN: The city's overall tax-supported debt burden is expected to remain average due to manageable future capital needs. Amortization of outstanding principal is also average.

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong economy. Federal budget cuts under sequestration could result in a softening of the regional economy given the preponderance of direct and indirect federally funded employment. However, Fitch does not currently expect the impact to be severe enough to alter the credit fundamentals.

CREDIT PROFILE

The city of Norfolk is located in the Hampton Roads region of Virginia, along the Atlantic Ocean. The city covers 66 square miles and has an estimated 2013 population of 245,782.

FINANCIAL RESERVES REMAIN SOUND

Financial operations are sound and benefit from well-conceived fiscal policies. Fiscal 2012 ended with a modest operating deficit (after transfers) of $3.8 million (0.63 percent of spending). The city was able to replenish the majority of the nearly $16.1 million general fund balance appropriated to balance the fiscal 2012 budget with expenditure reductions and controlled discretionary spending.

The unrestricted general fund balance totals $92.2 million, or a healthy 15.5 percent of spending. The city recently approved a resolution that establishes financial policies, including maintaining an unassigned fund balance at 5 percent of the annual general fund budget. The city remains compliant with its reserve requirement. While the 5 percent reserve policy is inadequate at the current rating level, available risk management and economic downturn reserves add additional financial flexibility.

Officials expect to conclude fiscal 2013 with a modest surplus after transfers (less than 1 percent of spending) and fund balance to tick up by $4 million. Management again attributes positive operating results to on-going realignment of expenditures to reduce costs and control of discretionary spending.

FISCAL 2014 BUDGET BALANCED

The 2014 budget reflects a 1.5 percent increase ($11.7 million) in expenditures year-over-year. To fund the increase the city has adopted a 4-cent property tax increase (the first since 1996), which is projected to generate approximately $6.6 million in additional revenue. The budget includes a nominal $300,000 increase in appropriated fund balance. Higher budgeted spending mainly funds additional support to the public school system, a salary increase and higher healthcare costs for retirees.

Property taxes represent approximately 45 percent of general fund revenue. After three consecutive years of declining TAV (8 percent cumulative decline) through fiscal 2013, the city is projecting a modest 0.5 percent increase for fiscal 2014. The city's 2014 real estate tax rate of $1.15 per $100 of TAV is average relative to neighboring cities within the Hampton Roads region.

SIGNIFICANT MILITARY PRESENCE

Site of world's largest naval complexes, Norfolk's economy and employment are centered on defense-related activity. Hampton Roads has about 123,000 active-duty and civilian Navy military personnel, 56 percent of whom are assigned to Norfolk. Government sector employment within the Virginia Beach-Norfolk-Newport News, VA-NC metropolitan statistical area (MSA) stands at 20 percent (more than the commonwealth's high 18 percent and the nation's 15 percent). The heavy presence of military personnel contributes to lower income levels.

Despite the significant military presence within the city, the city has not been impacted by sequestration to date. The unemployment rate as of July 2013 was 7.5 percent, a notable decline from 8.7 percent a year prior.

ENHANCED ECONOMIC DIVERSIFICATION BUT MODEST GROWTH FORECASTS

Recent retail, commercial, and tourism growth are viewed favorably by Fitch. The Granby Street district has been developed as an entertainment and retail destination in addition to offering residential and commercial office space. The city continues to redevelop its downtown. Three apartment buildings are currently under construction adding approximately 262 new units. The Wells Fargo Center was completed in 2010 at a cost of $170 million. Tenants include AECOM, a Los Angeles-based architectural, engineering, and consulting company.

Other notable employment sectors include healthcare and education (13 percent of MSA employment), anchored by Sentara Healthcare, and Old Dominion University. Employment growth for the MSA is forecast to be modest at 1.3 percent annually through 2014 according to the Virginia Employment Commission.

MANAGEABLE DEBT OBLIGATIONS

Overall net debt levels are affordable at $2,144 per capita and 2.6 percent of market value, well within the city's 3.5 percent policy limit. These metrics exclude self-supporting GOs issued on behalf of the city's utility systems. The city's exposure to variable-rate debt will be approximately 2.2 percent of total GO debt outstanding after this issuance, and the city has no swap exposure. Debt service equaled approximately $85 million (an affordable 9 percent of total governmental and education spending minus capital spending) in fiscal 2012.

Pension contributions consume a manageable share of total governmental spending excluding capital (approximately 7 percent), and the city-administered pension plans are adequately funded at 80.7 percent as of June 30, 2012; the city uses a conservative 7 percent discount rate and has a practice of fully funding its actuarial contributions. Other post-employment benefit (OPEB) costs are also reasonable, and the city funds costs on a pay-go basis.

The $230.7 million fiscal 2014 - 2018 capital improvement plan will be 81 percent debt funded. Major projects include the construction of a courthouse complex, school renovations, and the construction of a new elementary school. Fitch does not believe that the city's additional issuance plans will materially impact credit quality.

Additional information is available at 'fitchratings.com'.

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, RealEstate Business Intelligence, Virginia Employment Commission.

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

fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

fitchratings.com/gws/en/disclosure/solicitation?pr_id=802552

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