Fitch Rates Danville, Virginia's GOs 'AA-'; Outlook Stable
--$4.6 million GO public improvement bonds series 2016A;
--$13.2 million GO public improvement refunding bonds series 2016B.
The proceeds will be used to finance various school and public improvements and to refund certain outstanding maturities of series 2009A GO bonds and all of the series 2014A and 2014B GO bonds. The bonds will be sold via competitive bid on Aug. 3.
In addition, Fitch affirms the following ratings at 'AA-':
--Long-Term Issuer Default Rating (IDR);
--$88.3 million in outstanding GO bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are direct and general obligations of the city for which the full faith and credit of the city will be pledged.
KEY RATING DRIVERS
The 'AA-' IDR and GO rating reflects the city's long history of conservative budgeting resulting in positive financial operations and significant reserves. These strengths, combined with the city's broad revenue raising capacity and very flexible expenditure framework, temper risks associated with an economy that has yielded a slow rate of revenue growth and population and employment declines.
Economic Resource Base
The city of Danville, population 42,082, is located adjacent to the Virginia-North Carolina border about 45 minutes north of Greensboro, NC. The population is down about 10% from the 2000 Census reflecting the decline of the textile industry, though current estimates show the population decline has generally lessened. Manufacturing makes up 16% of the employment base, approximately double the national average.
Revenue Framework: 'a' factor assessment
The independent ability to adjust property taxes without limitation adds flexibility to otherwise stagnant prospects for revenue growth for a general fund that relies on utility transfers.
Expenditure Framework: 'aa' factor assessment
The city maintains ample expenditure flexibility due to low carrying costs including the lack of other-post employment benefits (OPEB) and a favorable labor environment.
Long-Term Liability Burden: 'aaa' factor assessment
They city's long-term liability burden is low due to a very healthy pension situation and a moderate debt burden. Capital plans are significantly pay-as-you-go funded and GO debt issued for enterprise fund activity is self-supporting.
Operating Performance: 'aaa' factor assessment
Sizable reserves above policy levels and superior budget flexibility leave the city well-situated to address a fiscal stress in a moderate economic downturn.
RATING SENSITIVITIES
CHANGE IN ECONOMIC TRENDS: Population and economic growth that support a long-term expectation for healthier general fund revenue growth could support a consideration for positive rating action. Conversely, contraction in the city's narrow economy that exceeds Fitch's expectations of gradual declines could pressure the rating.
CREDIT PROFILE
Historically a textile and tobacco based economy, the city is still heavily manufacturing dependent but also has significant medical, education and retail trade components. Goodyear's manufacturing plant in Danville is the largest employer in the greater MSA (which includes Pittsylvania County) at 2,300 employees. The plant accounts for a notable 5% of jobs in the MSA. The MSA's top five largest private employers are all in the city and include the Danville Regional Health System (1,300 employees), followed by Nestle Refrigerated Foods (600 employees).
The poverty level in the city is twice that of Virginia and elevated relative to the county. The May 2016 unemployment rate of 5.6% has improved from a high of 13.5% in 2010 when it was the highest among all regions in the state. The rate remains well above the state and national rate at 3.6% and 4.5%, respectively. The improved unemployment was primarily due to the labor force declining more rapidly than the drop in employment during the period of population decline. The city's recent economic development efforts have resulted in several industrial and technology parks, fostered by access to high speed broadband internet, as well as the redevelopment of the downtown river district.
Revenue Framework
General fund revenues are comprised of a mix of property taxes (33%), intergovernmental aid (22%), and sales tax (10%). A substantial portion of general fund operations are funded through a large transfer from the utility funds, primarily the electric fund. The fiscal 2015 transfer was $14.8 million or 15% of general fund revenue.
General fund revenues net of non-recurring adjustments have increased slightly below the rate of inflation during the 10-year period ending fiscal 2014.
Fitch believes the prospects for revenue growth absent policy action have slightly improved due to recent public and private development in the downtown river district, but unlikely to improve dramatically from historical levels. The city's property tax base has remained mostly flat since 2009, and the city's population has yet to exhibit signs of growth, having declined slightly from the 2010 Census.
The city has very broad revenue raising capacity, as there is no limit to the property tax rate or levy in Virginia.
The utility department delivers water, wastewater, gas, electric and telecommunications services to residents within and outside of city limits. Per city policy, the transfers to the general fund approximate taxes that would be paid if the enterprises were run as a private utility. The transfer level is not permitted to decline per formal city policy but can be increased with the approval of the city council, who adopts the utility budget.
The city's utility electric operations are the primary source of general fund transfers. The electric system is mainly a distribution network, purchasing substantially all of its electric power supply through long-term take or pay contracts with American Municipal Power (AMP) in the Prairie State Coal Project (rated 'A'/ Negative Outlook), Fremont Energy Center Natural Gas (rated 'A'/ Stable Outlook), and AMP Combined Hydroelectric Projects (rated 'A'/Stable Outlook).
The city's utility funds generate positive operating margins and strong debt service coverage and are fully self-supporting. Enterprise fund liquidity is solid with $76.8 million in current cash and investments in fiscal 2015 equivalent to 217 days of operation.
Expenditure Framework
The city's main general fund expenditures are public safety (30%) and education (19%). Virginia public schools are largely funded by a mix of state and local aid contributions. The amount of local contributions is determined by the city council, and based on the state-determined performance standards for the school system.
Fitch expects spending growth will generally track revenue performance over time. Debt and retiree-related expenditures are expected to remain stable.
The city has demonstrated an ability to realign spending with changes in revenue in recent years without making substantial cuts. Flexibility remains including the ability to postpone capital spending. Paygo capital spending is a significant portion of the capital plan and was $7.5 million in fiscal 2015 or about 9% of spending. Carrying costs are a low 6% of spending and benefit from the fact that the city does not provide OPEB. The lack of labor contracts in Virginia provides additional flexibility for management to adjust workforce levels and compensation.
Long-Term Liability Burden
The city's long-term liability burden is estimated by Fitch at 3.4% of personal income. The city's combined net pension liability was overfunded by roughly $45.6 million as of the July 1, 2014 valuation date. Furthermore, close to half of the city's direct debt is supported from user charges derived from the operation of the city's combined utility system.
The city's general fund capital improvement plan (CIP) for fiscal years 2016-2020 totals $84 million of which about $12 million will be bond financed. Amortization of the city's outstanding debt is at 70% within 10 years and exceeds the expected borrowing over that time period. The utility portion of the CIP represents an additional $62 million and is largely pay-go funded. Funding for the utility CIP should also be affordable given other financial commitments, including the transfers to the general fund.
The city's pension liabilities are derived from a single-employer defined benefit pension plan that is funded at 125% and an agent multiple-employer plan managed by the Virginia Retirement System funded at 91%. Both use a 7% investment return assumption. The city portion of the VRS plan's unfunded actuarial liability is just $2 million.
The city eliminated OPEB benefits in fiscal 2014, satisfied the outstanding liability and transferred the remaining $2.7 million from the closed trust account to the city's general fund.
Operating Performance
The Fitch Analytical Scenario Tool (FAST) indicates a low level of general fund revenue volatility for the city. Fitch expects the city would address any such recessionary revenue declines while maintaining a high level of financial flexibility using a combination of their healthy existing reserve levels and superior budget flexibility.
The city has exhibited sound budget management through economic cycles, maintaining general fund reserves well above both its formal 20% policy level and what Fitch considers a minimal reserve safety margin for a 'aaa' financial resilience assessment by results in FAST. In recent years the city's financial performance came in ahead of conservative budgets; the city is well positioned to maintain strong financial resilience.
Fiscal 2015 ended with a surplus, positive relative to the original budgeted deficit, increasing available fund balance to $47.6 million or 50% of spending. The city also maintains some excess reserves outside of the general fund that, if necessary, could be transfer from internal service funds and made available for general fund spending. The fiscal 2016 budget was adopted with a $4.6 million use of fund balance, but current estimates project a roughly $1 million use of fund balance attributable to capital spending.
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