Fitch Rates Isle of Wight County, VA's GO Bonds 'AA'; Outlook Stable
NEW YORK -- June 11, 2014
Fitch Ratings assigns an 'AA' rating to the following general obligation (GO)
bonds of Isle of Wight County, Virginia (the county):
--$24.9 million series 2014A (tax-exempt);
--$12.31 million series 2014B (taxable).
The bonds will sell via negotiated sale on or about June 24. Proceeds will be
used to restructure a portion of the county's debt for upfront debt service
In addition, Fitch affirms the following rating:
--$132.63 million in outstanding county GO bonds at 'AA'.
The Rating Outlook is Stable.
The bonds are general obligations of the county, secured by its full faith and
credit and unlimited taxing power.
KEY RATING DRIVERS
FISCAL IMBALANCE: Unrealized revenue projections and increasing debt service
costs resulted in an operating deficit in fiscal 2013 and a projected deficit
for fiscal 2014. Measures planned for the next several fiscal years are
projected to restore budgetary balance.
MODERATE DEBT LEVELS: Debt levels should remain moderate given no additional
debt plans. The amortization is slow at 34% retired in 10 years.
SOUND RESERVE LEVELS: Despite the fiscal 2013 operating deficit, general fund
reserves remain healthy with an unrestricted balance of roughly 25% of
spending at year-end.
DIVERSIFYING ECONOMY: The county's employment base remains heavily
concentrated in manufacturing, although this risk is somewhat offset by the
diversity exhibited in the broader regional economy and continued local
investment in non-manufacturing enterprises.
STRUCTURAL BALANCE: The rating is sensitive to the county's ability to meet
current projections for fiscal 2014 operations, and to reverse a recent trend
of operational imbalance and maintain satisfactory reserve levels going
Isle of Wight County is located in the Hampton Roads region of southeastern
Virginia. The county's population is small at an estimated 35,656 in 2013, but
growth has been strong with a 19% increase over the past decade. The
population is expected to increase an additional 10% by 2020.
HEALTHY RESERVES MAINTAINED DESPITE DECLINES
Reflecting a planned use of reserves for one-time capital spending and a
smaller than expected gain from the sale of certain assets, fiscal 2013 ended
with a larger than projected $4.66 million operating deficit. The unrestricted
balance was reduced to $16.65 million but was still strong at 25.8% of general
The adopted fiscal 2014 budget included an eight cent real estate tax increase
($3.2 million in additional revenue) and no fund balance appropriation. The
county prudently implemented a tax rate increase to fund education and public
safety increases, and five cents was dedicated to the equalization of revenues
to offset assessed value declines. Management reports the decline was due to a
decline in real estate values following reassessment.
Estimated year-end results show a manageable $2.5 million operating deficit
(4% of projected 2014 spending), further reducing the unrestricted balance to
$14.15 million or a still healthy 22% of general fund spending. Management
reports the operating deficit was mostly due to an error in the budgeting of
property tax revenues.
The county's fund balance policy requires the unassigned general fund balance
to equal 10% of budgeted governmental funds expenditures, plus budgeted
expenditures in the school operating and food service funds. Fitch believes
the policy is conservative in that it measures fund balance against much
larger spending base. The county remains in compliance with its policy.
Liquidity has declined but remains satisfactory with approximately three
months of cash on hand, down from approximately four and half months in fiscal
PLAN TO REGAIN FISCAL BALANCE
The fiscal 2015 budget addresses the initial $3.9 million gap from fiscal
2014, $700,000 in additional school needs and a $3.2 million conversion of
water reservation fees from being accounted for as capital to operating
expenses. County management has prudently developed a plan to regain balanced
operations with a combination of revenue raising measures (one-time and
recurring) and spending reductions.
The county had previously bonded for the funding of the water reservation
fees. The county's new management has discontinued that practice and has added
the reservation fees to operating expenditures. Although the fiscal 2015
budget includes rate increases, the public utilities fund is not
self-supporting and will continue to require support from the general fund.
The first year of the plan, which has been adopted by the Board of
Supervisors, includes a $.12 cent real estate tax increase that is expected to
generate approximately $4.8 million in additional revenue, and a $3.2 million
use of fund balance. Despite being the second consecutive tax rate increase,
the tax burden remains low relative to rates of neighboring communities and
affords additional financial flexibility.
Management expects to balance operations in fiscal 2016 with additional
revenues from a property reassessment scheduled for fiscal 2015 and a $1.6
million use of fund balance. A number of development projects have been
approved recently, including 1,583 new single family homes and apartments,
nearly 1,000 square feet of retail space and a 100-room hotel. These projects
are expected to generate an increase in various revenues, including meals and
lodging taxes, water/sewer connection and usage fees and property taxes.
Future rating actions will reflect the county's ability to balance operations
with recurring revenues and minimize or eliminate the use of reserves to close
MANUFACTURING BASED ECONOMY BEGINNING TO DIVERSIFY
The county's economy remains concentrated in manufacturing (29% of employment)
but is diversifying as a result of the increased demand for warehousing and
distribution being driven by the growth of the nearby Port of Virginia. Fitch
anticipates that the presence of the port, with its commercial and military
activities, will continue to help broaden the local economy.
Per capita and median household income metrics are above the national average
and track closely to those of the state despite the high number of local
The county's employment base has done well to recover from the loss of 1,100
jobs due to the closure of an International Paper facility in 2010. At 5.5% as
of March 2014 the county's unemployment rate tracks well below the national
average and has significantly improved from a high of 7.4% in 2010.
In July 2012, International Paper invested $90 million and reopened a portion
of the mill, creating 220 plus jobs. Also in July 2012, Tak Investments, Inc.
announced it would invest $60 million to establish a recycled tissue plant at
the International Paper site. In June 2013, Franklin Lumber LLC announced that
it would purchase the idle International Paper sawmill and restart operations,
investing $14.8 million over five years and creating 72 jobs.
Also, the county is continuing to develop a 3,200 acre intermodal industrial
complex along U.S. Route 460 in the Windsor section of the county. To date,
Keurig Green Mountain Coffee opened a $180 million facility in the park, and
several other companies also have located facilities there.
MODERATE DEBT PROFILE; DEBT RESTRUCTURING WILL RELIEVE COST PRESSURES
Fitch expects the county's moderate overall debt ratios (3.9% of market value
or $4,348 per capita) will remain largely unchanged given the county's lacks
of additional borrowing plans, modest assessed value growth assumption and
slow amortization rate following the current restructuring. Debt ratios also
include GO water and sewer bonds, as the utility system is currently not
Debt service expenditures accounted for 10.3% of total governmental spending
in fiscal 2013, up sharply from the prior year's expense of 4.15%. The current
amortization schedule includes a doubling in annual debt service payments by
fiscal 2016. The substantial increase is mostly due to the maturity of the
$7.5 million literary anticipation note.
This restructuring refinances the literary loan and extends the maturities of
the county's water and sewer debt. The county is expecting to achieve $27.4
million in total cash flow saving through 2023, with a present value cost of
The county participates in the state-wide Virginia Retirement System in a
separate cost-sharing pool. The plan is adequately funded at 76% for county
employees and assumes a discount rate of 7%. The county regularly contributes
its annual required contribution (ARC). For fiscal 2013 the $1.9 million ARC
equaled a modest 2.5% of total governmental spending.
The ARC to amortize the county's other post-employment benefits ($224,000) is
also very manageable at a low 0.3% of total governmental spending, although
the county currently funds this cost on a pay-as-you-go basis. Carrying costs
for debt service, pension and OPEB totaled a low 12.8% of fiscal 2013
governmental fund spending.
Additional information is available at 'www.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, Virginia
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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Evette Caze, +1 212-908-0376
Fitch Ratings, Inc.
33 Whitehall St.
New York NY 10004
Michael Rinaldi, +1 212-908-0833
Steve Murray, +1 512-215-3729
Elizabeth Fogerty, +1 212-908-0526
Press spacebar to pause and continue. Press esc to stop.