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MOODY'S ASSIGNS Aa1 RATING TO THE CITY OF NEWPORT NEWS' (VA) $65.4 MILLION G.O. BONDS, SERIES A AND B OF 2011

30 Jun 2011

LONG-TERM Aa1 RATING APPLIES TO $573 MILLION OF OUTSTANDING G.O. DEBT, INCLUDING CURRENT ISSUE

Municipality
VA

Moody's Rating

ISSUE

RATING

General Obligation General Improvement Bonds, Series A of 2011

Aa1

  Sale Amount

$42,000,000

  Expected Sale Date

07/12/11

  Rating Description

General Obligation General Improvement Bonds, Series A of 2011

 

General Obligation General Improvement and Water Refunding Bonds, Series B of 2011

Aa1

  Sale Amount

$23,400,000

  Expected Sale Date

07/12/11

  Rating Description

General Obligation General Improvement Refunding Bonds, Series B of 2011

 

Opinion

NEW YORK, Jun 30, 2011 -- Moody's Investors Service has assigned a Aa1 rating to the City of Newport News' (VA) $42 million General Obligation General Improvement Bonds, Series A of 2011, $20 million General Obligation General Improvement Refunding Bonds Series B of 2011, and $3.4 million General Obligation Water Refunding Bonds, Series B of 2011. Concurrently, Moody's has affirmed the Aa1 rating on $511.4 million of outstanding parity debt.

SUMMARY RATING RATIONALE

The current issue is secured by the city's unlimited general obligation pledge. The Aa1 rating reflects a sizable and increasingly diversified tax base historically centered on shipbuilding, sound financial management, and above-average, but manageable debt position. Proceeds of the Series A bonds will provide new money that will be used to fund the construction of a recreation center, as well as various school renovations and road improvements. Proceeds of Series B bonds will refund the city's Series 2001A, Series 2001C, Series 2002, Series 2002A Water, Series 2003B, Series 2003B Water, Series 2004A, and Series 2004D for an approximate net present value savings of $930,000 or 4.2% of refunded principal, with no extension of maturity.

STRENGTHS:

- Sizable and diverse tax base

-Stable military presence

- Sound financial reserves

CHALLENGES:

- Above-average debt burden

- Below-average socioeconomic indicators

DECLINES IN TAX BASE EXPECTED; SHIPBUILDING INDUSTRY REMAINS STABLE

Moody's expects the city's $18 billion tax base will remain stable due to strong military presence and the city's continued efforts to attract and retain business outside the military to diversify the local economy from a historical focus on shipbuilding. The U.S. Army's Fort Eustis and Huntington Ingalls (previously a business sector of Northrop Grumman; Senior Unsecured rated Baa2/Not on Watch) account for a large percentage of the employment base, with more than 6,000 and 20,000 employees, respectively. As a result of BRAC, the U.S. Army's Training and Doctrine Command will be relocated to Fort Eustis, raising the status of the base from a one-star to a four-star command, as well as increasing employment by approximately 1,700 in the near-term. In addition, Huntington Ingalls is expected to remain stable with a long-term $14 billion contract with the U.S. Navy for the construction of 18 nuclear submarines. In addition, Huntington Ingalls continues to pursue a joint venture with AREVA to produce heavy components for nuclear power plants, which is expected to create 540 new jobs by 2013. Nonetheless, service and manufacturing firms such as Riverside Regional Medical Center (Riverside Health Systems revenue bonds rated A1/stable outlook), Canon (issuer rating Aa1/stable outlook), Ferguson Enterprises, and Christopher Newport University have become significant employers as well. Each have headcounts of at least 1,000 employees and have continued to expand. Future improvements include a $25 million expansion of the Apprentice School at the shipyard, as well as a $15M upgrade at Liebherr Mining Company in anticipation of increase production in mining trucks.

The city's economic development efforts have spurred significant growth in recent years, boosting assessed values by 107% over the last 10 years. Due to the current economic environment, assessed value growth has slowed from a high of 15.4% in fiscal 2007 to 3.2% in fiscal 2010, and is projected to decrease over the next two fiscal years, as the tax rate remains level. Unemployment decreased to 7.2% as of April 2011 from 7.8% in the previous year and remains above the state's 5.8% unemployment, but below that of the nation at 8.7%. Wealth levels are below both state and national medians, with per capital income representing 74.4% and 82.7%, and median family income representing 78.5% and 85% respectively, which is typical for Virginia jurisdictions outside the wealthy Washington, D.C. region.

SOUND RESERVE LEVELS DRIVEN BY EXPENDITURE CONTROLS; LOW PENSION FUNDING

Despite slowing tax base growth, efforts to maintain a level tax rate and low annual contribution rates for pension benefits, Moody's expects that with continued departmental expenditure controls, the city will maintain sound reserve levels, well within targeted levels, over the near-term. After an $11.9 million decrease in the General Fund balance during fiscal 2008 ($93.7 million or 22.8% of General Fund revenues) resulting from a transfer for capital projects, the city generated two consecutive years of operating surpluses totaling $9.9 million, in an effort to rebuild the General Fund balance to pre-fiscal 2008 levels through the implementation of expenditure controls. As a result, the city ended fiscal 2010 with a General Fund balance of $103.7 million, or a sound 25.4% of General Fund revenues, slightly below their largest General Fund balance of $105.6 million in fiscal 2007. Undesignated General Fund balance continued to increase to a high of $41.8 million or 10% of General Fund revenues. These consecutive surpluses were driven by various controls that the city implemented including the elimination of multiple employment positions and implementation of a hiring freeze, in conjunction with over-performing property tax revenues as result of the healthy and expanding local economy.

While the city is committed to these expenditure controls, annual pension and debt service costs continue to limit financial flexibility, representing 20.4% of the operating revenues in fiscal 2010. In an effort to regain some of this flexibility during the current economic environment the city began reducing its annual pension contribution during fiscal 2008. While the city has continued to slowly increase its annual pension contribution over the last two fiscal years, as well as limited debt issuances to every 18 to 24 months, the city will be challenged with a solid financial position and make progress toward reducing these long-term obligation. If the city is not able to maintain its solid reserve levels due to these increasing long-term obligations, negative credit pressure is possible.

Preliminary fiscal 2011 results project an overall $2 million increase in General Fund revenues to $105.7 or a still-strong 25.8% of General Fund Revenues, net of a $7.8 million transfer to a Special Project Reserve Fund for various capital costs. The undesignated General Fund balance is expected to be maintained at 10%, well within the city's policy of maintaining at least 7.5% of General Fund revenues. The surplus was primarily a result of expenditure savings realized from position vacancies, as revenues were slightly under-budget due to state aid cuts and under-performing property tax revenues. The fiscal 2012 budget represents a 0.9% increase from fiscal 2011 and does not incorporate a tax rate increase. This budget reflects relatively level revenues aside from an increase in the cigarette tax, continued savings from the elimination of additional positions, and increasing pension contributions. In addition, the city plans to fund at least 20% ($18.2 million) of its annual Capital Improvement Plan in an effort to ease its debt service obligations.

MANAGEMENT IMPLEMENTS PENSION AND OPEB REFORMS

In March 2010, the city adopted a pension reform package to not only address the low funded ratio of the Newport News Employee Retirement Fund (NNERF), but also to reduce the city's future liability. Some of the major changes to the pension plan include closing the fund to new hires and rehires for all School Board personnel and city employees who will be entered into the Virginia Retirement System, for a first-year estimated savings of $11 million. In addition, the strategy includes annual incremental increases in the city's contribution with a goal of reaching the full ARC by fiscal 2017. At the end of fiscal 2010, NNERF was 57% funded ($472 million UAAL), with the city contributing 50% of the ARC. According to management, the city expects to fund 54% of the ARC in fiscal 2011 and 59% of the ARC in fiscal 2012. Originally management had expected to fully fund the ARC by 2015, a goal that has now been extended by two years due to the current economic environment. Moody's views the city's recent inability to comply with its stated plan to systematically increase contribution rates as a credit weakness. Continued failure to progress toward its goal of meeting its ARC could negatively impact the city's credit profile.

In addition, the city adopted an OPEB reform package. This reform included closing the fund for new hires and rehires who will now participate in health reimbursement arrangement to which the city will contribute 3% of average employee salary, as well as establishing a new dollar cap for the city premium contribution related to those employees who do not elect single coverage. Overall, these reforms are expected to decrease the city's OPEB liability by approximately $7 million. At the end of fiscal 2010, OPEB was 3% funded ($339 UAAL), with the city contributing 85.2% of the ARC, up from 45% in fiscal 2009. While the city has not established a goal for funding 100% of their OPEB ARC, they state that they are committed to increasing their ARC contribution going forward. Similar to the pension plan, Moody's will continue to monitor the city's OPEB liability, as a significant decrease in funding could result in negative credit pressure.

ABOVE AVERAGE DEBT LEVELS; LIMITED EXPOSURE TO SWAPS

Moody's expects the city's above average debt burden to remain manageable due to average payout and management's plans to limit borrowing until economic conditions improve. The city's direct debt burden is an above-average 2.8% of full valuation when considering the self-supporting nature utility debt. Of note, Newport News' direct debt burden includes $7.5 million in moral obligations and $82.6 million of Economic Development Authority debt secured by payment agreements with the city. Net of moral obligation debt of the city's EDA, which has never required any city contribution, the debt burden falls to a more manageable 2.5% of full valuation. Outstanding principal is amortized at a healthy 70.4% within 10 years (inclusive of the EDA issues).

The city's $230.6 million fiscal 2012 through 2016 capital improvement plan includes $41.5 million of pay-go capital and $149.9 million of debt-funded projects. The majority of these funds will be used to support schools (21%), roads (16%), community development (16%), and transit (11%). Positively, given a concerted effort to retire more debt than issued ($73 million retired between fiscal 2009 and fiscal 2011), the city was able to comply with its goal of reducing the debt burden to 3% by the end of fiscal 2009, three years ahead of schedule. The city's continued progress towards reducing its overall debt burden remains an important consideration in Moody's Aa1 rating assignment.

Newport News has limited exposure to swap agreements through its Economic Development Authority/Industrial Development Authority-issued debt. The city's swap exposure is limited to two agreements that represent 1% of the city's total debt burden. The city maintains a moral obligation on a swap associated with the EDA's 2004 bonds, with a par outstanding of $3.1 million as of May 2011. The swap was entered in April 2004 with Bank of America (senior unsecured rating Aa3/possible downgrade), whereby the EDA will pay a fixed interest rate of 5.58% in exchange for a monthly-adjusted floating rate based on LIBOR (plus 0.95%). The current mark-to-market indicates swap termination would result in a payment to Bank of America of $286,827. Notably, there have been no failed remarketings of this debt and no trigger payments from the city.

The city also has a swap on the EDA's Series 2000A debt, with a notional amount of $3.6 million as of May 2011. The swap was entered with Wells Fargo Bank (senior unsecured debt rated Aa2/possible downgrade). Under the terms of the swap, the EDA pays a fixed rate of 7.64% in exchange for a weekly-adjusted floating rate based on LIBOR. These bonds briefly became bank bonds from September 2008 through January 2009, but have been successfully remarketed. In the event of a termination, the maximum swap termination fee would be $927,831. As of May 2011, the mark-to-market value of termination was $862,293.

KEY STATISTICS

2010 Population: 193,172 (7.2% since 2000 census)

2010 Full valuation: $18 billion

2010 Full valuation per capita: $93,432

2000 Per capita income: $17,843 (74.4% of VA; 82.7% of U.S.)

2000 Median family income: $42,520 (78.5% of VA; 85.0% of U.S.)

Fiscal 2010 General Fund balance: $103.7 million (25.4% of General Fund revenues)

Debt burden: 2.8%

Payout of principal (10 years): 70.4%

Post-refunding parity debt outstanding: $573 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Jennifer Rinaca
Analyst
Public Finance Group
Moody's Investors Service

Susan Kendall
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO THE CITY OF NEWPORT NEWS' (VA) $65.4 MILLION G.O. BONDS, SERIES A AND B OF 2011
No Related Data.
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