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MOODY'S ASSIGNS Aa2 RATING TO FAIRFAX COUNTY ECONOMIC DEVELOPMENT AUTHORITY'S (VA) $95 MILLION REVENUE BONDS, SERIES 2011

06 Jul 2011

COUNTY'S LONG-TERM Aaa RATING AND STABLE OUTLOOK AFFIRMED, AFFECTING APPROXIMATELY $2.2 BILLION G.O. DEBT

Fairfax (County of) VA
County
VA

Moody's Rating

ISSUE

RATING

Revenue Bonds (Wiehle Avenue Metrorail Station Parking Project) Series 2011

Aa2

  Sale Amount

$95,000,000

  Expected Sale Date

07/15/11

  Rating Description

Revenue

 

Opinion

NEW YORK, Jul 6, 2011 -- Moody's Investors Service has assigned a Aa2 rating to Fairfax County Economic Development Authority's (VA) $95 million Revenue Bonds (Wiehle Avenue Metrorail Station Parking Project), Series 2011. Concurrently, Moody's has affirmed the county's Aaa long-term general obligation rating and stable outlook affecting approximately $2.2 billion of outstanding general obligation debt.

SUMMARY RATING RATIONALE

The Aa2 rating on the current issue reflects Fairfax County EDA's support for bond principal and interest payments, payable from revenues appropriated by Fairfax County to the EDA under an Installment Purchase Contract, and the county's demonstrated commitment to regional transportation initiatives. The Aa2 rating also incorporates the strong long-term credit quality of the county and the non-essential purpose (parking facility adjacent to Wiehle Avenue Metrorail station). Bond proceeds, along with $8.6 million of county equity and $6.7 million of MWAA equity provide $87 million toward construction of an underground parking facility, $11 million in capitalized interest (2.5 years) as well as other project and issuance costs as well as contingencies for the $117 million project. The bonds are limited obligations of the EDA and are secured by revenues pledged under the original Wiehle Avenue Metrorail Station Parking Project trust agreement, as supplemented for this Series 2011 bond issue. The county's Aaa long-term G.O. rating reflects the county's economic importance in the national capital region, sound financial position supported by strong management practices and low debt burden with manageable future borrowing plans.

STRENGTHS

-High quality long-term credit strength of Fairfax County

-Security provided by installment purchase agreement between county and Fairfax County EDA trust agreement between EDA and trustee

-Solid history of county support for appropriation-backed debt including historical practice of single debt service appropriations

-Importance of regional transportation improvements to the county's long-term economic strength

CHALLENGES

-Risks associated with annual county appropriation for non-essential project

-Lack of leasehold interest or debt service reserve fund

DETAILED CREDIT DISCUSSION

REVENUE BONDS BACKED BY INSTALLMENT PURCHASE CONTRACT

The bonds are payable from Basic Contract Payments made by Fairfax County under an Installment Purchase Contract with the Fairfax County Economic Development Authority (EDA). Annual Contract Payments are subject to annual appropriation and will be made directly to the trustee for the account of the EDA one day prior to the debt service payment due date. Under the terms of the contract, the county directs its budget officer to include amounts sufficient to pay debt service in annual budgets as a single line item. Unlike a traditional lease structure in Virginia, a leasehold interest in the financed assets is not pledged to bondholders, thus the county does not lose access to the financed assets in an event of non-appropriation which Moody's considers to be a weakness. Moody's believes risk of full recovery by bondholders in the event of default is largely mitigated, however, by the county's strong credit quality and practice of making a single appropriation for all debt service.

WIEHLE AVENUE METRORAIL STATION VITAL TO REGIONAL TRANSPORTATION

In association with the Washington Metropolitan Area Transit Authority's (WMATA, revenue bonds rated Aa3/stable outlook) expansion of service from its West Falls Church station to Dulles Airport, Fairfax County EDA will construct an underground parking garage. The $121.5 million project will be funded primarily with this issue's proceeds along with equity contributions from Fairfax County ($8.6 million) and the Metropolitan Washington Airport Authority ($6.7 million) (MWAA, revenue bonds rated Aa3/negative outlook). The Wiehle Avenue garage will be sited on a 9-acre of county-owned land adjacent to the planned Wiehle Avenue metrorail station in the Reston area of the county. Wiehle Avenue is the last stop in Phase I of the extension, and the station is expected to begin service in late 2013. The garage will be constructed by the EDA under a development agreement with CRS Construction Service but will ultimately purchased by the county and operated by Comstock Reston Station Holdings. Although revenue supporting this issue's debt service will be appropriated by the county from annually appropriated revenues, including funds available in the county's commercial and industrial tax fund, the project is expected to be supported by lease revenues generated by a 99-year ground lease with the developer for above-ground commercial development. The county levies roughly $50 million in commercial and industrial property taxes, which are dedicated to county transportation improvements, and the commercial and industrial tax fund currently has an unrestricted balance of $60 million; these revenues are not pledged but could be available to support this issue's debt service. The public parking garage is designed to provide 2,316 parking spaces and multi-modal transportation facilities. The entire project is broader in scope and includes up to 1 million square feet of residential and commercial development. Construction of the office building and retail space specified in the first phase of the commercial development is expected to begin immediately following completion of the garage construction in 2012 and is required to be delivered when the station opens in late 2013. Completion of all phases of the mixed-use development is currently slated for 2020.

LARGE AND DIVERSE TAX BASE IN METRO WASHINGTON, D.C. REGION EXPERIENCING MODERATE DECLINES IN ASSESSED VALUATION

Despite continued weakness in the local housing and commercial markets, value declines are expected to end in 2011 with overall modest annual growth of 2-3% projected, spurred primarily by development underway at Tyson's Corner and other areas adjacent to the Dulles Metrorail extension project. Fairfax County benefits from its favorable location, high-end employment base and strong wealth levels which lend long-term stability to this $208 billion broad-based economy. Located outside of Washington D.C. (G.O. debt rated Aa2/stable outlook), Fairfax County, like much of the Washington metro area, was at the forefront of the housing boom for the majority of the last decade. Assessed valuations of all real property increased at a strong average annual rate of 15.3% in fiscal years 2002 through 2007, reflecting a robust level of new home construction and market value appreciation. However, values peaked in 2009 at $231 billion and suffered a considerable reversal with a 9.95% drop in 2010 assessed valuation to $208 billion erasing all of the gains since 2007, when the tax base was valued at $220 billion. However, recent improvement in the number and value of sales, although limited to the residential sector, are projected to boost assessed valuation growth to a modest, but positive, 2.32% in 2011. Additional gains of 2.3% and 3% are forecast for 2012 and 2013, respectively. Performance in the county's commercial sector is expected to recover more slowly, although Class A office vacancy rates dropped in 2010 to a reasonable 13.3%. The tax base remains primarily residential at 73.1% of assessed value. Foreclosure activity persists in Fairfax County, although the number of properties currently in foreclosure dropped to 873 from 981 in September, 2009 and remains much lower than the peak of 2,257 in September 2008. Real estate tax collections in fiscal 2010 remained solid, exceeding 99% within the current fiscal year, and current-year personal property tax receipts were also favorable at roughly 97.6%.

Positioned for long-term stability, the county's economy is diverse with considerable commercial activity including high-technology, telecommunications, defense, health care and financial services firms. The county's large commercial sector includes an estimated 100 million square feet of office space and significant retail space in the Tyson's Corner, Fair Oaks and Springfield Mall shopping centers. Government-related employment is integral to the regional economy, and Fairfax is also home to a number of government-related agencies, including Freddie Mac (senior unsecured rated Aaa/stable outlook), Sallie Mae (now SLM Corp, senior unsecured debt rated Ba1/negative outlook) and the U.S. Geological Survey, as well as Fort Belvoir, a U.S. Army installation. The Department of Defense Base Realignment and Closure (BRAC) process has resulted in the slated addition of approximately 22,000 jobs to Fort Belvoir by 2011-the vast majority of which are being relocated from neighboring Arlington County (G.O. rated Aaa). The addition of these jobs plus an expected influx of related contractors will help balance projected tax base contraction through the mid-term as county estimates do not incorporate BRAC-related effects, which could be tempered by federal cuts in defense spending. The county's largest private employers include defense-related firms such as Raytheon (senior unsecured rated Baa1/stable outlook), Lockheed Martin (senior unsecured rated Baa1/stable outlook), SAIC (senior unsecured rated A3/stable outlook) and Northrop Grumman (senior unsecured rated Baa1/stable outlook), which is relocating its corporate headquarters, and roughly 300 employees to Fairfax County from Los Angeles, California. Unemployment as of April, 2011, while still elevated from the economic downturn, is low at 4%, well below the statewide measure of 5.8% and the 8.7% national rate. The County benefits from strong income indices that are well above state and national averages and full value per capita is a very strong $193,624, more than twice the national median of $75,780.

MODERATE RESERVE GROWTH DESPITE ECONOMIC PRESSURE ON REVENUES

Fairfax County continues to experience slow revenue growth which continues to create moderate budgetary pressures. However, the county's solid financial management practices will sustain adequate reserve levels in accordance with county policy. Following a slim surplus in fiscal 2009, the county adopted a 12-cent property tax rate increase and adjusted various other fees and generated a modest 0.58% revenue increase and sizeable $71.5 million general fund surplus, despite a 10% decrease in assessed valuation. The surplus was generated by favorable performance of both revenues and expenditures. Expenditures have been carefully controlled with widespread budget reductions including over 481 position eliminations since fiscal 2009. Although assistance from the commonwealth has declined $26 million (7.56%) since fiscal 2008, funding for education has remained relatively flat. Fairfax County's General Fund reserve position improved to $349 million, a solid 10.3% of General Fund revenues in fiscal 2010, with the unreserved portion improving to $312 million, a sound 9.2% of revenues. After moderate draws in recent years to offset revenue declines the county has fully funded its Revenue Stabilization and Managed Reserves at $103.8 million and $68 million, respectively. The county designated roughly $69 million to be held in reserve for fiscal 2011 and the $108 million remainder is earmarked for future operating requirements.

Reflecting ongoing pressure on revenue growth, the fiscal 2011 budget includes a disbursement reduction of $3.3 million, 2.7% lower than the fiscal 2010 budget. A 5-cent property tax increase was adopted to maintain property tax revenues just below fiscal 2010 levels, and a ½-cent increase in the county's stormwater tax rate was also imposed. The budget was balanced without salary increases for municipal and school employees, and additional savings are expected to be identified during the remainder of the fiscal year. Revenues and expenditures are running favorably compared to budget and the county projects a slight increase in General Fund balance after replenishing the $69 million fund balance appropriation.. The fiscal 2012 budget includes an overall 2.7% decrease in expenditures and incorporates a 2.32% tax base increase and a two-cent tax rate drop. Roughly $24 million was reserved at fiscal 2011 year-end for fiscal 2012 operating expenditures. Property taxes are the primary source or Fairfax County's General Fund revenues, at 71.4% in fiscal 2010. Various local taxes represented 13.6% of revenues and commonwealth revenues yielded 10.2% of fiscal 2010 revenues. Personal Property taxes, at roughly 15.1% of revenues, are projected to decline 0.6% while Sales Tax, 5% of revenues, is expected to decline 2.5% in fiscal 2011. However, the county expects a reversal of economically-sensitive revenue performance and has initially budgeted 2% growth in fiscal 2012.

Fairfax County's liability for other post employment benefits (OPEB) is $441.3 million, according to an actuarial study performed as of January 1, 2009. In fiscal 2010 the county contributed $17.7 million, or 54.6% toward the $32.6 million annually required contribution (ARC). Favorably, the county increased funding in fiscal 2011 to $21.8 million and plans to increase funding again in fiscal 2013 to meet the full ARC. With assets of $50.2 million, prior to the fiscal 2010 and 2011 contributions, the county's OPEB plan was funded at 11.39% of UAAL as of July 1, 2009. The county administers four employee retirement systems, which are adequately funded at between 75% and 82% of the respective UAALs. Like many other public retirement systems nationwide, the economic downturn has placed pressure on investment performance, however the county funds the full ARC for each pension system annually and expects to increase its aggregate contribution by $15 million in fiscal 2011.

Looking forward, management acknowledges the challenge of constructing a balanced 2012 budget given current revenue assumptions and has begun discussing measures to address the potential budget gap. However, in spite of ongoing budgetary challenges, the county continues its practice of strong budgetary control of spending, funding of long-term liabilities and a conscientious reliance on a number of self-imposed financial and debt management guidelines. The county board has required the maintenance of General Fund reserves in the 4% to 5% range. While this is modest on a percentage basis, Moody's believes that the county's consistent history of meeting its budget and monthly monitoring, as well as its maintenance of unreserved balances is supportive of this modest level.

CAREFULLY MANAGED DEBT POSITION WITH SIZEABLE CAPITAL PLAN

The county maintains a favorable debt profile, with a reasonable overall debt burden of 1.5% of full valuation, an average 68.9% rate of principal retirement within 10 years, a significant amount of self-supporting utility debt and strong debt management guidelines. Moody's believes the county will continue to accommodate its capital needs, which include significant investment in school facilities, transportation improvements and sewer upgrades as well as smaller county capital projects and equipment purchases. The adopted FY11-15 CIP totals $2.4 billion, however it is likely to be revised downward in light of the economic downturn which has reduced demand for infrastructure growth. Annual G.O. borrowings of approximately $275 million are anticipated through the medium term, and additional self-supporting borrowings for sewer, solid waste and transportation projects are planned. The county remains well below its guidelines to limit the amount of tax-supported debt to 3% of total full value, and at 7.9% in fiscal 2010 total debt service payments are comfortably under the county's maximum of 10% of General Fund disbursements. Although the county has a sizeable capital improvement plan, Moody's believes that the county's active debt management will ensure the county's debt burden remains manageable. All outstanding debt is fixed-rate, although the county does have a $100 million variable rate line of credit with Bank of America (senior unsecured debt rated A2/negative outlook), but no draws have been made to date. The county has no exposure to swap agreements.

Outlook

Fairfax County's stable outlook reflects primarily its favorable location; wealthy, diverse and sizeable tax base; conservative approach to budgeting and financial management, as reflected in its stable financial position throughout the recession; and manageable debt burden including significant future borrowing plans.

WHAT COULD MAKE THE RATING GO DOWN:

"Deterioration of wealth and income levels

"Declines in tax base valuations

"Adoption of less conservative approach to budgeting

"Less stringent monitoring of revenue performance and expenditure controls

"Significant increase in debt burden

KEY STATISTICS:

2010 Estimated population: 1,074,227 (+10.8% since 2000)

2010 Full valuation: $208 billion

Full value per capita: $193,624

Fiscal 2010 General Fund balance: $349 million (10.3% of General Fund revenues)

Fiscal 2010 Unreserved General Fund balance: $312 million (9.2% of General Fund revenues)

1999 Per Capita Income: $36,888: 154% of VA, 171% of US

1999 Median Family Income: $92,146 170% of VA, 184% of US

Unemployment (April, 2011): 4% (5.8% VA, 8.7% US)

Debt burden: 1.5% of full valuation

Payout of general obligation principal (10 years): 68.9%

Post-Sale G.O. debt outstanding: $2.19 billion

Post-Sale total long-term debt outstanding: $3.5 billion

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations, published in October 2004.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' 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

Susan Kendall
Analyst
Public Finance Group
Moody's Investors Service

Dora Lee
Backup Analyst
Public Finance Group
Moody's Investors Service

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

Contacts

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MOODY'S ASSIGNS Aa2 RATING TO FAIRFAX COUNTY ECONOMIC DEVELOPMENT AUTHORITY'S (VA) $95 MILLION REVENUE BONDS, SERIES 2011
No Related Data.
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