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MOODY'S ASSIGNS INITIAL A1 UNDERLYING RATING AND Aa3 ENHANCED RATING WITH STABLE OUTLOOK TO SMYTH COUNTY'S (VA) $5 MILLION GENERAL OBLIGATION NOTES, SERIES 2010

19 Oct 2010

County
VA

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation Notes, Series 2010

A1

Aa3

  Sale Amount

$5,000,000

  Expected Sale Date

10/27/10

  Rating Description

Electric Revenue

 

Opinion

NEW YORK, Oct 19, 2010 -- Moody's Investors Service has assigned an A1 underlying rating and a Aa3 enhanced rating with a stable outlook to Smyth County's (VA) $5 million General Obligation Notes, Series 2010.

RATINGS RATIONALE

The notes are secured by the county's general obligation, unlimited tax pledge. The A1 underlying rating reflects the county's moderately-sized rural tax base, manageable debt burden and satisfactory financial position despite a fiscal 2009 reserve reduction stemming from a write-down of an illiquid interfund receivable. While the current issue is considered a note due to its use as an interim financing vehicle, its five year maturity qualifies it for a long-term debt rating. Proceeds represent the first borrowing design and construction costs for a new courthouse facility with an ultimate not-to-exceed cost of $25 million.

The enhanced Aa3 rating with stable outlook reflects The Virginia Localities Intercept Program, authorized by Section 15.2-2659 of the Code of Virginia, which directs the commonwealth's comptroller to cure any general obligation payment delinquency by appropriating all necessary future payments of state aid due the locality. Although the intercept takes effect after a default has occurred, Moody's believes that the program's sound mechanics and the commonwealth's strong financial position and liquidity, as reflected by its Aaa General Obligation rating and stable outlook, significantly increase the likelihood of recovery should a scheduled debt service payment be missed. The county has met Moody's criteria for receiving the programmatic rating. The county's current state aid allocation is at least two times the maximum annual debt service payments due on all general obligation debt. Also, the county will pay its debt service to a paying agent, who will promptly notify the commonwealth if there is a default.

FINANCIAL POSITION TO REMAIN SATISFACTORY FOLLOWING FISCAL 2009 WRITE-DOWN

Moody's expects the county's financial position to remain satisfactory despite a write-off of approximately $4 million in fiscal 2009 related to an illiquid receivable from the county's Water and Sewer fund. Failure to raise rates for water and sewer services since the mid-1990's led to increasing reliance on General Fund support. By the close of fiscal 2009, accumulated advances to the utilities had reached $4 million, or 35% of the county's $11.4 million General Fund balance, an amount that roughly equaled the deficit in the Water and Sewer Fund's unrestricted net assets before the write-off. Consequently, the county's total General Fund balance declined to $7 million (a still healthy 24.1% of revenues), from a more ample $11.4 million at the close of fiscal 2008. Lower than anticipated state aid and shortfalls in investment income prohibited full replenishment of the $3.1 million of appropriated fund balance. Of note, at the close of fiscal 2009 the school board held nearly $3.8 million in fund balance, or 7.5% of school operating revenues, which provides added budgetary cushion and is significant as many school boards, reported as component units of the parent municipality, often keep little to no independent reserves. Interdependence between the county and school board has historically permitted the county to operate without cash flow borrowing despite its once annual property tax collection. Officials report that in prior years, the county relied on school department cash for the first half of the fiscal year before the January 1 remittance of property taxes. Given the delay of some state funding to the schools as well as the conversion to a new billing system which delayed property tax billing by a month, management has arranged for a $5 million line of credit with a local bank for cash flow purposes. To date, officials have not drawn upon the credit line; however, Moody's believes this situation highlights the need for sufficient liquidity.

The fiscal 2010 General Fund operating budget represented a 14.7% increase over fiscal 2009 original appropriations with approximately half of the increase related to capital spending. To offset this increase, officials appropriated $2.9 million from fund balance while maintaining the tax rate at 6.9 mills, which had been raised from 6.3 mills the prior year. County officials expect that total General Fund balance will reflect an amount no lower than $7 million at the end of fiscal 2010 (year ended June 30), thereby maintaining the county's satisfactory reserve position. General Fund support of enterprise operations continued into the year and is included in the projected result; officials have indicated a goal of having the enterprise reach self-supporting operations in the medium term. The fiscal 2011 projects a 7.6% increase in general property taxes and contains additional cost-saving measures primarily related to labor expenditures across departments. Future rating actions will factor the county's ability to maintain structurally balanced operations and healthy reserve levels consistent with budgetary growth.

MODESTLY SIZED TAX BASE IN SOUTHWESTERN VIRGINIA

Smyth County's modestly sized $1.67 billion tax base is expected to reap moderate benefits from a revaluation in fiscal 2010, with overall stability expected for the long-term. Located in the southwest corner of the state near the shared North Carolina-Tennessee border, the county has grown at an average annual rate of 1.8% annually since 2005. The local economy was influenced by manufacturing layoffs by several major employers in 2008 and 2009, which was a primary factor in the county's unemployment rate rising to 11.4% as of August 2010 from 6.2 % in 2008. The county's largest taxpayer and second largest employer, Utility Trailer Manufacturing comprising 1.1% of assessed valuation, is reportedly maintaining stable operations. Resident income levels represent approximately two-thirds state medians and three quarters of national levels. Full value per capita at $52,028 trails national medians and is less than one-half Virginia averages, although the latter is skewed by the high property wealth in the Greater Washington region.

DEBT PROFILE TO REMAIN MANAGEABLE DESPITE ADDITIONAL BORROWING

Moody's expects the town's debt burden to remain manageable despite a below average rate of principal amortization and modest future borrowing plans. The town's direct debt burden is a modest 1.6% of full valuation, but increases to a moderate 2.8% of full valuation when accounting for the town's pro rata share of overlapping county and school district debt obligations. Debt principal is retired at an average rate (67.8% within 10 years) and debt service comprised 4.5% of fiscal 2009 General Fund expenditures. Future capital needs over the near term are expected to amount to an additional $20 million for the current projects, including a new courthouse facility, parking garage, and an emergency communication system, which would increase the county's debt burden to a higher, albeit still manageable, 2.8% of full value on a pro-forma basis. County officials are also considering the issuance of up to $25 million for school construction projects. The town has no exposure to variable rate debt or derivative products.

What would make the rating change - UP

-Improved financial position through an established trend of structurally balanced operations across funds

-Reduction in debt burden

-Material improvement in the town's wealth characteristics to levels more consistent with higher rating categories

-Trend of favorable operations at county enterprises and reduced advances from the General Fund

What would make the rating change - DOWN

-Protracted structural budget imbalance

-Depletion of reserves

-Deterioration of the town's tax base

KEY STATISTICS:

2007 population estimate: 32,050 (3.1% decrease from 2000)

2010 Full Valuation: $1.67 billion

Full Value per Capita: $52,028

Overall Debt Burden: 1.6%

Principal repayment within 10 years: 67.8%

FY09 General Fund balance: $7 million (24.1% of revenues)

FY09 General Fund balance (unreserved, undesignated): $6.6 million (22.8% of revenues)

1999 Median Family Income: $36,392 (67.2% of VA and 72.7% of US)

1999 Per Capita Income: $16,105 (67.2% of VA and 74.6% of US)

Post-sale debt outstanding: $26.9 million

PRINCIPAL METHODOLOGY

The principal methodology used in rating County of Smyth (VA) was General Obligation Bonds Issued by U.S. Local Governments, rating methodology published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings.

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

Cesar Avila
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


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USA

MOODY'S ASSIGNS INITIAL A1 UNDERLYING RATING AND Aa3 ENHANCED RATING WITH STABLE OUTLOOK TO SMYTH COUNTY'S (VA) $5 MILLION GENERAL OBLIGATION NOTES, SERIES 2010
No Related Data.
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