Fitch Rates Commonwealth Transportation Board's (VA) Trans Rev Refunding Revs 'AA+'; Outlook Stable

Fitch Ratings has assigned a 'AA+' rating to the following Commonwealth Transportation Board (CTB, or the board) bonds:

--$56.13 million transportation revenue refunding bonds (Northern Virginia Transportation District Program) series 2014A;

--$147.29 million transportation revenue refunding bonds (U.S. 58 Corridor Development Program) series 2014B.

The bonds are expected to sell competitively on Feb. 5, 2014.

In addition, Fitch has affirmed the 'AA+' rating on approximately $2.3 billion CTB appropriation-backed transportation revenue bonds. A detailed list of ratings follows at the end of this release.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the CTB, secured by and payable from general assembly appropriations or CTB allocations from general assembly appropriations.

KEY RATING DRIVERS

COMMONWEALTH APPROPRIATION OBLIGATION: The rating is based on ultimate access to general assembly appropriations, not limited to transportation revenues.

TRANSPORTATION TRUST FUND OFFERS BROAD BACKSTOP: Despite the access to commonwealth appropriations at large, the bonds are expected to be paid from specific revenue streams, backstopped by access to the broad transportation trust fund (TTF, or the fund), though the TTF???s revenue composition can be altered by the legislature.

AAA COMMONWEALTH GO RATING: The commonwealth's GO bonds are rated 'AAA' by Fitch, reflecting Virginia's conservative financial management, diverse economy and moderate debt levels.

RATING SENSITIVITIES

The rating for the bonds is sensitive to changes in the commonwealth's 'AAA' GO rating, to which it is linked.

CREDIT PROFILE

The 'AA+' rating is based on ultimate access to legally available funds in the Commonwealth of Virginia's TTF and other general assembly appropriations. The Northern Virginia Transportation District (NVTD) program bonds and the U.S. Route 58 (Route 58) bonds are expected to be paid first from specific revenue streams within the larger transportation trust fund (TTF) appropriations to CTB by the general assembly.

Importantly, the payment agreements for the NVTD and Route 58 bonds specify that appropriations can be made by the general assembly from any sources, including but not limited to TTF revenues.

TTF REVENUES EXPECTED TO GROW

The TTF receives a variety of revenues representing various highway-related taxes and a portion of the state sales and use tax. Trust fund revenues totaled $1.084 billion in fiscal year (FY) 2013 and are projected to total $1.204.5 billion in FY 2014, with the increase attributable to a major transportation funding reform package enacted during the 2013 legislative session. Overall, the CTB projects $3.5 billion in new transportation funding over the next five years.

Other commonwealth transportation bonds also have access to the TTF including those issued for the commonwealth's Route 28 and Oak Grove Connector projects, as well as federal highway revenue anticipation notes (FRANs) and grant anticipation revenue notes (GARVEEs). Also, the CTB's capital project revenue bonds which were initially authorized in the amount of $3.18 billion have access to TTF funds if necessary.

COMMONWEALTH FINANCES REMAIN SOUND

Virginia???s 'AAA' rating reflects its substantial fiscal resources, conservative approach to financial operations which includes periodic revenue forecast updates, and low-to-moderate debt levels. Economic and revenue performance has improved since the start of the 2010-2012 biennium, which began July 1, 2010, and continued through fiscal 2013 (the midway point of the 2012 - 2014 biennium). Revenue over-performance through fiscal 2012, combined with below-budget spending, allowed the commonwealth to close the 2010 - 2012 biennium on June 30, 2012 with a surplus of $448.5 million.

The commonwealth made a $133 million revenue stabilization fund (RSF) deposit in fiscal 2013, and an additional $245 million deposit is budgeted for fiscal 2014. Both deposits are required under constitutional provisions to dedicate a portion of annual tax revenue growth to the RSF. The legislature and governor also enacted a further $95 million prepayment towards RSF deposits required in the next biennium. Based on unaudited fiscal 2013 results, a $243 million deposit will be due in fiscal 2015.

Following these deposits, the RSF balance is expected to increase substantially from its current level of $440 million to $689 million as of June 30, 2014 (the end of the current biennium), and to $939 million at the close of fiscal 2015.

Additionally, Fitch notes that $30 million is programmed for deposit to a Federal Action Contingency Fund (FACT), a second, statutory reserve established to address the risk of federal deficit reduction, with a further appropriation of $30 million contingent on attainment of a budget surplus during the 2012-2014 biennium. Assuming $60 million is ultimately set aside in the FACT fund, when combined with the expected $689 million in the RSF, the commonwealth is projected to have accumulated $749 million in reserves (representing approximately 4.4% of forecasted fiscal 2014 revenues), by the close of the 2012 - 2014 biennium.

Fiscal 2014 revenues collections are trailing the official (reflecting the enacted budget) and updated forecast estimates, though the state notes that January data could substantially revise the current trend. Through December, total general fund revenues were up 0.7% year-over-year (YOY) versus the 1.5% official forecast and 1.7% in the updated forecast. A decline in corporate income tax (CIT) collections is the primary driver of the shortfall, with CIT down 17.2%, or just over $60 million YOY. Virginia???s CIT collections are generally very volatile and the updated forecast projects collections will be only slightly ahead of the prior year, increasing 0.4% by the end of fiscal 2014.

Fitch anticipates federal sequestration, as well as the recent federal shutdown, will negatively affect the commonwealth's general fund revenues, primarily sales and income tax collections, given the commonwealth's exposure to federal government and government-related employment. While the full extent of any decline is unclear, Virginia maintains sound and growing reserve levels to offset any near-term effect on revenues.

BROAD ECONOMIC BASE

The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 and 2010 by 3.2% and 0.1%, respectively, though this performance was less severe than national declines of 4.4% and 0.7% for 2009 and 2010, respectively. Virginia employment bottomed out in mid-2010, and 1.2% and 1.1% growth was recorded in 2011 and 2012, respectively. As of November, YOY employment growth was 0.7%, below the 1.7% growth rate for the nation. YOY employment losses in federal government employment associated with federal contraction began in April 2013 with a 0.2% decline, and accelerated every month through October with a 2.7% decline. The pace improved slightly in November to a 1.9% decline, but that could have been skewed by the effects of the October federal shutdown. Fitch will continue to monitor the effects of this contraction, although Fitch believes the strength of the commonwealth's economy will allow it to absorb anticipated losses without significantly weakening Virginia's credit profile. Unemployment has historically been well below the national rate, and the 5.4% rate for November 2013 represents just 77% of the U.S. rate for the same month.

Personal income growth in Virginia has been strong through most of the last decade, typically exceeding that of the nation. After a 0.7% decline in 2009 (less severe than the national decline of 2.9%), personal income grew for the next three years. Growth in 2010 of 3.1% and 6.1% in 2011 met or exceeded U.S. growth, while 3.7% growth in 2012 slightly trailed national growth of 4.2%. Quarterly data through 3Q'13 indicate personal income growth continues to lag the national trend. Personal income per capita growth also lagged the national rate in 2012, but remains high at $48,377 or 110.6% of the U.S. average in 2012; Virginia ranks 10th among the states on this metric.

WELL-MANAGED DEBT PROFILE

The commonwealth's debt ratios are in the moderate range and have grown slightly over the past fiscal year. As of June 30, 2013, net tax-supported debt totaled approximately $10.8 billion (preliminary, unaudited basis), equal to 2.8% of 2012 personal income. GO debt constitutes approximately 17% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Certain appropriation-linked debt, are excluded from Fitch's calculation of state debt due to their track record of self-support. Capital needs for higher education and transportation improvements remain large with substantial authorized but unissued balances outstanding.

PENSION LIABILITIES UNDER CONTROL

On a combined basis, the burden of the commonwealth's net tax-supported debt and unfunded pension obligations equals 4.6% of 2012 personal income, below the median of 7% for U.S. states rated by Fitch. The adjusted calculation includes the commonwealth's portion of the total liability of the Virginia Retirement System (VRS) covering only commonwealth employees, and the full liability for several much smaller systems where the commonwealth is the sole employer. The system-wide funding of the VRS declined in recent years in part due to underfunding of contributions (partially used as a budget balancing measure), and the June 30, 2012 funded ratio on a reported basis was 65.8%, down from 84% funded on June 30, 2009. As of 2011, the system utilizes a 7% investment return assumption, in line with Fitch's standard adjustments to pension system liability calculations for other governments. In recent years, the commonwealth enacted pension reforms addressing required contribution levels and various plan design changes, all expected to limit further growth in the commonwealth's pension liabilities in the coming years. Importantly, the commonwealth anticipates phasing back in full actuarially required contributions by fiscal 2019. Funded ratios could weaken until then, though Fitch does not anticipate material reductions, absent significant investment market declines.

As indicated above, Fitch has affirmed the 'AA+' rating for the following CTB appropriation-backed transportation revenue bonds that are supported by commonwealth appropriations and therefore linked to the commonwealth's GO rating. The Outlook on all of the ratings remains Stable.

--$255.16 million in NVTD transportation revenue and revenue refunding bonds;

--$347.98 million in U.S. Route 58 corridor development program revenue and revenue refunding bonds;

--$15.825 million in Oak Grove Connector, city of Chesapeake transportation revenue and revenue refunding bonds;

--$1.62 billion in transportation capital projects revenue bonds.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from the Underwriter and IHS Global Insight.

Applicable Criteria and Related Research:

--'Fitch Rates VA Public School Auth's School Financing Bonds (1997 Resolution) Ser 2013 B 'AA+'' (Oct. 21, 2013);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816991

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