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Fitch Rates VA Public School Auth School Tax Credit Bonds 'AA+'; Affirms VA GOs at 'AAA'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following Virginia Public School Authority (VPSA) bonds:

--$23.265 million school tax credit bonds (direct payment), series 2012-1.

The bonds are expected to be sold via competition on Oct. 10, 2012.

In addition, Fitch affirms the 'AAA' ratings on the Commonwealth of Virginia's $1.78 billion in outstanding general obligation (GO) bonds. Further, Fitch affirms the 'AA+' ratings on the commonwealth's appropriation debt as detailed at the end of this release.

The Rating Outlook for all related bonds is Stable.

SECURITY

VPSA school tax credit bonds are ultimately payable from appropriations from the Commonwealth of Virginia's literary fund and, in the event of literary fund insufficiency, a 'sum sufficient' appropriation from the commonwealth's general fund.

KEY RATING DRIVERS

COMMONWEALTH APPROPRIATION OBLIGATION: The 'AA+' rating on the school tax credit bonds, one notch below the commonwealth's 'AAA' GO rating, is based on the availability of a sum-sufficient appropriation for debt service deficiencies from the commonwealth's literary fund and, if necessary, the general fund.

CONSERVATIVE COMMONWEALTH FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue shortfall reserve. Revenue performance has improved considerably since the recession and deposits to the state's reserve fund are budgeted per policy during the current biennium.

DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. Reductions in government sector employment over the next few years are likely as the federal government contracts.

BELOW-AVERAGE DEBT LEVELS: Virginia's debt ratios are in the lower moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant.

PENSION FUNDING REFORMS: The funded status of Virginia's retirement system has declined in recent years, due in part to an underfunding of actuarially required contributions to the system. The commonwealth has adopted a series of pension reforms that are expected to result in increased contributions to the system and limit further growth in the state's pension liabilities in the coming years.

CREDIT PROFILE

The VPSA school tax credit bonds benefit from a 'sum sufficient' appropriation from available moneys of Virginia's literary fund and, if those are not adequate, the commonwealth's general fund. The appropriation, which the governor must request from the general assembly pursuant to statute, provides credit enhancement to the local government loan repayments that are the primary source of security. Additional strength derives from state law providing for the withholding of state payments to local governments in the event of a local loan payment default, along with Virginia's fundamental credit strengths and the state commitment to education.

VPSA bond proceeds will be used to purchase GO bonds issued by seven cities and counties of the commonwealth for school capital projects. Local repayments of principal and interest on the locally issued GO bonds will be used to pay debt service, and interest subsidy payments received by VPSA, in connection with these tax credit bonds, will be transferred to the local units. No local government has defaulted in VPSA's history, but in the event of a default, state law requires the intercept of state payments due to the local unit until the default is cured. Local payments are due approximately 15 days in advance of bond payments, allowing time for implementation of the intercept. Finally, if required, the sum-sufficient appropriation would be used.

The commonwealth's 'AAA' GO rating reflects its substantial economic resources, conservative approach to financial operations which includes periodic revenue forecast updates, and lower-moderate debt levels.

Economic and revenue performance has improved since the start of the 2010-2012 biennium, which spanned fiscal years 2011 and 2012 and began July 1, 2010. The mid-biennium budget amendments, adopted in May 2011, allocated approximately $480 million in additionally forecast biennium revenues toward health and human services, higher education, and K-12 education. Revenue overperformance continued through fiscal 2012, and combined with spending that was ultimately below budgeted levels, the commonwealth closed the 2010-2012 biennium on June 30, 2012 with a surplus of $448.5 million.

Given this revenue overperformance, $133 million has been set aside to fund a deposit due to the revenue stabilization fund in fiscal 2013, while an additional deposit of $244 million is reserved for deposit in fiscal 2014. Following these deposits, the rainy day balance is expected to more than double in size from its current level to total $689 million at the close of fiscal 2014.

Additionally, Fitch notes that $30 million is programmed for deposit in a Federal Action Contingency Fund (FACT; to address the risk of federal austerity) with a further appropriation of $20 million contingent on attainment of a budget surplus during the current 2012-2014 biennium (which began on July 1, 2012 and spans fiscal years 2013 and 2014). Assuming $50 million is ultimately set aside in the FACT fund, when combined with the expected $689 million in the revenue stabilization fund, the commonwealth is projected to have approximately $740 million, representing approximately 4.3% of expected fiscal 2014 revenues, in reserve funds by the close of the 2012-2014 biennium.

The adopted budget for the 2012-2014 biennium reflects general fund spending of $34.8 billion over the two-year period, reflecting growth of 9.4% over adjusted 2010 - 2012 biennial spending. Revenue growth of 2.9% and 4.5% is reasonably projected for fiscal years 2013 and 2014, respectively. The enacted budget includes the aforementioned reserve deposits, increased funding for the state's retirement system to partly address contribution savings taken during the downturn, growing Medicaid funding requirements, as well as additional support for K-12 education and higher education.

The commonwealth benefits from a diverse economic base and high wealth levels. Employment declined in 2009 by 3.2% and 0.4% in 2010, 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% growth was recorded in 2011. As of August 2012, year-over-year growth was 1.3%, in line with 1.4% growth for the nation over the same period. Some employment losses associated with expected Federal government contraction is expected in the near to medium term given the significant federal and related private sector presence in the northern part of the state, but Fitch believes the strength of the state's economy will allow it to absorb a portion of the employment losses.

Unemployment has historically been well below the national rate, and the 5.9% rate for August 2012 represents just 73% 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. The year 2009 saw a decline of 2.2%, comparing favorably with the national decline of 4.3% for the year, while growth of 4.1% for 2010 and 5.4% in 2011 exceeded U.S. growth. Personal income per capita, at $46,107, equaled 111% of the U.S. average in 2011, ranking eighth among the states.

The commonwealth's debt ratios are in the lower moderate range and have grown slightly over the past fiscal year. As of June 30, 2012, net tax-supported debt totaled approximately $10.8 billion, equal to 2.9% of preliminary 2011 personal income. GO debt constitutes approximately 16% of net tax-supported debt, with the remainder principally represented by various appropriation credits. Capital needs for higher education and transportation improvements remain large, and planned transportation borrowing is being expedited. On a combined basis, the burden of the state's net tax-supported debt and adjusted unfunded pension obligations equals 4.9% of 2011 preliminary personal income, well below the 6.6% median for U.S. states rated by Fitch. The adjusted calculation includes only the state's portion of the total liability to the Virginia Retirement System.

The system-wide funding of the Virginia Retirement System has declined in recent years in part due to underfunding of contributions, and the June 30, 2011 funded ratio was 69.9%, down from 84% funded on June 30, 2009. The 2011 calculation now includes a 7% investment return assumption which Fitch views as conservative. While certain pension reforms were adopted in 2010, additional reforms addressing required contribution levels and various plan design changes have been adopted which are expected to limit further growth in the state's pension liabilities in the coming years.

As noted earlier in this release, Fitch also affirms the 'AA+' ratings and Stable Outlook on the following Commonwealth appropriation-backed credits:

--VA Public Building Authority - Public Facilities Revenue Bonds;

--VA Public School Authority - School Financing Bonds;

--VA Public School Authority - School Educational Technology Notes;

--VA College Building Authority - Public Higher Education Financing Program Bonds;

--VA College Building Authority - 21st Century College & Equipment Program Bonds;

--VA Port Authority - Commonwealth Port Fund Revenue Bonds;

--Big Stone Gap Redevelopment and Housing Authority - Correctional Facilities Lease Revenue Bonds;

--Norfolk Industrial Development Authority - Commonwealth of VA Lease Revenue Bonds;

--Virginia Biotechnology Research Partnership Authority - Commonwealth of VA Lease Revenue Bonds;

--Fairfax County Economic Development Authority- Commonwealth of VA Lease Revenue Bonds.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

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

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

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

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Fitch Ratings
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Source: Fitch Ratings