Newport News (City of) VA

Transcription

1 CREDIT OPINION Newport News (City of) VA Update to credit analysis Summary Contacts Evan W Hess Associate Lead Analyst evan.hess@moodys.com Leonard Jones MD-Public Finance leonard.jones@moodys.com Tiphany Lee-Allen AVP-Analyst tiphany.lee-allen@moodys.com Newport News, VA's (Aa1) credit profile reflects a sizeable tax base in the Hampton Roads Region of the Commonwealth of Virginia (Aaa stable) exhibiting steady growth that benefits from the stabilizing presence of multiple military institutions in the region. While the city's reserve and liquidity position is lower than similarly-rated cities nationwide, it is healthy and has remained stable over the past several years, supported by conservative budgeting, growth in core operating revenues, and adherence to formal fiscal policies. The city's debt and pension burdens are elevated for the rating category, but will remain manageable given moderate additional debt plans and continued tax base growth. On December 19th, we assigned a Aa1 rating to the city's $85.5 million General Obligation Bonds, Series Credit strengths» Sizeable and growing tax base anchored by stable military presence CLIENT SERVICES Americas Asia Pacific Japan EMEA » Strong financial management evidenced by multi-year trend of stable reserves Credit challenges» Elevated debt and pension burden compared to national Aa1 medians» Resident income levels below similarly-rated cities nationwide Rating outlook Outlooks are typically not assigned to issuers with this amount of debt outstanding. Factors that could lead to an upgrade» Material improvement in reserve levels and balance sheet ratios» Reduction in debt burden» Continued tax base growth and improvement in the city's socioeconomic profile Factors that could lead to a downgrade» Trend of operating deficits and narrowing reserve levels» Material declines in tax base values and wealth levels» Substantial increase in debt burden

2 Key indicators Exhibit 1 Newport News (City of) VA Economy/Tax Base Total Full Value ($000) $16,207,738 $16,319,157 $16,716,737 $17,082,661 $17,372,973 Population 181, , , ,775 Full Value Per Capita $89,367 $90,000 $92,049 $94, % 87.9% 87.0% 85.6% $441,727 $448,545 $459,552 $470,975 $473,990 Median Family Income (% of US Median) Finances Operating Revenue ($000) Fund Balance ($000) $87,342 $90,521 $84,834 $82,088 $85,094 Cash Balance ($000) $81,653 $83,526 $75,716 $82,022 $87,965 Fund Balance as a % of Revenues 19.8% 20.2% 18.5% 17.4% 18.0% Cash Balance as a % of Revenues 18.5% 18.6% 16.5% 17.4% 18.6% Debt/Pensions Net Direct Debt ($000) 3-Year Average of Moody's ANPL ($000) Net Direct Debt / Full Value (%) $507,380 $468,879 $478,127 $502,566 $457,544 $889,838 $883,951 $925,125 $1,013, % 2.9% 2.9% 2.9% 2.6% Net Direct Debt / Operating Revenues (x) 1.1x 1.0x 1.0x 1.1x 1.0x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 5.5% 5.3% 5.4% 5.8% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 2.0x 1.9x 2.0x 2.1x Source: City of Newport News, VA Audited Financial Statements; Moody's Investors Service Profile Newport News, VA is an independent city in the Hampton Roads Region of the Commonwealth of Virginia (Aaa stable) encompassing approximately 69 square miles. The city is organized according to a council-manager form of government and the region is home to a number of stabilizing military institutions. According to the most recent U.S. American Community Survey, the city s population totaled 180,775 in 2017, which represents a modest 0.6% decline from Detailed credit considerations Economy and Tax Base: Growth Continues in Robust Local Economy Anchored by Military Institutions Newport News' $17.4 billion tax base (fiscal 2018), which is large compared to the national Aa1 medians, continues to experience modest growth as economic development and diversification efforts continue. The city s tax base increased by an average annual rate of 1.3% over the past five years, inclusive of a modest 0.6% decline in The city's military presence will remain a stabilizing force in the local economy. Officials report continued investment in Joint-Base Langley Eustis with several new projects planned through The U.S. Army's Joint Base Langley-Eustis and Huntington Ingalls Industries account for a large percentage of the employment base. Additionally, the shipyard continues to benefit the local economy, with a recently announced $1 billion investment that will add 2,000 new jobs over the next five years. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Exhibit 2 Newport News' Tax Base Exhibiting Steady Growth In Recent Years Total Assessed Value (In Thousands) Between Fiscal Years Real Property (left axis) Personal Property (left axis) % Change (right axis) $20,000, % $18,000, % $16,000,000 $14,000, % $12,000,000 $10,000, % $8,000, % $6,000,000 $4,000, % $2,000,000 $ % Source: City of Newport News, VA Audited Financial Statements; Moody's Investors Service The city continues efforts to diversify its base beyond the military industry with a growing presence of research and development and manufacturing. Jefferson Lab recently completed a $400 million upgrade to Continuous Electron Beam Accelerator Facility (CEBAF), Printpack, Inc. recently completed a $25.7 million, 150,000 square-foot addition in early 2017, and officials report a number of ongoing expansions of existing businesses. Additionally, there are multiple planned and ongoing redevelopment efforts to help revitalize portions of the city. Resident income levels trail the national Aa1 median, due in part to a large military population, with the 2017 median family income at 85.6% of the nation according to the most recent U.S. American Community Survey. The September 2018 unemployment rate of 3.4% is above the state (2.8%) and slightly below the national (3.6%) rates for the same period. Financial Operations and Reserves: Reserves and Liquidity Will Remain Stable, Supported By Formal Fiscal Policies Newport News' financial position will remain healthy given a strong commitment to conservative budgeting and maintaining reserves as well as continued growth in core operating revenues. The city's total operating fund balance (inclusive of both the general and debt service funds) is satisfactory and has remained stable, averaging 21.3% of revenues over the past five fiscal years ( ). At fiscal year-end 2018, the city's operating fund balance totaled $97 million, or 20.5% of revenues, which is adequate but below the national Aa1 city median. Available operating fund balance (committed, assigned, and unassigned portions) totaled $85.1 million, or 18.0% of revenues. Exhibit 3 Fund Balance Levels Have Remained Relatively Stable Available Operating Fund Balance (In Thousands) Available Operating Fund Balance (left axis) Fund Balance as % of Revenues (right axis) $100,000 21% $90,000 20% $80,000 20% $70,000 19% $60,000 19% $50,000 18% $40,000 18% $30,000 $20,000 17% $10,000 17% $- 16% Source: City of Newport News, VA Audited Financial Statements; Moody's Investors Service 3

4 The city's adopted general fund budget for fiscal 2019 totals $486.9 million, a modest 0.2% increase from the prior year's budget. The budget is balanced, does not include any fund balance appropriations, and projects increases in tax revenues with no change in the current tax rates. Management adheres to a formal minimum fund balance policy that sets the minimum unassigned general fund balance at 7.5% of prior year revenues, with an informal target of maintaining no less than 10%. Since fiscal 2013, the city has maintained unassigned fund balance at 11% or higher. LIQUIDITY The city's operating fund cash position (inclusive of both the general and debt service funds) is satisfactory and has remained stable, fluctuating within a relatively narrow band, averaging 18% of revenues over the past five fiscal years ( ). At fiscal year-end 2018, operating fund cash totaled $88 million, or 18.6% of revenues, which is a level below similarly-rated cities nationwide. Debt and Pensions: Above-Average Debt Burden Will Remain Manageable Post-issuance of the Series 2019 bonds, the city's direct debt burden (net of bonds issued for self-supporting utilities) will represent approximately 2.8% of 2018 full value, or 1.03 times operating revenues, which is higher than the national Aa1 medians of 0.8% and 0.79 times, respectively. Because Virginia cities are responsible for school operations, including capital borrowing, the median direct debt burden is generally higher than national medians relative to full value. The city's fiscal city manager recommended capital improvement plan totals $361.4 million, of which 33% is for transportation projects and 20% will fund street and bridge projects. Approximately, $146 million, of the capital plan is expected to be funded with additional bond issues and a sizable $173 million will be funded with grants. Given active management of the city's capital plan, continued tax base growth, and satisfactory principal amortization, the city's debt load is expected to increase but remain manageable. The city plans to remain in compliance with all of its debt management policies, which require total tax-supported debt service to remain under 9.5% of revenues and total debt under 3% of total full value. DEBT STRUCTURE All of the city's debt is fixed rate and amortized over the long-term. DEBT-RELATED DERIVATIVES The city is not party to derivative agreements. PENSIONS AND OPEB The city participates in the Newport News Employee Retirement Fund (NNERF), a single-employer defined benefit plan, and the Virginia Retirement System (VRS), a cost-sharing multiple-employer retirement system. In 2010, the city adopted a pension reform package to not only address the low funded ratio of 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 now be entered into VRS. In addition, the city's strategy included annual incremental increases in the city's contribution with a goal of reaching the full ARC by fiscal Positively, the city accomplished this goal in fiscal 2016, one year ahead of schedule. The city plans to fully fund the ARC going forward. Any failure to do so could result in negative credit pressure. The city's combined three-year average adjusted net pension liability (ANPL), under Moody's methodology for adjusting reported pension data, is just over $1 billion, or 2.14 times operating revenues, which is higher than the national medians for the Aa1 rating category. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The adjustments are not intended to replace the city's reported liability information, but to improve comparability with other rated entities. The city provides other post-employment benefits (OPEB) to retirees, which will remain a small portion of the city's annual fixed costs given that it is financed on a pay-go basis. OPEB contributions in fiscal 2018 totaled $8.2 million, or 1.7% of operating revenues. Total fixed costs (inclusive of debt service, OPEB, and pension contributions) represented approximately 20.6% of fiscal 2018 operating revenues. 4

5 Management and Governance Newport News' strong credit profile is supported by a history of conservative budgeting, adherence to financial policies, and a commitment to multi-year financial forecasting. Virginia Cities have an Institutional Framework score of Aaa, which is very high. Institutional Framework scores measure a sector's legal ability to increase revenues and decrease expenditures. The sector has one or more major revenue sources that are not subject to any caps. Unpredictable revenue fluctuations tend to be minor, or under 5% annually. Across the sector, fixed and mandated costs are generally less than 25% of expenditures. Virginia is a Right to Work state, providing significant expenditure-cutting ability. Unpredictable expenditure fluctuations tend to be minor, under 5% annually. 5

6 2018 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY S PUBLICATIONS MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. 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 or in preparing the Moody s publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER

7 CLIENT SERVICES 7 Americas Asia Pacific Japan EMEA