Prince William County, Virginia; Appropriations; General Obligation

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1 Summary: Prince William County, Virginia; Appropriations; General Obligation Primary Credit Analyst: Danielle L Leonardis, New York (1) ; danielle.leonardis@standardandpoors.com Secondary Contact: Karl Jacob, Boston (1) ; karl.jacob@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research JULY 2,

2 Summary: Prince William County, Virginia; Appropriations; General Obligation Credit Profile US$ mil go pub imp bnds ser 2013 due 08/01/2033 Long Term Rating AAA/Stable New Prince William Cnty COPs Long Term Rating AA+/Stable Affirmed Prince William Cnty GO Long Term Rating AAA/Stable Affirmed Rationale Standard & Poor's Ratings Service assigned its 'AAA' long-term rating to Prince William County, VA's general obligation (GO) public improvement bonds series 2013 and at the same time affirmed the 'AAA' long-term rating on the county's outstanding GO debt. The outlook is stable. The rating reflects our opinion of the county's: Deep and diverse economy, which participates in the Washington metropolitan area; Sizable and diverse property tax base, which exhibits strong wealth and income despite a steep decline in assessed value (AV) during the recession; Strong financial management, resulting in consistent operations and strong reserves throughout the recession; and Low-to-moderate debt, albeit with significant additional capital needs. The GO bonds are secured by the county's full-faith-and-credit pledge and unlimited ad valorem taxing powers. We understand the county will use proceeds from this issue to finance various capital projects, primarily for road and park projects. At the same time, the county plans to issue additional special obligation bonds through the Virginia Public School Authority (VPSA) for school capital projects, which has also been rated 'AAA.' The 348-square-mile Prince William County (2010 census population: 402,002) is in northern Virginia, about 35 miles southwest of Washington. The county continues to benefit from its access to, and participation in, the Washington metropolitan area. Marine Corps Base Quantico and Fort Belvoir are both located within or near the county and nearly 30,000 personnel were relocated to these two installations as a result of the U.S. military's Base Closure and Realignment in The realignment also attracted a number of defense contractors to the county. The county estimates 7% of at-place employment positions are civilian federal employees and 5.4% are federal contractors. In addition, Quantico employs 6,700 civilians. The county will continue to monitor federal sequestration's impact on the local employment base and income levels. However, the county believes it is well positioned to withstand federal spending cuts due to the presence of many large and well-diversified contracting firms that focus on cyber-security and JULY 2,

3 Summary: Prince William County, Virginia; Appropriations; General Obligation other high-tech industries. The county also believes it can benefit from any additional consolidation of defense installations, due to its proximity to Washington, existing military presence, relatively well-educated workforce, and affordable cost of living. The county also continues to diversify its employment base and recent economic development has focused on such growing businesses as data centers, high-tech, and bio-tech industries. An additional near-to-moderate term sizable economic development project includes the Tidewater Resort, a five-star hotel and conference center, within the greater Potomac Shores Town Center complex. Once constructed, it will be the only five-star facility in Northern Virginia and is expected to be marketed to a nationwide audience. The county's participation in the project is modest and it expects approximately one-third of debt service on the $30 million of bonds to be issued by the Community Development Authority (CDA) and supported by Transient Occupancy Tax (TOT) revenues. Prince William's unemployment rate remains low at 4.8% in 2012, compared with 5.8% for the state and 8.1% for the nation. Median household effective buying income is, in our opinion, a very strong 157% of the national average. The county's tax base increased 4.4% in 2013 to $43.5 billion. Market value was $47.9 billion, or $113,550 per capita, a level we consider extremely strong. Finances are, in our view, strong and have remained consistent throughout the recession due to a conservative and proactive financial management team. Fiscal 2012 ended with a $22.2 million general fund deficit, due mostly to $26.6 million in transfers out to the capital projects funds. Total fund balance at the close of fiscal 2012 was $163.2 million, or 18.9% of expenditures, which we consider very strong. Unassigned fund balance was $64.5 million, or 7.5% of expenditures. Total available fund balance (committed, assigned and unassigned) was $161.7 million, or 18.7% of expenditures. The county also funded its revenue stabilization reserve at $31.5 million, or 3.7% of expenditures, well above the county's 1% policy level. Year-end liquidity was also strong, with available cash providing 173 days' operating liquidity. Nearing the close of fiscal 2013, management is projecting a $25 million to $30 million operating surplus, net of transfers. Revenues are tracking 0.2% ahead of budget due to growth in sales and personal property taxes. The county is also on track to expend just 95% of the expenditure budget. Reserves will remain fully funded according to the county's formal policy. The Revenue Stabilization Fund is projected to be $27.4 million at year end or 3.1% of general fund expenditures; still well above formal policy of 1%. The county does plan to use $13.2 million of general fund reserves for the subsequent year's budget. The county's fiscal 2014 adopted budget totals $962.6 million; a 5.3% increase over the prior year's budget. As previously mentioned, it includes the use of $13.2 million of reserves. It also includes an amended revenue sharing agreement with the schools, modestly shifting 57.23% of county revenues to the schools in 2014 from 56.75% in fiscal The 2014 budget further includes a tax rate reduction of 2.8 cents to $1.181 per $100 of assessed value; which will ultimately result in an average tax bill increase of 2.3% on the residential side and an average 2.6% increase on the commercial side. Looking forward, the county's five-year adopted budget plan ( ) is balanced and looks to add to the revenue stabilization fund in fiscal years 2014 and 2015 ($9.9 million total) and then draw from it in fiscal years 2016 and 2017 for various capital purposes. The projected fiscal 2018 revenue stabilization fund balance is estimated at $18.8 million or 1.75% of expenditures. Furthermore, the county anticipates receiving additional revenues JULY 2,

4 Summary: Prince William County, Virginia; Appropriations; General Obligation from the recent passing of a General Assembly Bill, which authorizes an increase in existing taxes, for transportation needs in northern Virginia. It is still unclear how much additional revenue the county will receive going forward. Standard & Poor's considers the county's financial management practices "strong" under its Financial Management Assessment methodology, indicating practices are strong, well embedded, and likely sustainable. In our opinion, overall net debt is a moderate $2,328 per capita, or a low 2.1% of market value. Carrying charges accounted for a moderate 11.9% of total governmental expenditures in fiscal We consider amortization above average, with officials planning to retire approximately 70% of debt over 10 years and 100% over 20 years. The adopted capital improvement plan (CIP) for fiscal years is $1.2 billion. About 75% of the CIP is for education while 14% is for general county improvements. Management plans to fund approximately 30% of the CIP with cash, continuing the county's practice of cash-funding a significant portion of capital projects. Management also intends to fund about 69% of the CIP with debt. We understand the county intends to issue debt in fiscal 2014 to support the CIP. Prince William County contributes to the Virginia Retirement System for its county and school employees. The county has historically budgeted 100% of the annual required contribution for all post retirement plans, which the commonwealth determines annually. It also maintains a supplemental pension plan for public safety employees that was 83.2% funded as of July 1, The county also offers other postemployment benefits (OPEB) to its employees, and established a trust fund in 2009 to fund this liability. As of July 1, 2011, the county's OPEB liability was 20.1% funded. In fiscal 2012, pension and OPEB contributions were $32.7 million, or about 3.2% of total governmental expenditures. Outlook The stable outlook reflects Standard & Poor's opinion of the county's consistent finances despite a significant decline in assessments during the recent recession. We believe the county's strong management team will likely maintain, what we consider, its solid finances as the tax base and economically sensitive revenue increase. We also expect the county's proactive management team will make the necessary budget adjustments as needed to offset the potential effects of federal spending cuts and maintain structural balance. The county's strong wealth and income, continued economic development, and participation in the diverse Washington metropolitan area underscore the rating stability. We are unlikely to revise the rating within the outlook's two-year horizon. Related Criteria And Research USPF Criteria: GO Debt, Oct. 12, 2006 USPF Criteria: Key General Obligation Ratio Credit Ranges Analysis Vs. Reality, April 2, 2008 State And Local Government Ratings Are Not Directly Constrained By That Of The U.S. Sovereign, Aug. 8, 2011 Complete ratings information is available to subscribers of RatingsDirect at All ratings JULY 2,

5 Summary: Prince William County, Virginia; Appropriations; General Obligation affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. JULY 2,

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