Fitch Affirms Wise County, VA Implied GOs at 'AA-' & Lease Rev BANs at 'A+'; Outlook Stable

Fitch Ratings has affirmed the following rating for Wise County, VA (the county):

--Implied general obligation (GO) bonds at 'AA-';

--$14.58 taxable lease revenue bond anticipation notes (BANs) series 2012 at 'A+' issued by the Wise County Industrial Development Authority.

The Rating Outlook is Stable.

SECURITY

Public facility lease revenue bond anticipation notes are secured by lease payments subject to annual appropriation by the county. The notes are also secured by a lien on the Eastside High School.

KEY RATING DRIVERS

LIMITED ECONOMY: The local economy is limited with a still elevated unemployment rate and below-average income levels. The tax base is concentrated and experienced a decline in 2014 with additional declines expected in 2015.

SOLID FINANCIAL MANAGEMENT: Sound financial management and planning have resulted in healthy reserve levels despite a weak revenue environment.

FAVORABLE DEBT PROFILE: The overall debt burden is expected to remain stable and costs affordable due to county plans for pay-as-you-go capital funding and limited long-term financing plans.

MODEST OTHER LONG-TERM OBLIGATIONS: Pension and OPEB costs are modest and do not pressure financial operations.

LIEN ON ESSENTIAL ASSETS: The lease revenue BANs feature solid legal provisions and are secured by a lien on school buildings, which Fitch considers essential county property. In the event of non-appropriation, noteholders have the right to take possession of the leased assets, among other remedies afforded by law.

RATING SENSITIVITIES

STABLE FUNDAMENTALS: The rating is sensitive to shifts in the county's fundamental credit characteristics, including its limited economy and solid fiscal management. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely in the upcoming credit review cycle.

CREDIT PROFILE

Wise County is located in southwest Virginia, approximately 50 miles northwest of Bristol. The county encompasses a land area of 407 miles with a 2013 population of 40,589 that has declined about 3% over the last decade.

CONCENTRATED TAX BASE AND WEAK WEALTH INDICATORS

The economy is limited, with government employment accounting for 29% of employment (two correctional facilities are located within the county), retail trade 16% and health care and social services 13%. With the slowdown of coal mining activity, mining represents just 8% of the employment base.

Median household income of county residents is 55.2% and 66.2% of state and national averages respectively. The county's employment base declined a cumulative 15.6% between 2012 and 2014 which is somewhat reflective of the completion of the Dominion power plant. As a result, the county's labor force has also continued to contract (13.8% of the same time period), resulting in a lower but still above average unemployment rate of 7.7% as of September 2014.

The county's tax base is highly concentrated. The top five taxpayers account for 35% of fiscal 2013 assessed value (AV) and are comprised of coal, gas and utility companies. The top taxpayer, Dominion Resources Inc. (IDR 'BBB+' by Fitch), accounts for a significant 16.7% of AV. Once the plant's valuation is fully recognized in fiscal 2015, the estimated total of $1.38 billion will represent more than 30% of projected total AV and 15% of total revenue.

HEALTHY RESERVE BALANCES

The county's reserve levels remain healthy and continue to exceed the adopted fund balance policy. Fiscal 2013 ended with a $40.57 million net operating deficit after transfers which reflects the use of bond proceeds received during fiscal 2012 and $4.9 million operating deficit. The $4.9 million operating deficit mostly represents $2 million in capital spending, and a $2.4 million shortfall in coal severance revenues. The unrestricted general fund balance totaled $15.6 million or 13.9% of spending; of the total, $8.58 million is unassigned and $7 million is committed for school projects and debt service. The unassigned balance, at 15% of adjusted spending (minus the use of bond proceeds during the year) and transfers out, was above the 10% policy threshold.

The fiscal 2014 budget of approximately $58 million is a 3% increase over 2013 and includes a $3.3 million fund balance appropriation of which $2.7 million has been designated to fund school construction projects. Management is projecting break-even year-end operating results and the use of $2.7 million of committed reserves as budgeted. The unassigned fund balance is projected at $9 million or 17% of general fund estimated spending and $4.5 million is committed for future debt service.

The fiscal 2015 budget is a notable 7% decline over fiscal 2014, although the tax rate was increased 3 cents, the first time in a decade. The budget decline reflects the weakened local tax revenues mainly due to reduced coal mining activity. Fitch expects the county will be able to continue to prudently manage through the weakened revenue environment given its financial flexibility.

NEUTRAL DEBT PROFILE

The county's debt profile is neutral, characterized by an average debt burden, average principal amortization (54% in 10 years), and limited borrowing plans. Overall debt totals a moderate 2.4% of market value and $2,293 per capita. Debt service for fiscal 2013 accounts for an affordable 9% of adjusted spending, which is below the county's 10% policy cap.

The five-year capital plan totals a modest $15 million. The plan is 81% debt funded ($7.7 million for general government and $4.8 million for utilities) and 15% pay-go. Major projects include courthouse renovations and public safety capital spending.

MODEST PENSION AND OPEB COSTS

Long-term liabilities related to employment benefits are not expected to pressure future operations. As of June 2012, the county's pension program, provided through the Virginia Retirement System, was adequately funded at 73% assuming a 7% rate of return. Given that the state's plan is underfunded, this may result in raising costs to the county to the future resulting in higher carrying costs. The unfunded actuarial accrued liability of $13.4 million accounts for a low 0.3% of market value. The county makes its full required contribution annually. 2013 pension costs were a low 2% of spending. The county provides an implicit subsidy to retirees so OPEB costs were a modest 0.2% of adjusted spending. Overall carrying costs for debt service, pension and OPEB were affordable at 18.6% of spending in fiscal 2013, in large part due to modest retiree benefit costs; Fitch notes these may rise in the future, given the state pension plan is underfunding its annual required contribution (ARC).

LEGAL PROVISIONS

Under the terms of the financing lease, Wise County will make basic rent payments to the IDA, subject to appropriation, equal to debt service on the lease revenue bond anticipation notes. The authority pledges the revenue received to the trustee for payment of principal and interest. Fitch believes the essentiality of the financed projects, plus the right of noteholders to take possession of the assets in the event of non-appropriation, provide sufficient incentive to appropriate.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Virginia Employment Commission.

Applicable Criteria and Related Research:

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

--'U.S. Local 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. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934895

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