Fitch Rates Hopewell, VA's $20MM GOs 'A+'; Outlook Revised to Negative.

WASHINGTON -- Fitch Ratings assigns an 'A+' rating to the City of Hopewell, VA's (the city) $20 million general obligation (GO) public improvement bonds. The offering will consist of two separate series, series 2004A (tax-exempt bonds) and series 2004B (taxable bonds), with exact amounts to be determined at a later date. Both series are scheduled for sale via negotiation on June 30 with Davenport & Company LLC. Fitch also affirms the 'A+' rating on the city's outstanding $12.6 million in GO bonds. The Rating Outlook is Negative.

The 'A+' rating reflects the city's satisfactory fund balance levels; long-range strategic planning, which has improved school infrastructure over the past decade and aims to redevelop the downtown and improve housing inventory within the city; steady tax base growth over the past few years; and manageable debt levels. The rating also reflects a high taxpayer concentration among industrial users, low current property tax collections, and a declining fund balance, which has fallen below the minimum set by city policy.

The Rating Outlook is revised to Negative from Stable despite the city's ambitious efforts to revitalize its aging downtown because Fitch believes that the city's finances could deteriorate further in the event of an unfavorable outcome of an appeal by one of the city's largest taxpayers. Fitch believes that the outcome of this appeal, by a state-assessed cogeneration plant, might not only reduce property taxes from this payer but could lead the three other cogeneration plants that reside in the city to review their assessments as well. The city has not set aside reserves to mitigate the potential impact of the current or any future appeals. Prior to this appeal, the city drew down its general fund balance for five consecutive years. The undesignated balance at the end of fiscal 2003 was below the city's internal policy level of 10% of spending. The real estate tax rate was increased in fiscal 2004 and is above average for Virginia localities, which provides less flexibility for future tax increases, if needed. With only a modest surplus projected for the end of fiscal 2004, further drawdowns in the near term are possible, especially if an unfavorable appeal settlement occurs. To maintain the current rating, Fitch expects that over the next one to two years, conditions will allow the city to maintain satisfactory financial flexibility, including incorporating the impact of the current and any future assessment appeals.

Hopewell, with a 2003 estimated population of 22,277, lies on the James and Appomattox rivers and is 25 miles southeast of the state capital, Richmond. Due to the large presence of manufacturing and power cogeneration plants, the city has a high concentration among the top ten taxpayers, which comprise 43.4% of the total tax base. Unemployment levels are typically above those of the state and nation, which is reflective of the large presence of manufacturing. The Virginia Employment Commission reports that manufacturing constitutes 26% of jobs in the city. Income levels lag those of the state and nation.

Historically, financial operations for the city have been strong, but over the past five fiscal years, the city has drawn down its fund balances due to pay-as-you-go funding of capital projects, the effects of the economic slowdown, state-funding reductions, and a timing issue related to the changeover of assessments on the four cogenerator plants to the state. The general fund undesignated fund balance equaled $3.1 million, or 9.4% of expenditures and transfers out, at the end of fiscal 2003, which is down from the $4.2 million, or 14.3% of expenditures and transfers out, in fiscal 1998. The unreserved general fund balance at the end of fiscal 2003 was $6.9 million, or 20.7% of spending, which still affords adequate financial flexibility. In fiscal 2004, the city council increased the real estate tax rate by $0.08 to $1.20; $0.05 are dedicated towards downtown redevelopment and will support debt service on the series 2004A and series 2004B bonds and the remainder is for general operations.

Debt levels are manageable. About 61% of the city's outstanding debt is related to school infrastructure. Although debt levels are projected to increase modestly as the city redevelops its downtown, dedicated real estate and machinery and tools taxes will aid in this effort. The redevelopment plans to add retail, housing, and entertainment venues to the downtown, which is projected to translate into solid tax revenue growth for the city as projects are completed. The current offering is part of the first phase of public investment towards the redevelopment of the downtown area, which includes the construction of a new main library, redevelopment of an apartment building, streetscape improvements, and adaptive re-use of an existing building to house the human services department. The city's fiscal 2005-2009 capital improvement plan (CIP) identifies $37.8 million in needs, including the library and human services building projects; however, specific funding sources beyond fiscal 2005 have not been identified.