Fitch Rates Virginia Beach, VA $75MM 2007 GOs 'AA+'; Stable Outlook.

NEW YORK -- Fitch Ratings assigns an 'AA+' rating to Virginia Beach, Virginia's approximately $75 million general obligations (GOs), series 2007. The bonds are scheduled to sell competitively on or about March 13, with proceeds funding various public improvement projects. Government Finance Associates, Inc. and ARD Government Finance Group are the city's co-financial advisors. In addition, Fitch affirms the 'AA+' on the city's approximately $548.6 million of outstanding GO bonds. The Rating Outlook is Stable.

Virginia Beach's 'AA+' rating reflects its solid financial management, low debt levels, and substantial use of current resources for capital projects. The city's improving income indicators and strong general fund balances are also rating factors. The Stable Rating Outlook reflects Fitch's belief that the city will continue diversifying its economy beyond the traditional military and tourism industries.

Virginia Beach, in the Hampton Roads region of Virginia, is the commonwealth's largest city. Efforts to diversify the economic base are ongoing, led by the Town Center mixed-use development, a city initiative to create a core business area through the establishment of a special tax district. The city's new $200 million convention center opened this January, and private investments in hotel renovations and construction along the popular beachfront continue. Aggregate spending by tourists grew 5.5% in calendar 2005, generating an estimated $70.5 million in tax revenues. The unemployment rate of 2.7% for December 2006 remained at or below regional, commonwealth, and national averages. Per capita income levels in Virginia Beach are on par with the commonwealth's and above the national average, showing improvement since the beginning of the decade.

The base realignment and closure (BRAC) selection process is complete, and the Navy's east coast master jet base will remain in the city despite the BRAC's recommendation to relocate operations to Cecil Field in Jacksonville, Florida. The city will continue to purchase and clear property in the primary accident potential zone around the periphery of the base at the rate of $15 million annually, split between the city and state.

Stable management and conservative planning have resulted in significant financial flexibility. Fiscal 2006 ended with an unreserved general fund balance of $166 million, equal to a strong 19% of expenditures, transfers out, and other uses. The undesignated fund balance of $123.4 million exceeds the budget ordinance level set by the city council to equal at least 8%-12% of the subsequent fiscal year's revenues. The city prepares detailed interim financial reports that track performance against the budget and prior fiscal year results; through January of fiscal 2007, general fund revenues and expenditures were slightly better than the prior fiscal year's levels for the same period. The city council reduced the real estate tax by 3.39 cents to $0.99 per $100 of assessed value for fiscal 2007, for a total decline of 23.00 cents in the tax rate since fiscal 2004. City officials expect that continued double-digit growth in assessed value may lead to another tax rate rollback for fiscal 2008, while maintaining strong growth in the tax levy. The fiscal 2007 budget includes a large increase in property tax revenues due to roughly 20% growth in the fiscal 2007 assessed value. Excess revenues are used for capital projects, including transportation, and potentially to fund a portion of the city's other post-employment benefit liability. The city's revenue-sharing agreement with the school system is fully funded.

Debt affordability policies have resulted in low debt levels, currently equal to $2,086 per capita and 2.15% of property market value. The per capita debt affordability target was recently revised upward to $2,400, which Fitch views as a neutral action, given that a significant portion of the city's debt is paid from dedicated taxes and is not a strain on the general fund. Debt levels are well within other policy ranges. Amortization is rapid, with 67.6% of GO debt retired within 10 years. The fiscal years 2007-2012 capital improvement program totals $1.12 billion, of which about 43% is to be financed through debt and lease purchases.

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