Fitch Rates Virginia Beach Develop Auth, VA $104MM Revs 'AA-'.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to the City of Virginia Beach Development Authority, VA's (VBDA) approximately $104 million public facility revenue bonds, series 2007A and 2007B (taxable). The bonds are scheduled to sell competitively on June 13, with bond proceeds funding, in part or in total, 10 capital improvement projects. Government Finance Associates, Inc. and ARD Government Finance Group are the city's co-financial advisors. Fitch also affirms the 'AA-' rating on the VBDA's approximately $274 million of outstanding public facility revenue bonds and the 'AA+' rating on the city's $572 million of outstanding general obligation bonds. The Rating Outlook is Stable.

The 'AA-' rating is based on a support agreement between the VBDA and the city of Virginia Beach that requires the city to make all debt service payments, subject to annual appropriation. Bondholders have no security interest in the projects being financed and are reliant solely on the city to make payments under the support agreement; the VBDA has assigned its rights to such payments directly to the bond trustee. Virginia Beach's 'AA+' rating reflects its solid financial management, substantial use of current resources for capital projects, and low debt levels. The city's improving income indicators and diversifying economy are also rating factors.

Although the financed projects are not of the highest essentiality, appropriation risk is somewhat mitigated by the city's overall financial flexibility and demonstrated commitment to the projects, as evidenced by the dedication of increases to existing taxes to support debt service and equity contributions. The city's fiscal 2006 unreserved general fund balance equaled $129 million, a sound 15% of expenditures and transfers out, and officials expect fiscal 2007 to result in another surplus year.

Debt service for the convention center, the performing arts theater, and open space site acquisition program is anticipated to be supported almost entirely by dedicated portions of the city's hotel, meal, and cigarette taxes, the rates of all of which were increased in 2001. Together, the projects total $303 million of the $441 million public facilities capital program. Revenues from the three taxes, along with the unencumbered excess of the city's admissions tax and investment earnings, are expected to total $20 million in fiscal 2007, providing slightly less than 1.0 times (x) coverage of maximum annual debt service on the bonds allocated to these projects. However, the city anticipated narrow coverage during the projects' initial years and prudently built up a significant balance in the major projects fund to help make debt service payments until available revenues are sufficient.

The city has funded $369 million of the $441 in public facilities capital projects with public facilities revenue bonds, and the existing public facility revenue bond authorizations are fully exhausted with this issuance. Of the remaining $72 million of sources, $29 million came from general obligation bonds, $21.3 million came from pay-as-you-go and other internal sources, and $11.7 million came from donations (for the performing arts center). A $10 million state contribution for the convention center has not been collected as yet. Future project phases would likely require additional public facility revenue bond authorizations.

Virginia Beach, in the Hampton Roads region of Virginia, is the commonwealth's largest city. Efforts to diversify the economic base are ongoing, and private investments in hotel renovations and construction along the popular beachfront continue. Aggregate spending by tourists grew 7.2% in calendar 2006, reportedly generating an estimated $75.6 million in tax revenues. The unemployment rate of 2.7% for March 2007 was below regional, commonwealth, and national averages. City per capita personal income levels are on par with the commonwealth's and above the national average, showing improvement since the beginning of the decade.

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