Fitch U.S. Muni Surveillance: Virginia Beach, Virginia's Storm Water Revs Affirmed at 'AA+'.

AUSTIN, Texas -- In the course of routine surveillance, Fitch Ratings affirms the 'AA+' rating on Virginia Beach, Virginia's (the city) $7.9 million of outstanding storm water utility (the system) revenue bonds. The bonds are payable from a senior lien on and pledge of the net revenues of the system. The Rating Outlook is Stable.

The 'AA+' rating reflects the system's strong financial performance, low leverage ratios, manageable capital plan, and stable and diverse service area. The rating also considers payments from the commonwealth as providing a secure revenue source to supplement user fees. While continued economic softening could pressure the system's overall financial operations, Fitch expects the city will take necessary actions to preserve its strong financial metrics.

Financial performance has been very strong, with senior annual debt service (ADS) coverage levels averaging a high 12.4 times (x) over the fiscal 2004-2008 period. Almost one-third of the system's total revenues are payments from the commonwealth. Projected ADS coverage for the system over the next few years is expected to remain strong. Financial margins have been solid, averaging 240 days cash on hand and Fitch expects for reserves to remain at comparable levels - if not slightly improve if debt is issued to fund its capital improvement plan (CIP) - over the next five years. Given the city's conservative practice of pay-go funding its CIP, debt levels are very low with outstanding debt per capita at $24 and are projected to remain low even with projected debt issuances. Future capital needs are manageable at $62 million. Very preliminary estimates show approximately 35% of the five-year CIP being funded with debt, with the remainder being funded with cash.

Virginia Beach is the commonwealth's largest city with an estimated population of 433,000. A broadening of the city's economic base beyond its largest traditional components, the Hampton Roads region's huge military presence and tourism, continues but is not yet fully realized. Unemployment estimates for August were below state and national levels at 5.7%. Income levels are above state and national levels.

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