Fitch Ratings has assigned a ‘AA+’ rating to the following Virginia Port Authority (VPA) bonds:
–$52,795,000 commonwealth port fund revenue refunding bonds, series 2020A (taxable);
–$21,105,000 commonwealth port fund revenue refunding bonds, series 2020B (AMT).
The bonds are expected to price via negotiated sale the week of July 20, 2020.
The Rating Outlook is Stable.
The bonds are limited obligations of the authority, payable from legislative appropriations to the CPF, which derive from a share of revenues of the commonwealth’s transportation trust fund (TTF). In the event such revenues are insufficient, bonds would be paid from a sum sufficient appropriation from, first, legally available revenues in the TTF and, second, from the commonwealth’s general fund.
The ‘AA+’ rating on the VPA CPF bonds, one notch below the commonwealth’s ‘AAA’ Issuer Default Rating (IDR), is based on ultimate access to legislative appropriations from the general fund.
ECONOMIC RESOURCE BASE
Virginia’s fundamental economic profile remains strong, with a diverse mix of industries and high wealth. Fitch expects the Commonwealth to absorb negative effects of the current coronavirus pandemic and any federal contraction and maintain economic growth over time. Professional and business services and government, the Commonwealth’s leading sectors, drive the Commonwealth’s steady employment gains over the past several years, which are slightly below the national level. Growth prospects over the long term are solid, with above-average population growth and high education levels signaling a well-positioned workforce.
KEY RATING DRIVERS
Revenue Framework: ‘aa’
Fitch expects Virginia’s revenues, primarily income and sales taxes, will continue to reflect the depth and breadth of the economy, as well as its volatility. The Commonwealth has complete control over its revenues, with an unlimited legal ability to raise operating revenues as needed.
Expenditure Framework: ‘aaa’
Virginia maintains ample expenditure flexibility, with a low burden of carrying costs for liabilities and the broad expense-cutting ability common to most U.S. states. As with most states, Medicaid remains a key expense driver, but one Fitch expects the Commonwealth will be able to actively manage without threatening fiscal stability.
Long-Term Liability Burden: ‘aaa’
Virginia’s long-term liability burden is low and well managed. Debt issuance is carefully monitored through both constitutional limitations and more stringent policy and institutional practices. A budget-driven deferral of pension contributions weakened the funded position during the Great Recession, but has since been restored. Virginia’s net pension liabilities remain below those of most states.
Operating Performance: ‘aaa’
The Commonwealth remains well positioned to deal with economic downturns, with exceptionally strong gap-closing capacity derived from its control over revenues and spending. Virginia also demonstrated an ability to restore financial flexibility at times of economic recovery and expansion.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Not applicable for a ‘AAA’ rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–A severe economic contraction extending well into the second half of the year or beyond, consistent with Fitch’s coronavirus downside scenario, which triggers greater than anticipated, sustained and deep revenue declines and materially erodes the state’s gap-closing capacity.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Sectorwide Coronavirus Implications
The recent outbreak of the coronavirus and related government containment measures worldwide creates an uncertain global environment for U.S. state and local governments and related entities in the near term. Fitch’s ratings are forward looking, and Fitch will monitor developments in state and local governments tied to the severity and duration of the virus outbreak, and incorporate revised expectations for future performance and assessment of key risks.
In its baseline scenario, Fitch assumes sharp economic contractions hit major economies in the 1H20 at a speed and depth that is unprecedented since World War II. Recovery begins from the third quarter of 2020 onward as the health crisis subsides after a short but severe global recession. Fitch assumes GDP remains below its 4Q19 level until mid-2022.
Federal Aid Provides Some Support for State Budgets
Federal aid measures enacted in recent weeks will benefit state budgets, although details remain fluid. The Families First Coronavirus Response included a 6.2 percentage point (pp) increase in the Federal Medical Assistance Percentage (FMAP) for Medicaid for every quarter of the national public health emergency. FMAP is the rate at which the federal government reimburses states for Medicaid spending. The commonwealth estimates the 6.2pp increase yielded $300 million – $350 million in the last two quarters of fiscal year 2020. The ultimate value of the FMAP rate increase will depend primarily on the state’s actual Medicaid spending and the extent of the national public health emergency, which has been extended at least into the current quarter ending on September 30.
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted on March 27, the U.S. Treasury department distributed $150 billion to state and local governments using a population-based formula via the Coronavirus Relief Fund (CRF). The statute limits the use of the CRF to coronavirus expense reimbursement rather than to offset anticipated state tax revenue losses. Virginia received $3.3 billion from the CRF. Of that amount, the commonwealth has appropriated $1.2 billion, with approximately $645 million to localities (excluding Fairfax County, which qualified to receive $200 million directly from the CRF) and a similar amount for state coronavirus response. The balance of approximately $2 billion remains available until its statutory expiration on December 31.
Coronavirus — Virginia Liquidity Update
Fitch considers Virginia well positioned to address liquidity pressure emanating from the coronavirus pandemic and related state and federal policy responses with no interruption in timely payments for key operating expenses, including debt service. Virginia extended its deadline for personal and corporate income payments, normally due between April 1 and June 1, to June 1. In fiscal 2019, personal income tax and corporate income tax collections in April 2019 and May 2019 combined were 18% of total general fund revenues for the fiscal year. The Commonwealth also announced a policy for businesses to request 30-day extensions of sales tax payments that were due on March 20. April 2019 sales and use tax revenues were less than 2% of total general fund revenues for the fiscal year. Based on the Office of the Comptroller’s monthly report on analysis of cash and investments, Virginia had $5.2 billion in unrestricted cash available for immediate transfer into the general fund as of May 31, 2020, and another $8.97 billion available in non-general fund sources to support cash flow in other Commonwealth operating funds as necessary. Both levels are up markedly from prior-year levels of $4.6 billion and $5.6 billion, respectively. The commonwealth does not anticipate borrowing from the Federal Reserve’s $500 billion Municipal Liquidity Facility (MLF).
Coronavirus — Virginia Budgetary Update
As with liquidity, Fitch considers the Commonwealth well positioned to absorb potential budgetary implications without materially affecting its long-term credit profile. Economic implications for Virginia will be significant as in all states, but initial data indicates the Commonwealth’s effects may be somewhat less severe.
In April, the governor implemented several measures to manage expenditures for fiscal 2020, including instituting a broad hiring freeze and directing agency heads to cut back on discretionary spending and begin planning for reductions in the next biennium.
In May, the governor signed the budget for the fiscal year 2021 – 2022 biennium, which utilized a pre-pandemic revenue estimate. In recognition of the considerable uncertainty surrounding revenues, the budget included reductions in direct spending items of $122.2 million and $2.2 billion in unallotted or frozen spending. The unallotted spending, which includes pre-pandemic policy priorities including K-12 education, is unable to be spent. The budget also includes authorization for the governor to unilaterally reduce spending by as much as 15% from enacted budgets.
Virginia’s legislature will reconvene in August to consider budget amendments with results from an interim revenue forecasting process which will reflect an updated economic and revenue outlook. Near the start of the pandemic, the administration estimated revenue losses could reach $1 billion in the last three months of fiscal year 2020, followed by potential revenue losses of $1 billion in the first year of the biennium beginning July 1, 2020, and $2 billion in the second year. On July 9, the Governor reported a $236.5 million revenue shortfall for fiscal 2020 versus the enacted budget, which was well ahead of the $1 billion loss anticipated at the start of the pandemic.
While this over-performance in fiscal 2020 may signal some potential improvement in the fiscal 2021 and 2022 outlook, the commonwealth notes that the sharpest revenue gains came from non-withholding personal income taxes, which largely reflected 2019 calendar year activity. Payroll withholding and sales tax receipts, reflective of current economic activity, fell 2% and 7% yoy, respectively in the last quarter of fiscal 2020.
Since the general fund revenues for fiscal year 2020 were 1% or more below the amount included in the official budget estimate for fiscal 2020, a state law that requires the Governor to prepare a reforecast of general fund revenues for the new 2020-2022 biennium was triggered. The new official forecast will be developed over the next several weeks and will be presented to the legislature’s joint money committee in mid-August.
Virginia – Updated FAST Analysis
The Fitch Analytical Stress Test (FAST) scenario analysis tool relates historical tax revenue volatility to GDP to support the assessment of operating performance under Fitch’s criteria. FAST is not a forecast, but it represents Fitch’s estimate of possible revenue behavior in a downturn based on historical revenue performance. Hence, actual revenue declines will vary from FAST results. FAST does provide a relative sense of the risk exposure of a particular state compared to other states.
Fitch anticipates Virginia will absorb the budgetary effects of Fitch’s coronavirus baseline and downside scenarios by utilizing its robust fiscal resilience, and be positioned to quickly rebuild that resilience through the eventual recovery period. Virginia’s FAST results show the Commonwealth’s tax revenue decline would be in line with most other states through Fitch’s three-year scenario period in both the baseline scenario and downside scenarios. The current coronavirus baseline scenario results in a 16% first-year decline in Virginia’s revenues, followed by a 8% increase in year two and a cumulative 5% decline over the three-year scenario. This compares to the states’ median decline of 17% in the first year and negative 6% over the three-year scenario. A more severe recession of the depth and duration of Fitch’s downside scenario would pose more of a challenge to the state’s financial resilience but one Virginia still appears positioned to absorb without materially affecting its long-term ability to restore and then maintain robust financial resilience. Under this scenario, Virginia’s first-year decline would be 31%, followed by a rebound of 11% in the second year. The cumulative three-year decline of 20% is approximately in line with the median 22% decline for all states.
In addition to the reserves noted above, the Commonwealth retains the significant budgetary powers afforded to nearly all states as reflected in the decision to freeze more than $2 billion in previously planned new spending for the current biennium and in the governor’s broad expense-cutting powers.
The ‘AA+’ rating is based on access to legally available funds in the commonwealth’s TTF and, ultimately, the commonwealth’s general fund. CPF revenue bonds are expected to be paid from revenues of the CPF, consisting of 2.5% of revenue allocated to the TTF including the commonwealth’s sales tax, motor vehicle sales and use tax, motor fuel tax, motor vehicle registration fees, motor vehicle rental tax, recordation taxes, insurance tax revenues, and highway use fee that are credited to the TTF along with allocable interest earnings (collectively, port fund income). The authority has covenanted in the bond resolution that it will request the Governor to include in his budget, that the primary income be maintained and set aside in the Port Fund at a level sufficient for the payment of principal and interest on the CPF revenue bonds, and in the event that the primary income derived from the port fund is insufficient for debt service, an appropriation of a sum sufficient amount to provide for any deficiency, first from the TTF and then from the general fund. VPA reports that every commonwealth budget enacted since 1997 has included this sum sufficient appropriation.
The TTF receives a variety of revenues including various highway-related taxes and a portion of the state sales-and-use tax. Trust fund revenues totaled $1.031 billion in fiscal 2019 (ended June 30, 2019) and are projected to total $1.751 billion in fiscal 2021. Revenues have increased since fiscal 2013 following the 2013 enactment of HB 2313, a major transportation funding reform package, which envisioned $4 billion in new transportation funding over the first six years post implementation. The 2020 General Assembly enacted new transportation legislation, which changed the composition and increased revenue sources for the Transportation Trust Fund as well as decreasing the statutory-specified percentage to be deposited into the Port Fund from the Transportation Trust Fund to 2.5% from 4.2%. The 2020 legislation expands transportation-related revenues to include taxes on motor vehicle rentals, statewide recordation, liquid alternative fuels, international registration plan fees, and insurance premium taxes.
The TTF allocation to the CPF was $42.9 million for fiscal 2019, covering pro-forma maximum annual debt service (MADS; in fiscal 2022) by a sound 2.3x.
The Virginia Port Authority, through Virginia International Terminals, operates four port facilities in the Norfolk area, one intermodal facility in Front Royal, VA approximately 70 miles west of Washington, DC, and the Richmond Marine Terminal located along I-95 and the James River. The bonds are issued under the 2002 resolution and will refund certain maturities of the series 2012B, 2012C, and 2015 CPF bonds. The issuance of additional new money CPF bonds under the 2002 resolution requires satisfaction of an historical test of 1.10x coverage of MADS on all bonds from adjusted port fund income in the preceding fiscal year. (Adjusted income allows for recognition of any changes that may be made to the income sources). Each issuance of port fund revenue bonds also requires approval of the governor and the commonwealth’s Treasury Board, which oversees all debt issuance.
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies).
Source: Fitch Ratings