Fitch Rates Virginia Public School Auth's School Tech & Security Notes, Series III 'AA+'

Fitch Ratings assigns an 'AA+' rating to $67.425 million Virginia Public School Authority (VPSA) school technology and security notes, series III.

The bonds are expected to sell via competition on or about May 5, 2015.

The Rating Outlook is Stable.

SECURITY

VPSA's school educational technology and security notes are payable from appropriations from the commonwealth of Virginia's literary fund and, in the event of literary fund insufficiency, a 'sum sufficient' appropriation from the commonwealth's general fund. This appropriation support provides the basis for the rating.

KEY RATING DRIVERS

COMMONWEALTH APPROPRIATION OBLIGATION: The 'AA+' rating on the VPSA notes, one notch below the commonwealth's 'AAA' GO rating, is based on the availability of a 'sum sufficient' appropriation for debt service deficiencies from the commonwealth's literary fund and, if necessary, the general fund.

CONSERVATIVE FINANCIAL MANAGEMENT: The commonwealth's financial operations are conservatively managed with periodic revenue forecast updates and a constitutional revenue stabilization fund (RSF). The commonwealth has consistently made prompt adjustments to respond to fiscal uncertainties.

DIVERSE ECONOMY WITH HIGH WEALTH LEVELS: The commonwealth benefits from a diverse economy with relatively low unemployment and high wealth levels. As anticipated, federal government contraction weakened economic growth trends, though Fitch still views Virginia's economic profile as strong.

MODERATE LIABILITY LEVELS: Virginia's debt ratios are in the moderate range, maintained through deliberate policy and above-average amortization. Capital needs for education and transportation improvements remain significant and issuance has accelerated in recent years. While the funded status of Virginia's retirement system declined in recent years, due in part to an underfunding of actuarial contributions to the system, unfunded liabilities as a percentage of personal income remain below average for U.S. states.

RATING SENSITIVITIES

GO-LINKAGE FOR APPROPRIATION BONDS: The rating on the bonds is sensitive to changes in the commonwealth's GO rating, to which it is linked.

CREDIT PROFILE

VPSA note proceeds from the current offering will be used to make grants primarily to school divisions of cities, towns, and counties of the commonwealth for school technology and security projects. The series III bonds are being issued pursuant to two separate, but similar note resolutions, which both include appropriations from Virginia's literary fund and, if those are not adequate, a 'sum sufficient' appropriation from the commonwealth's general fund. The appropriation, which the governor must request from the general assembly pursuant to statute, provides the primary source of security. Additional strength derives from Virginia's fundamental credit strengths and the state commitment to education.

COMMONWEALTH'S STRONG CREDIT QUALITY

Virginia's 'AAA' GO rating reflects its solid fiscal resources, conservative approach to financial operations which includes periodic revenue forecast updates, strong fundamental economic profile, and moderate liability levels. Economic and revenue performance underperformed notably in fiscal 2014 compared to earlier forecast expectations, the result of both the continuing timing impact of 2013 federal tax law changes on state tax filers and the commonwealth's exposure to ongoing federal contraction. Virginia addressed the resulting gaps in fiscal 2014 and in the current year through a mix of one-time and recurring measures including fund sweeps, one-time and recurring revenue and expenditure cuts, and use of the RSF. The most significant savings are from a $216 million reduction in the Medicaid program over the biennium, which the administration attributes largely to benefits from prior year policy changes including an increasing shift to managed care programs.

Earlier this month, the commonwealth reported strong revenue results with general fund receipts through March of $12 billion up 7.1% year-over-year (yoy), versus the 4.7% growth in the mid-session revenue forecast adopted in February. The mid-session reforecast added $474 million to the current biennium versus the December 2014 revenue forecast, including $245 million this year.

The legislature passed a final set of budget amendments they sent to the Governor at the end of February, and the Governor signed the bill into law with no vetoes. Provisions include modest raises for state employees and teachers, partial restoration of local aid cuts, increased pension funding, and an early deposit to Virginia's RSF. Considering the collaborative fiscal management steps taken by the administration and legislature since last year's revenue shortfall, Fitch views positively the smoother enactment process for this year's budget proposal compared to last year's.

For more information on the commonwealth's GO rating, please see the Fitch release titled 'Fitch Rates Virginia College Bldg Auth's Educ Facil Bonds Ser 2015A&B 'AA+'', dated March 12, 2015 and available at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Fitch Rates Virginia College Bldg Auth's Educ Facil Bonds Ser 2015A&B 'AA+'' (Mar. 12, 2015).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983560

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