Fitch Ratings has assigned an 'AAA' rating to the following City of Virginia Beach, VA (the city) general obligation bonds:

--$62,915,000 GO public improvement bonds series 2016A;

--$50,565,000 GO public improvement refunding bonds series 2016B.

The proceeds of the series 2016A bonds will be used to finance various city and school capital improvements. The series 2016B bonds are refunding a portion of the city's outstanding series 2004B and 2009 GO bonds for savings. The bonds are scheduled to sell competitively on January 27.

In addition, Fitch has affirmed the following ratings:

--$639 million outstanding GO bonds at 'AAA';

--$353 million outstanding Virginia Beach Development Authority (VBDA) revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are backed by the full faith and credit and unlimited taxing authority of the city. The VBDA bonds are backed by annual payments to VBDA from the city pursuant to a support agreement, subject to annual appropriation. Bondholders have no security interest in the financed projects.

KEY RATING DRIVERS

SOUND FINANCIAL MANAGEMENT: Management's conservative budgeting practices, maintenance of very sound reserves within policy levels, and detailed financial monitoring and forecasting reinforce the city's strong financial flexibility.

CLIMBING DEBT, RAPID AMORTIZATION: Prudent debt management policies and use of pay-as-you-go capital funding has kept levels moderate. Future debt plans are expected to decrease capacity under the city's policies and increase ratios, but they should remain moderate as principal amortization is rapid.

STRONG SOCIOECONOMIC INDICATORS: Wealth levels are above average and unemployment rates are low compared to the state and nation. The expanding economy, although concentrated in the military and tourism sectors, has generated positive performance in economically sensitive revenues over the past six years.

MANAGEABLE FIXED CARRYING COSTS: The city's pension and other post-employment benefits (OPEB) costs are manageable and when combined with debt service expenses represent a manageable portion of governmental spending.

VBDA REVENUE BONDS: The VBDA's 'AA' bond rating is notched down from the city's GO rating, reflecting risk to annual appropriation and the absence of a security interest in the financed projects.

RATING SENSITIVITIES

FINANCIAL AND DEBT MANAGEMENT PRACTICES: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and adherence to conservative debt policies. A diversion from these practices could affect the Rating Outlook or rating.

CREDIT PROFILE

Virginia Beach covers the eastern border of Virginia south of the Delmarva Peninsula, including the entire area from the Chesapeake Bay to the North Carolina border. It is the most populous city in the Commonwealth with a 2014 census-estimated population of 450,980 (up 3% since 2010).

STRONG FINANCIAL MANAGEMENT PRACTICES

The city has a well-established history of strong financial management and has adhered to prudent debt and operating policies, resulting in a manageable fixed cost burden and healthy liquidity levels. Operating margins are consistently positive, with reserve draw-downs in four of the last five fiscal years used to fund capital and other one-time projects.

FISCAL 2015 RESULTS REFLECT CONSERVATIVE BUDGETING

The city outperformed budgetary expectations in fiscal 2015. The fiscal 2015 final budget originally included the use of $53 million in fund balance, primarily for pay-as-you-go capital spending. Due to positive expenditure variances only $8 million of fund balance was drawn upon at fiscal year-end. The city's unrestricted fund balance declined to $156 million from $163 million in fiscal 2014, and totaled a sound 15.2% of spending.

Property taxes accounted for 53% of general fund revenues in fiscal 2015. The more economically sensitive sales and consumption-related taxes accounted for 23% of revenues.

REVENUES INCREASED FOR FISCAL 2016 BUDGET

The adopted fiscal 2016 budget of $1.87 billion for city and schools is up by $40.7 million or 2.2% compared to the prior year. State and federal revenues declined by $9.3 million or 2 cents on the real estate tax. The majority of the loss in state revenues is for education, which the city plans to make up from other sources.

Real estate tax assessments are up 3%. This gain, combined with a six cent real estate tax increase, is generating $47.2 million in additional revenue. Of the six cent increase, 2.31 cents will go to school operations, 1.89 cents to city operations and 1.80 cents to approved light rail construction. Even with this tax increase, the city's tax rate remains one of the lowest in the region.

Pay-as-you-go capital was increased to $58 million and is funded in part from $31 million in fund balance appropriations. The budget included 239 fewer positions, 210 of which are school related due to a decision to increase class size by one student. Revenues and expenditures are trending in line with budget through November 2015, and management reports it is taking measures to control expenditures to limit the use of appropriated fund balance.

Fitch considers the city's willingness to raise recurring revenues, and the inherent budget flexibility associated with robust pay-go funding, as credit positives. Fitch expects management to maintain unassigned fund balance within its 8% -12% policy range and that the overall unrestricted fund balance will remain sound.

ECONOMY HIGHLIGHTED BY MILITARY AND TOURISM SECTORS

The city is located in the Hampton Roads region of Virginia and participates in a regional economy with a strong emphasis on naval activities. Military installations in Virginia Beach include the Oceana Naval Air Station, the east coast's master jet base, and the Joint Expeditionary Base Little Creek-Fort Story, the primary east coast base supporting overseas contingency operations. In total, the city's military bases had an annual payroll of $1.7 billion for 32,000 military and civilian employees in 2014.

Tourism is also an economic mainstay of the region due to the city's beachfront location and year-round convention center events. In 2014 visitor spending was a record $1.37 billion (up 4.6% from 2013), generating $115 million of city and state tax revenues and supporting 12,568 jobs within the city (as reported by the U.S. Travel Association).

Visitor activity translates into additional revenue for the city, primarily in the form of hotel room and meal tax receipts. These combined revenues were up 5.2% compared to fiscal 2014 and provided for 4.4% of general fund revenue in fiscal 2015; they also support debt service for tourism-related improvements and the city's tourism advertising program. Sales taxes, which represent 5.8% of general fund revenue, have also trended upward since fiscal 2010.

DIVERSIFIED TAX BASE PROJECTING GROWTH

The city's tax base is diversified, with the top 10 taxpayers representing a low 4% of total assessed value (AV) of $56 billion for fiscal 2015. Assessment growth has been positive for the last two years, with real estate assessed values increasing 3.1% and 3.8% in fiscal years 2016 and 2015, respectively. This return to growth reflects the positive housing market trends and new economic development.

ABOVE-AVERAGE SOCIOECONOMIC INDICATORS

The city's 4.1% unemployment rate for October 2015 improved from 4.6% the prior year, although labor and jobs showed declines of 1.3% and 0.8%, respectively, over that period. The city rate is equal to that of the Commonwealth's and is below the national rate of 4.8%.

Median household disposable income is at 99% of Commonwealth levels and 116% of the national average. Per capita money income figures are 102% of Commonwealth and 111% of national levels.

DEBT LEVELS TO INCREASE BUT REMAIN MANAGEABLE

Prudent debt affordability policies and consistent use of pay-as-you-go capital financing have resulted in moderately low debt levels. The overall net debt burden equals $2,333 on a per capita basis and a low 1.9% of fiscal 2015 market value.

The fiscal 2016 - 2021 capital improvement plan (CIP) totals $1.5 billion and is up almost $400 million from the fiscal 2015 adopted CIP. The major additions to the plan include a $310 million light rail extension project. The cost for the light rail project is being split with the Commonwealth.

In addition, the CIP includes $79 million in infrastructure improvements related to a new privately funded 18,000 seat entertainment and sports arena. On Dec. 8, 2015, the city council formally approved agreements with the developer, United States Management (USM), to build the arena--subject to USM obtaining financing for the estimated $200 million project.

USM will assume all financial and operational risk associated with the arena in return for a portion of hotel, sales and other taxes as well as real estate and personal property taxes paid by the arena. Fitch will not include the arena's private financing debt in its tax-supported debt burden calculations, as the structure described above is similar to other public/private tax abatement arrangements.

Utility projects total approximately $375 million while schools account for roughly $223 million of the CIP. Funding sources for the six year plan include current resources (fund balance, state and federal sources and recurring revenue) and approximately $844 million in new GO, lease and utility revenue backed debt. Fitch estimates that $396 million in combined GO and authority debt will be issued over the next six fiscal years, assuming all projects are approved.

Fitch expects debt ratios to increase but remain moderate, as current debt amortizes at a rapid 76% over 10 years and the city has prudent debt policy limitations in place. Full issuance of the expected debt could constrain the city's future debt capacity as the city will reach the top end of certain of these debt policies in certain future years based on Fitch's calculations.

Debt policies with respect to debt per capita were raised in May of 2015 to $3,000 from the previous $2,800. This ratio had been in place for ten years and Fitch believes it is still fairly conservative. Adherence to strong debt and financial policies is a key factor in Fitch's current 'AAA' rating for the city's GO debt. Fitch does not expect debt policy limitations to be increased again to accommodate future issuances.

WELL-MANAGED RETIREE OBLIGATIONS

The city participates in the statewide Virginia Retirement System (VRS) and has historically paid its actuarially required contributions (ARC). The city employees' plan has a net pension liability of $334 million as of a measurement date of June 30, 2014, based on the plan's assumed 7% investment rate of return.

The city's contribution towards its pensions in fiscal 2015 was $49 million, equivalent to 3.7% of total governmental spending.

The city continues to fund the required ARC with respect to its OPEB liability, which Fitch considers a prudent practice. Unfunded OPEB liabilities for the city and school board are modest at $97.0 million (0.2% of AV). The city established a trust account for the city/schools OPEB liabilities and the account balance totaled $52.5 million as of Jan. 1, 2015.

Total carrying costs, calculated by dividing city debt service, pension contributions and OPEB costs by fiscal 2015 total governmental fund spending, equaled a relatively low 11.3% and should remain in the moderate range even with increasing debt service payments.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998085

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998085

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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