Virginia Sets $168M for Schools Amid Base-Closure Concerns

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WASHINGTON — Virginia is preparing to competitively issue $168.4 million of general obligations bonds for seven universities at a time when the Pentagon’s proposal to close a major military base in the Hampton Roads area is raising concerns about the state’s credit.

One of eight states rated triple-A by all three major rating agencies, Virginia plans the sale for Wednesday just two months after Defense Secretary Robert Gates proposed closing the Joint Forces Command campus, or JFCOM, which is based in Norfolk and employs about 2,200 people.

Gates’ recommendation is part of a broader effort to trim the Defense Department’s budget, including 30% cuts in contract spending over the next three years.

The DOD cuts follow concerns that federal spending is too high and is raising the deficit amid the economic recession.

Until now, Virginia’s dependence on federal military spending partially insulated its economy from the worst of the economic downturn.

Last year, its unemployment rate was 6.7% compared to 9.3% for the entire nation.

Like most other states, Virginia has cut state spending to balance its budget and ended fiscal 2010 on June 30 with $230 million more in its general fund than estimated.

Now, rating agencies are beginning to analyze the challenges posed to Virginia’s economy by the military spending cuts. While Gates’ proposals are still preliminary, Moody’s Investors Service estimated that a JFCOM closure would affect 5,000 jobs.

The Defense Department is the No. 1 public-sector employer in Virginia. In fiscal 2009, the state overtook California as the largest recipient of DOD contracts by dollar volume with $57.9 billion, according to the Richmond-based Virginia National Defense Industrial Authority.

Federal military spending equaled $7,223 per resident, more than double the next-largest state in terms of per capita spending.

The JFCOM was formed in 1999 to centralize the U.S. military’s experimentation and education.

Gov. Robert McDonnell has organized a bipartisan coalition of state officials to fight its closure. He estimates that Virginia could lose up to 10,000 jobs if the JFCOM campus is closed.

The campus closure would be “a significant loss not only because of the jobs lost directly tied to the Joint Forces but because you have a ripple effect around the economy,” said Christine Chmura, president and chief economist at Richmond-based Chmura Economics & Analytics.

Businesses such as modeling and simulation companies based near the JFCOM campus would be affected, and “those jobs are really high-paying jobs,” she said. Additionally, 80% of the hotel business in the area comes from JFCOM business, Chmura said.

But Nicholas Samuels, Moody’s lead analyst on Virginia, said the impact may be smaller than expected. JFCOM’s shutdown would have “more of a local impact in the near term” on Norfolk, Suffolk, and the Hampton Roads region, he said. In addition, military jobs could be reassigned within the state, potentially mitigating any adverse impact.

“The longer-term concern is the stated goal of reducing defense expenditures overall by 10%,” he said. “We know already that contracting is being cut back. It is something that we are watching.”

Eveyln Whitley, Virginia’s director of debt management, said she has not yet had conversations with rating agencies about JFCOM, but expects to be questioned about it in the future.

In 2005, the Base Realignment and Closure Commission prompted questions from credit analysts. But Virginia did not have a major base closed because of BRAC.

The possible JFCOM closure and any potential effect on the state’s credit has not become a concern for investors, according to several Virginia-based broker-dealers, who asked to speak anonymously because their firms may be placing bids on the GO bonds.

The bonds will mature between one and 30 years, and underwriters have the option of offering bids for tax-exempt or taxable Build America Bonds.

Public Resources Advisory Group is the financial adviser and Troutman Sanders LLP is bond counsel.

Unlike the Virginia College Building Authority bonds issued last week, which were backed by appropriations from Virginia’s general fund, the universities will be responsible for backing the bonds.

Virginia last issued GO bonds in 2009. It sold $23.7 million of BABs to Morgan Keegan & Co. at a true interest cost of 2.98%.

Other triple-A rated states have priced bonds recently and have been “embraced by the marketplace,” said Roy Carlberg, managing director and head of the municipal syndicate at Jefferies & Co.

Given the supply of competitive and negotiated deals next week, “I would expect to see [Virginia’s deal] priced very aggressively,” he said.

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