Current Landscape for Credit Ratings prepared for Fairfax County, Virginia Board of Supervisors Retreat Feb. 6, 2012

1. Current Landscape
for
Credit Ratings
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prepared for
Fairfax County, Virginia
Board of Supervisors Retreat
February 6, 2012
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presented by
y
JoAnne Carter, Managing Director
The PFM Group
4350 North Fairfax Drive, Suite 580
Arlington, VA 22203
(703) 741-0175
www.pfm.com

2. Value of Our Triple-A Ratings
• Fairfax County’s Triple-A ratings history
– Aaa Moody’s rating since 1975
– AAA S&P rating since 1978
– AAA rating from Fitch since 1997
• County savings from its triple-A rating is estimated to be
$538.1 million
• As of January 2012, the “Triple-Triple” Group has
Triple Triple
– 8 States
– 39 Counties
– 34 Cities
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3. Fairfax’s General Obligation Credit Profile
Positives Negatives
Economy & Demographics Economy & Demographics
• Local economy one of key anchors of Washington DC
• Recent declines in assessed value
regional economy - "Strong, deep, and affluent"
• Low historical unemployment rate
• One of the highest income levels for all counties in the US
• Assessed value appears to be stabilizing
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Financial Condition Financial Condition
• Modest General Fund reserves balanced by history of • Revenue performance slowed
meeting budget and maintenance of unreserved balances • Slight decline in General Fund balance
• $103.8 million Revenue Stabilization and $68 million • Continued pressure on budget in near term
Managed Reserve accou ts fully funded
a aged ese e accounts u y u ded
• Net surplus in 6 of 7 past fiscal years
Debt Debt
• Reasonable overall debt burden of 1.3% of full valuation • Significant CIP, including sizable transit-related borrowing
• Average 68.9% rate of principal retirement within 10 years
• D bt service affordable at 8 5% of general f d spending
Debt i ff d bl t 8.5% f l fund di
Management Management
• Financial management practices "strong" under S&P's • None
• Financial Management Assessment methodology
• Adherence to Ten Principles of Sound Financial
Management since 1975
• Strong debt management guidelines
• Conservative approach to budgeting and financial
management
Source: Summarized from reports by Moody’s, Standard & Poors and Fitch Ratings.
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4. Moody’s Current Rating Posture
Federal Government Linkage
• Affirmed the U.S. Aaa rating and assigned a negative outlook on August 2, 2011
• Affirmed a negative outlook on the Aaa rating of 39 state and local governments
on December 7, 2011
Linked Triple-As:
Alabama Pennsylvania Montgomery County
Lower Merion School District (Montgomery
City of Huntsville Prince George's County
Co.)
Colorado Texas City of Rockville
City & County of Denver Alamo Community College District Washington Suburban Sanitary District
El Paso County School District Bexar County Virginia
Indiana Dallas County Commonwealth of Virginia
Hamilton County City of San Antonio City of Alexandria
Missouri San Antonio River Authority Arlington County
City of Chesterfield Tarrant County City of Fairfax
St. Louis County Tarrant County Hospital District Fairfax County
New Mexico Maryland Fairfax County Water Authority
State of New Mexico Baltimore County Town of Herndon
Albuquerque M t
Alb Metropolitan A
lit Arroyo Fl d
Flood
City of Bowie Loudoun County
Control Authority
Bernalillo County Harford County Prince William County
Oklahoma Howard County Town of Vienna
Oklahoma County State of Maryland City of Virginia Beach
City of Oklahoma City
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5. Moody’s Federal Linkage Analysis
Sovereign Methodology
• Moody’s linkage analysis placed particular emphasis on the
following factors:
– Federal employment as a % of total employment
– Federal procurement as a % of total employment
– Healthcare employment as a % of total employment
– Exposure to federal transfers as measured by public hospital
expenditures as a % of an issuers’ total revenues
– Capital markets exposure as measured by short-term and
puttable debt as a % of available resources
• Downgrade of the U.S. rating will trigger a ratings
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downgrade of all “linked Triple-As”
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6. Moody’s Current Rating Posture
Local Government Outlook
• Moody’s has maintained a negative outlook on the entire
US local government sector since April, 2009 (most
recently reaffirmed in February 2012)
− The national economy continues to expand slowly while
showing renewed signs of weakness
− P
Property taxes and state aid remain under pressure
t t d t t id i d
− Budgetary tradeoff decisions are getting tougher
− E t
Enterprise and d bt structure risks continue t cause fi
i d debt t t i k ti to financial
i l
strain
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7. Did the Moody’s Negative Outlook Cost Us?
20-Bond GO Index
20-Bond GO
7.00%
Maximum 6.01%
6 01%
Minimum 3.60%
Average 4.52%
As of 1/30/12 3.60%
6.00%
Series 2007A
(1/18/2007)
20-Bond 4.21%
20 Bond – 4 21%
TIC – 4.11%
5.00%
4.00%
te
Series 2008A
Interest Rat
(1/15/08) Series 2009E BABs Series 2011A
20-Bond – 4.21% Series 2009A (10/14/2009) (1/25/2011)
TIC – 3.77% (1/13/2009) 20-Bond – 4.32% 20-Bond – 5.41%
3.00%
20-Bond – 4.54% TIC – 3.02%* TIC – 3.71%
TIC – 3.57% Series 2009C Series 2012A
(10/8/2009) (1/18/2012)
20-Bond – 4.06% 20-Bond – 3.62%
2.00% TIC – 2.40% TIC – 2.43%
Series 2009B
Series 2012B
(1/14/2009)
(1/19/2012)
20-Bond – 4.54%
1.00% 20-Bond – 3.62%
TIC – 1 47%
1.47% Series 2009D TIC – 1.77%
(10/14/2009)
20-Bond – 4.32%
TIC – 1.47%
0.00%
*TIC is net of the BABs Subsidy.
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8. S&P’s Current Rating Posture
• Between 2008 and 2011, upgraded 20 counties to AAA rating based on
– Change in rating criteria, which places more emphasis on management
– Economic, financial, and managerial strength exhibited through the
recession
• Only one of the three rating agencies to downgrade the US sovereign
rating to AA+ (negative outlook)
• Rating criteria allows for a higher rating on a state or local government
rating than the sovereign rating, subject to 1-notch difference
– Ability to maintain stronger credit characteristics than the sovereign
– An institutional framework that is predictable and that is likely to limit the
risk of negative sovereign intervention
– The projected ability to mitigate negative sovereign intervention by a
high degree of financial flexibility and independent treasury management
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9. Fitch’s Current Rating Posture
• Fitch anticipates the number of downgrades to continue to outpace
upgrades
• In 2011, Fitch identified six broad themes that are currently impacting
general obligation credit
1. Primary importance of management
2. Negative assessed valuation trends
3. Declining state funding and the shifting of responsibilities from states to local
governments
4. Declining reserves
5. Reliance on negotiated labor savings
6. Escalating pension responsibilities
• Management’s ability and willingness t respond t expenditure
M t’ bilit d illi to d to dit
demands and declining revenue is key
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10. Summary of Key Credit Trends
How Fairfax Compares
Five-Year Trend (FY06 to
Fi Y T d t Relative t S l t d
R l ti to Selected
Relative to Aaa Median
FY10) Peers
Assessed Value per Increased, however,
Outperforms Outperforms
Capita recent reductions
General Fund Balance as Increased after modest
Underperforms Underperforms
a % of Revenues decline
Unreserved General Fund
Increased after modest
Balance as a % of Underperforms Underperforms
decline
Revenues
Debt as a % of Assessed
Remained flat Comparable Underperforms
Value
Debt Service as a % of
Modest increase Outperforms Outperforms
Expenditures
Peer group includes: Arlington County, VA, Baltimore County, MD, Chesterfield County, VA, Howard County,
MD, King County, WA, Loudoun County, VA, Montgomery County, MD, Palm Beach County, FL, and Prince
William County, VA
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11. Assessed Value per Capita
Assessed Value per Capita
300
$273
250
200 $192
$187
ollars
$175 $176 $177
FY10 Peer Group
Thousands of Do
Median = $175.4k
150 $143
$115 $117
$111
FY10 Aaa Median =
100 $113.7k
50
0
Baltimore Chesterf ield Prince Palm Beach Howard Montgomery King County, Loudoun Fairf ax Arlington
County, MD County, VA William County, FL County, MD County, MD WA County, VA County, VA County, VA
County, VA
Source: Moody’s Financial Ratio Analysis database, all data is as of FY2010.
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12. Unreserved General Fund Balance
as a % of General Fund Revenues
Unreserved General Fund Balance as a % of Revenues
30.0%
25.0%
FY10 Aaa Median =
22.9%
20.0%
15.0%
FY10 Peer Group
Median = 13.6%
10.0% 9.2%
7.8% 7.7%
7.4% 7.1%
6.9%
6.1%
5.4%
4.9% 4.9%
5.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Fiscal Year
Fairf ax County Peer Median Aaa Median
Sources: Moody’s Financial Ratio Analysis database. Peer group and median data as of 6/30/10.
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13. Unreserved General Fund Balance
as a % of General Fund Revenues
Unreserved General Fund Balance as a % of Revenues
25.0%
23.3%
FY10 Aaa Median =
22.9%
20.0% 19.3%
18.8%
16.7%
15.0% 14.4%
12.7%
12 7% FY10 Peer Group
11.3%
Median = 13.6%
10.0% 9.2%
5.0%
1.3% 1.5%
1 5%
0.0%
Howard Montgomery Fairf ax King County, Baltimore Arlington Loudoun Palm Beach Prince Chesterf ield
County, MD County, MD County, VA WA County, MD County, VA County, VA County, FL William County, VA
County, VA
Peer Median Aaa Median
Source: Moody’s Financial Ratio Analysis database, all data is as of FY2010.
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14. Debt Service as a % of Operating Expenditures
Debt Service as a % of Operating Expenditures
12.0%
10.0% Policy = 10.0%
FY10 Aaa Median =
%
9.2%
7.9% FY10 Peer Group
8.0% 7.6% 7.7%
7.4% 7.5% Median = 9.1%
7.3%
6.8%
6.2%
6 2%
6.0%
5.4%
5.2%
4.0%
2.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Fiscal Year
Fairf ax County Peer Median Aaa Median Fairf ax County Policy Limit
Sources: Moody’s Financial Ratio Analysis database. Peer group and median data as of 6/30/10.
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15. Triple A’s Under Pressure
Cautionary Tales
• Since 1/1/2006, 6 County and State triple-As have been
downgraded
– Anne Arundel County, MD
– Clark County, NV
– Dekalb County, GA
– Macomb County, MI
– Marin County, CA
– State of Minnesota
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16. Triple A’s Under Pressure
Lessons Learned
• When problems arise, the rating agencies can reduce
ratings by more than one “notch” at a time
• Rating agencies expect timely budget adjustments to offset
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potential structural budget imbalances
• Structural imbalance in enterprise funds and internal
service funds can become an important GO rating criteria
• A lack of readily available information can contribute to
negative ratings actions
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17. Adapting to the “New Normal”
• Continue to manage carefully the County’s “controllable”
credit factors
– Policy compliance
– Structural balance
– Reserves
– Debt burden
• Proactive financial management of emerging factors
supports credibility, i.e. pension analysis
• Engaging County investors more important today than in
past
• Monitor value of three ratings and the long-term impact of
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Moody’s negative outlook 17