Current LandscapeCurrent Landscape for

Credit RatingsCredit Ratings

prepared forp pFairfax County, Virginia

Board of Supervisors Retreat

February 6, 2012

presented byp yJoAnne Carter, Managing Director

The PFM Group4350 North Fairfax Drive, Suite 580

Arlington, VA 22203Arlington, VA 22203(703) 741-0175www.pfm.com

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 hasAs of January 2012, the Triple Triple Group has

– 8 States

– 39 Counties39 Counties

– 34 Cities

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Fairfax’s General Obligation Credit Profile

Positives Negatives

Economy & Demographics Economy & Demographics• Local economy one of key anchors of Washington DC

regional economy - "Strong, deep, and affluent" • Recent declines in assessed value

• Low historical unemployment rate• One of the highest income levels for all counties in the US• Assessed value appears to be stabilizingpp gFinancial Condition Financial Condition

• Modest General Fund reserves balanced by history of meeting budget and maintenance of unreserved balances

• Revenue performance slowed• Slight decline in General Fund balance

• $103.8 million Revenue Stabilization and $68 million Managed Reserve accounts fully funded

• Continued pressure on budget in near terma aged ese e accou ts 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 i ff d bl t 8 5% f l f d di• Debt service affordable at 8.5% of general fund spending

Management Management• Financial management practices "strong" under S&P's • None• Financial Management Assessment methodology• Adherence to Ten Principles of Sound FinancialAdherence to Ten Principles of Sound Financial

Management since 1975• Strong debt management guidelines• Conservative approach to budgeting and financial

management

3Source: Summarized from reports by Moody’s, Standard & Poors and Fitch Ratings.

Moody’s Current Rating PostureFederal Government Linkage

• Affirmed the U.S. Aaa rating and assigned a negative outlook on August 2, 2011

Federal Government Linkage

• 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

City of Huntsville Lower Merion School District (Montgomery Co.) Prince George's County

Colorado Texas City of RockvilleCity & County of Denver Alamo Community College District Washington Suburban Sanitary DistrictCity & County of Denver Alamo Community College District Washington Suburban Sanitary DistrictEl Paso County School District Bexar County VirginiaIndiana Dallas County Commonwealth of VirginiaHamilton County City of San Antonio City of AlexandriaMissouri San Antonio River Authority Arlington CountyCity of Chesterfield Tarrant County City of Fairfax St. Louis County Tarrant County Hospital District Fairfax CountyNew Mexico Maryland Fairfax County Water AuthorityState of New Mexico Baltimore County Town of HerndonAlb M t lit A Fl dAlbuquerque Metropolitan Arroyo Flood Control Authority City of Bowie Loudoun County

Bernalillo County Harford County Prince William CountyOklahoma Howard County Town of ViennaOklahoma County State of Maryland City of Virginia Beach

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City of Oklahoma City

Moody’s Federal Linkage AnalysisSovereign MethodologySovereign 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– 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 g g gg gdowngrade of all “linked Triple-As”

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Moody’s Current Rating PostureLocal Government OutlookLocal 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 t t d t t id i d− Property taxes and state aid remain under pressure

− Budgetary tradeoff decisions are getting tougher

E t i d d bt t t i k ti t fi i l− Enterprise and debt structure risks continue to cause financial strain

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Did the Moody’s Negative Outlook Cost Us?

7.00%

20-Bond GO Index20-Bond GO

Maximum 6 01%

6.00%

Maximum 6.01%Minimum 3.60%Average 4.52%As of 1/30/12 3.60%

Series 2007A(1/18/2007)20 Bond 4 21%

4.00%

5.00%

te Series 2008A

20-Bond – 4.21%TIC – 4.11%

3.00%Inte

rest

Rat Series 2008A

(1/15/08)20-Bond – 4.21%TIC – 3.77%

Series 2009A(1/13/2009)20-Bond – 4.54%TIC – 3.57% Series 2009C

(10/8/2009)

Series 2009E BABs(10/14/2009)20-Bond – 4.32%TIC – 3.02%*

Series 2011A(1/25/2011)20-Bond – 5.41%TIC – 3.71%

Series 2012A(1/18/2012)

1.00%

2.00%

Series 2009B(1/14/2009)20-Bond – 4.54%TIC – 1 47%

(10/8/2009)20-Bond – 4.06%TIC – 2.40%

Series 2009D

(1/18/2012)20-Bond – 3.62%TIC – 2.43%

Series 2012B (1/19/2012)20-Bond – 3.62%

0.00%

TIC – 1.47% Series 2009D(10/14/2009)20-Bond – 4.32%TIC – 1.47%

TIC – 1.77%

7*TIC is net of the BABs Subsidy.

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 recessionrecession

• 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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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 creditgeneral 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

M t’ bilit d illi t d t dit• Management’s ability and willingness to respond to expenditure demands and declining revenue is key

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Summary of Key Credit Trends

How Fairfax ComparesFi Y T d (FY06 t R l ti t S l t dFive-Year Trend (FY06 to

FY10)Relative to Selected

Peers Relative to Aaa Median

Assessed Value per Capita

Increased, however, recent reductions Outperforms Outperforms

General Fund Balance as a % of Revenues

Increased after modest decline Underperforms Underperforms

Unreserved General Fund Increased after modestBalance as a % of Revenues

Increased after modest decline Underperforms Underperforms

Debt as a % of Assessed Value Remained flat Comparable Underperforms

Debt Service as a % of Expenditures Modest increase Outperforms Outperforms

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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Assessed Value per Capita

300

Assessed Value per Capita

$273

250

$175 $176 $177

$187$192200

olla

rs

FY10 Peer Group

$111$115 $117

$143150

Thou

sand

s of

Do Median = $175.4k

FY10 Aaa Median =

50

100 $113.7k

0Baltimore

County, MDChesterf ield County, VA

Prince William

Palm Beach County, FL

Howard County, MD

Montgomery County, MD

King County, WA

Loudoun County, VA

Fairfax County, VA

Arlington County, VACounty, MD County, VA William

County, VACounty, FL County, MD County, MD WA County, VA County, VA County, VA

11Source: Moody’s Financial Ratio Analysis database, all data is as of FY2010.

Unreserved General Fund Balanceas a % of General Fund Revenues

30.0%

Unreserved General Fund Balance as a % of Revenues

as a % of General Fund Revenues

25.0%

FY10 Aaa Median =

20.0%

22.9%

9.2%10.0%

15.0%FY10 Peer Group Median = 13.6%

4.9% 4.9%5.4%

6.1%

7.4% 7.8% 7.7%6.9% 7.1%

5.0%

0.0%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Fairfax County Peer Median Aaa Median

12Sources: Moody’s Financial Ratio Analysis database. Peer group and median data as of 6/30/10.

Unreserved General Fund Balanceas a % of General Fund Revenues

25.0%

Unreserved General Fund Balance as a % of Revenues

as a % of General Fund Revenues

18.8%19.3%

23.3%

20.0%

FY10 Aaa Median = 22.9%

12 7%

14.4%

16.7%

15.0%

FY10 Peer Group

9.2%

11.3%

12.7%

10.0%

FY10 Peer Group Median = 13.6%

1 5%

5.0%

1.3% 1.5%

0.0%Howard

County, MDMontgomery County, MD

Fairfax County, VA

King County, WA

Baltimore County, MD

Arlington County, VA

Loudoun County, VA

Palm Beach County, FL

Prince William

County, VA

Chesterf ield County, VA

Peer Median Aaa Median

13Source: Moody’s Financial Ratio Analysis database, all data is as of FY2010.

Debt Service as a % of Operating Expenditures

12.0%

Debt Service as a % of Operating Expenditures

10.0% Policy = 10.0%FY10 Aaa Median =

%

7.3% 7.4%

6.8%

6 2%

7.5% 7.6% 7.7% 7.9%8.0%

FY10 Peer Group Median = 9.1%

9.2%

5.4% 5.2%

6.2%

4.0%

6.0%

2.0%

0.0%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Fairfax County Peer Median Aaa Median Fairfax County Policy Limit

14Sources: Moody’s Financial Ratio Analysis database. Peer group and median data as of 6/30/10.

Triple A’s Under PressureCautionary TalesCautionary 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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Triple A’s Under PressureLessons LearnedLessons 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 g g p y g jpotential structural budget imbalances

• Structural imbalance in enterprise funds and internalStructural imbalance in enterprise funds and internal service funds can become an important GO rating criteria

• A lack of readily available information can contribute to• A lack of readily available information can contribute to negative ratings actions

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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 g gMoody’s negative outlook

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