1300 Courthouse Road, P. O. Box 339, Stafford, VA 22555‐0339 Phone: (540) 658.8600 Fax: (540) 720.4572 www.staffordcountyva.gov

Board of Supervisors Jack R. Cavalier, Chairman Gary F. Snellings, Vice Chairman Meg Bohmke Paul V. Milde, III Laura A. Sellers Cord A. Sterling Robert “Bob” Thomas, Jr.

Anthony J. Romanello, ICMA‐CM

County Administrator

Finance, Audit & Budget Committee Meeting

AGENDA

September 16, 2014 – 1:30 p.m. Conference Room A/B/C

Agenda Item 1. State budget 2. PFM – Credit Assessment 3. Schools’ CIP

State Budget Challenge

September 16, 2014

State Budget: Challenge Ahead

• In August, the Governor announced a $2.4B revenue shortfall for fiscal years 2014, 2015, and 2016.

• The state has already taken measures to narrow the gap using their budget reserves and Revenue Stabilization Fund.

• Remaining shortfall: • FY15: $346M • FY16: $536M

• State agencies have been directed to generate a list of options for possible reductions of 5% for FY15 and 7% for FY16.

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September Budget Amendment • Yesterday Virginia leadership announced that they had

reached an agreement on a budget amendment which is expected to pass later this week.

• It appears that funding for K-12 will be held harmless in the current fiscal year.

• The agreement calls for a $30 million reduction in aid to localities state-wide in FY15 and FY16. • Locality-specific information is not yet available. • However, if the reduction is applied the same way as in the past,

Stafford County would receive about $300k less than originally budgeted.

• We understand there will be flexibility in how the reductions are taken.

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State Budget – What’s Next? • Staff will provide updates to the Board as more information

becomes available. • State agencies have until Friday, September 19th to submit

plans for reducing budgets by 5% in FY15 and 7% in FY16, but it appears that the agreement calls for somewhat smaller reductions.

• In December, the Governor’s budget amendments will include other actions to address the remaining FY16 shortfall of $272 million.

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Budget Flexibility • The Board’s policies provide some safeguards to offset

possible unknown revenue reductions: • Structurally balanced budget • Fully funded contingency and cash capital, which provides

flexibility in current budget. • Fully funded revenue stabilization fund and other reserves.

• Departments continue to prudently manage their budgets. • A vigorous process is in place to ensure that vacant positions

are filled only after it has been confirmed that they add strategic value to the organization in a fiscally responsible manner. • Staff commits to managing vacancies through the year to realize

at least $500k in savings.

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Staffcon – Budget Readiness Levels

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6 The County Administrator has given notice to staff that the vigilance level has been raised to Level 2.

Description Personnel Operating Capital

●Fill vacancies as needed ●Prioritize service levels ●Prioritize needs●Consider new staffing needs to meet demand

●Encourage programs that meet priorities ●Encourage new capital improvements to meet County's needs

●Encourage training for staff ●Approve overtime as needed ●Encourage new initiatives to improve service

to County residents

●Prioritize filling of vacancies ●Postpone spending whenever possible ●Approve only essential capital purchases●Delay hiring when feasible ●Begin to identify lower priorities ●Seek new revenue sources

●Consider eliminating new initiatives unless offsetting savings can be identified

●Fill vacancies only after approval by County Administrator's office

●Single purchases exceeding $10,000 require approval by County Administrator's office

●Suspend capital expenditures except emergency repairs/replacement

●Eliminate paid overtime for non-exempt (except public safety)●Allow training for certification only

●Hiring Freeze - no vacancies filled ●Eliminate programs ●Eliminate all capital purchases

●Eliminate all training●Eliminate all paid overtime●Explore staff reduction options

Further declining revenues, difficult to estimate revenue levels

Revenues at or above budget; normal operations

Some revenue shortfalls have been identified but more are anticipated (ex: state); enough savings are identified that with serious, thoughtful belt-tightening, we will get through it. Options for savings are identified

Level 1

Level 2

Level 5 Revenues, cash flow will not support operations

Level 3

Level 4

Economic instability makes estimating resources difficult. Revenue shortfalls require serious expenditure reductions

Recommendation • The Board’s financial policies call for a quarterly budget

presentation to the Board. • In light of the current situation with the State budget, the

Board should direct staff to provide more frequent updates. • Monthly reports would give quick notice of any adverse

changes to the County’s financial situation and provide adequate time for Board action if needed.

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Stafford County, Virginia

Financial Advisor’s Report

September 16, 2014

Presented by

Kevin Rotty, Managing Director

Public Financial Management 901 East Byrd Street, Suite 1110

Richmond, VA 23219 www.pfm.com

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Stafford’s General Obligation Ratings

Moody’s S&P Fitch

Aaa AAA AAA

Aa1 AA+ (stable outlook)

AA+ (stable outlook)

Aa2 (positive outlook) AA AA

Aa3 AA- AA-

A1 A+ A+

A2 A A

A3 A- A-

Moody’s rating affirmed as of June 12, 2013. S&P rating affirmed as of June 11, 2013. Fitch rating affirmed as of June 18, 2013.

Moody’s Outlook for Local Government Credits

Source: Moody’s report, “2014 Outlook – US Local Governments,” December 4, 2013; Moody’s report; “Lower Liabilities, Higher Costs: Pensions Still Weigh on US Local Governments in 2014,” February 5, 2014; Moody’s report, “US Municipal Governments Can Leverage Federal Medicare to Lower OPEB Costs,” March 6, 2014.

“The ‘new stable’ will be an era of constrained resources, but the worst is over.” • Moody’s outlook for the US local government sector has been revised to stable from

negative

– The housing market has stabilized and is recovering nationwide

– Property tax revenues have proven their durability despite the recession

– State funding arrangements have mostly stabilized

– Local governments have recognized the fiscal landscape with major cost-cutting efforts

– Fund balances have stayed healthy despite restrictive budget measures

• Downgrade activity expected where pockets of pressure remain, i.e.:

– The local housing market has lagged in recovery

– Unemployment is persistently high

– Structural limitations hamper efforts to raise revenue or cut expenses

– Political will to utilize tools is lacking

– Local governments have failed to modify their cost structures

• Defined benefit pension costs will continue to weigh on municipal budgets in 2014 despite declining pension liability measures

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• S&P expects local government credit quality should continue to strengthen in 2014 as housing market gains gradually become reflected in their finances

• As a result of S&P’s view and the implementation of their revised local government GO criteria, rating actions trended heavily positive during the fourth quarter of 2013

• Financial management is more important than ever

– The primary challenge facing local government is how to strategically add back to services, employment, and infrastructure investments without compromising still tenuous financial positions

– Management of pension obligations and other long-term liabilities is likely to continue to differentiate credit quality

• Difficult to ascertain specific effects of sequester and federal budget decisions on the South Atlantic region

S&P’s Outlook for Local Government Credits

Source: S&P’s report, “U.S. State and Local Government Credit Conditions Forecast: 2014 will be a Balancing Act,” December 17, 2013; S&P report, “U.S. Public Finance Rating Changes Were Strongly Positive In The Fourth Quarter, Driven By New Criteria,” February 3, 2014. 4

• Negative outlook on the sector reflecting slowly improving revenue growth and increased spending demand

• Despite an encouraging growth in property taxes, revenue recovery remains restrained by uncertainties in federal and state revenue streams

– In localities with substantial federal government presence, focused on the potential impact of further reductions in federal employment

• After many years of budget cuts for many local governments, the ability to further reduce discretionary spending is limited

• Even with financial market recovery, benefit contributions will continue to pressure budgets

• Willingness to repay debts has been a hallmark of the municipal credit market, but evidence in a limited number of bankruptcy cases of management’s failure to prioritize debt service payments is troubling

Fitch’s Outlook for Local Government Credits

Source: Fitch’s report, “2014 U.S. Public Finance Outlooks,” January 15, 2014. 5

Path to Higher Ratings (Circa 2010)

1. Consistently comply with all financial policies and build a long-term track record of compliance

2. Grow overall reserve levels

3. Increase undesignated general fund balance policy minimum to 12% from current 10%

4. Reduce limitation on debt outstanding as a percentage of taxable assessed value to 3% from 4.5%

5. Reduce limitation on annual debt service as a percentage of the general governmental budget to 10% from current 12%

6. Consistently adopt structurally balanced operating budgets

7. Consistently demonstrate favorable budget to actual operating results

8. Annually adopt a 10 year capital improvement plan

9. Continue to implement budgeting techniques that provide for increased financial flexibility

10. Increase cash funding of capital projects in the CIP; working to increase the portion of cash capital that is funded on a recurring basis from the General Fund

11. Implement multiyear financial forecasting and planning

12. Consistently fully fund annually required contributions for pension and OPEB

13. Develop and implement a plan to eliminate OPEB liabilities

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Board Actions are Recognized by Agencies

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Board Adopts Financial Policies: Principals of

High Performance Financial Management

2005 2010 2015

1st Amendment to Policies - Finance & Budget Comm.

- Discourage use of fund bal. - Excess fund bal. to capital

Adoption of FY10 Budget - Recommits to restoring/ maintaining undesignated fund bal. at 10% or greater

BOS establishes: - Goal to achieve highest AA rating

- Capital Projects Reserve - Revenue Stabilization Reserve

BOS commits to the Economic Development Ten-Point Plan

Adoption of FY11 Budget - Stafford Opp. Fund

- Formula for funding reserve - Budgeted Revs. exceed Exps.

by $466k to build fund bal.

Moody’s Aa3

S&P AA-

Fitch AA-

Moody’s Upgrades

to Aa2

Moody’s Aa2 (Positive Outlook)

S&P Upgrades to AA+

Fitch Upgrades to AA+

2nd Amendment to Policies - Undes. fund bal. increased to 12%

- Reduces borrowing limits. - Capital Proj., Rev. Stabilization,

& Stafford Opp. Fund Reserve 3rd Amendment to Policies

- Realization of 12% unasgd. fund bal. - Established Health Insurance.

reserve - Constrain use of Rev. Stabilization

& Capital Proj. Reserves

4th Amendment to Policies - Increase cash capital

- Health insurance savings for OPEB

- Implement process for Schools Appropriations request

- Calendar to reflects School Board’s new process

6/21/2005

8/19/2008

4/21/2009

9/15/2009

4/20/2010

7/6/2010

3/19/2013

6/5/2012

1/12/2010

S&P Upgrades to AA

Fitch Upgrades to AA

Affirmed Feb 2008

Received May 2010

Received June 2013 Moody’s Aa3

S&P AA-

Fitch AA-

Note: The credit ratings listed in 2005 are carried over from March 2002 for Moody’s, December 2003 from S&P and, April 2002 for Fitch, where the County received the following: Aa3/AA-/AA-.

New Methodologies / Same Fundamentals

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• Within the past year, both Moody’s and S&P have gone to a formula based scorecard approach for preliminary rating assessment for the stated reason of improving transparency

• However, final rating is still determined by a Rating Committee and evaluates both quantitative and qualitative factors

• Key rating drivers continue to be:

– Economy and Market Value Growth

– Structural Balance (Ongoing Expenses paid with Ongoing Revenues)

– Conservative Budgeting

– Reserve Levels

– Debt Levels and Future Capital Plans

– Funding of all obligations including Pensions

What the Agencies are Saying about Stafford

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• “The positive outlook reflects the County’s improved financial position, strong management, and Moody’s expectation that a continued trend of operating surpluses could result in overall growth in reserves and financial flexibility” Moody’s June 2013

• “Going forward, Moody’s will continue to monitor the County’s financial operation. Continued operating surpluses resulting in growth in reserves and financial flexibility could result in upward rating movement” Moody’s June 2013

• “The County’s debt burden will remain elevated as additional borrowing is expected in the medium term, according to the County’s 10 year CIP. The County’s 2.7% direct debt burden is well above state (1.5%) and national (0.5%) averages.” Moody’s June 2013

What the Agencies are Saying about Stafford cont.

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• “County finances are well-managed, adhering to long-standing policy guidelines, and include detailed planning for capital and operating needs.” Fitch June 2013

• Credit strengths include diverse local economy, very strong wealth and income levels with below average unemployment and moderate debt burden. “We believe the County’s elevated debt service carrying charges with average amortization, coupled with some growth pressure, partially offset these strengths, though we believe that officials are actively managing the debt burden.” S&P June 2013

• S&P revised its score on the County’s financial management practices to “strong” from “good” indicated Stafford’s financial management practices are strong, well embedded, and likely sustainable. “The scoring reflects the County’s formal fund balance policy minimum of 12% of annual general fund revenue” S&P June 2013

Summary of Key Credit Trends

How Stafford Compares

Historical Trend Relative to

Selected Peers Relative to Aa1

Median Relative to Aa2

Median (FY08 to FY13)

Assessed Value per Capita Declined since sharp decrease

in FY10, slight increase between FY12 and FY13

Underperforms selected peers

Outperforms to Aa1 Median

Outperforms to Aa1 Median

Total General Fund Balance as a % of General Fund Revenues

Steady increase between FY08 and FY13

Outperforms selected peers

Underperforms Aa1 Median

Underperforms Aa2 Median

Unassigned General Fund Balance as a % of General Fund Revenues

Increased and Stable Comparable Underperforms Aa1 Median

Underperforms Aa2 Median

Direct Net Debt as a % of Assessed Value Slight increase since FY11 Underperforms

selected peers Underperforms

Aa1 Median Underperforms

Aa2 Median

Debt Service as a % of Operating Expenditures

Elevated, slight decrease in FY13

Underperforms selected peers

Underperforms Aa1 Median

Underperforms Aa2 Median

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Higher Ratings?

• New scorecard methodologies favor Stafford

• Stafford’s economic & demographic profile already includes attributes found among the highest rated credits

• To reach even higher ratings, Stafford would need to demonstrate the ability to continue to achieve and sustain high performance:

– Lower debt ratios

– Enhanced reserves

– Consistent financial performance through conservative budgeting

– Growing assessed value

– Continued diversification of tax base & revenue sources

– Continue to fully fund VRS and should urge the Commonwealth to do the same

– Continue developing strategy to fund OPEB obligation

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Value of High Credit Ratings

13 13 Source: Thomson Municipal Market Monitor, as of 9/8/2014.

• Establishes and provides a consistent benchmark of general creditworthiness of the County

• Provides an independent evaluation of the County’s overall credit profile, financial strength and economic vitality

• Economic Development recruiting tool

• Provides an increased access to the capital markets

• Reduces cost of capital which either reduces the County’s overall debt service or allows the County to fund additional projects

Fire & RescueTraining Center 2021 0 0 0 0 466,000 4,798,000 0 0 0 0 5,264,000

Fire & Rescue Station 14 2018 0 425,000 4,597,000 0 0 0 0 0 0 0 5,022,000

Fire & Rescue Station - Centerport 2024 0 0 0 0 0 0 0 784,000 7,147,000 0 7,931,000

Future Parks Projects On-going 0 0 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 32,000,000

Animal Shelter 2018 0 330,000 3,909,600 0 0 0 0 0 0 0 4,239,600

Courthouse Addition 2022 0 0 0 0 2,662,000 10,653,000 13,467,000 0 0 0 26,782,000

Library 2025 0 0 0 0 0 0 0 0 1,000,000 9,210,000 10,210,000

Transportation Transportation Bonds On-going 1,916,000 13,295,306 6,045,034 8,493,660 7,031,695 9,997,305 7,000,000 7,000,000 7,000,000 10,500,000 78,279,000

$1,916,000 $14,050,306 $18,551,634 $12,493,660 $14,159,695 $29,448,305 $24,467,000 $11,784,000 $19,147,000 $23,710,000 $169,727,600

Stafford High School Sept, 2015 17,684,000 4,000,000 0 0 0 0 0 0 0 0 21,684,000

Moncure Elementary Rebuild Sept, 2019 0 800,000 11,019,000 11,018,000 833,000 0 0 0 0 0 23,670,000

Ferry Farm Elementary Rebuild Sept, 2020 0 0 0 800,000 12,407,000 11,667,000 588,000 0 0 0 25,462,000

Elementary #18 with Head Start Sept, 2023 0 0 0 0 0 0 1,000,000 19,478,000 18,294,000 1,000,000 39,772,000

Brooke Point HS Addition Sept, 2016 750,000 5,861,000 0 0 0 0 0 0 0 0 6,611,000

Mt. View HS Addition Sept, 2017 300,000 450,000 7,316,000 0 0 0 0 0 0 0 8,066,000

Colonial Forge HS Addition Sept, 2016 750,000 6,524,000 0 0 0 0 0 0 0 0 7,274,000

Hartwood Elementary Renovation Sept, 2026 0 0 0 0 0 0 0 0 0 4,586,000 4,586,000

Middle School #9 TBD 0 0 0 0 0 0 0 0 0 1,000,000 1,000,000

Fleet Services Sept, 2022 0 0 0 0 0 0 750,000 4,051,000 0 0 4,801,000

Infrastructure On-going 5,379,559 2,299,643 3,723,738 4,310,909 3,777,906 3,941,683 3,262,084 3,531,946 2,926,104 2,719,388 35,872,959

$24,863,559 $19,934,643 $22,058,738 $16,128,909 $17,017,906 $15,608,683 $5,600,084 $27,060,946 $21,220,104 $9,305,388 $178,798,959

$26,779,559 $33,984,949 $40,610,372 $28,622,569 $31,177,601 $45,056,988 $30,067,084 $38,844,946 $40,367,104 $33,015,388 $348,526,559

FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 Total

County $1,916,000 $14,050,306 $18,551,634 $12,493,660 $14,159,695 $29,448,305 $24,467,000 $11,784,000 $19,147,000 $23,710,000 $169,727,600

Schools 24,863,559 19,934,643 22,058,738 16,128,909 17,017,906 15,608,683 5,600,084 27,060,946 21,220,104 $9,305,388 178,798,959

$26,779,559 $33,984,949 $40,610,372 $28,622,569 $31,177,601 $45,056,988 $30,067,084 $38,844,946 $40,367,104 $33,015,388 $348,526,559

29,428,000 33,448,000 40,438,000 35,157,000 40,192,000 41,566,000 32,089,000 36,177,000 37,110,000 23,772,000 349,377,000

2,648,441 2,111,492 1,939,120 8,473,551 17,487,950 13,996,962 16,018,879 13,350,933 10,093,828 850,441

FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024

Existing Bond Debt Service $39,456,494 $40,047,901 $39,543,968 $38,390,892 $37,020,022 $35,273,576 $33,464,685 $32,508,221 $30,551,268 $28,542,962New Bond Debt Service 0 2,241,000 5,086,000 8,485,000 10,881,000 13,490,000 17,260,000 19,777,000 23,029,000 26,408,000

$39,456,494 $42,288,901 $44,629,968 $46,875,892 $47,901,022 $48,763,576 $50,724,685 $52,285,221 $53,580,268 $54,950,962Existing Master Lease 2,026,156 3,829,724 3,829,724 3,408,155 3,044,145 3,044,145 3,044,145 972,000 972,000 972,000New Master lease 0 686,000 1,049,000 1,396,000 1,568,000 1,816,000 2,006,000 1,882,000 2,084,000 2,363,000

$2,026,156 $4,515,724 $4,878,724 $4,804,155 $4,612,145 $4,860,145 $5,050,145 $2,854,000 $3,056,000 $3,335,000

$41,482,650 $46,804,625 $49,508,692 $51,680,046 $52,513,167 $53,623,721 $55,774,830 $55,139,221 $56,636,268 $58,285,962

Cumulative (Deficit)/Surplus

Total All Projects

Total Borrows

Availability Limit

Bond Funded Summary (master lease not included)

School Projects 1

Public Works

Public Safety

Parks, Recreation & Community Facilities

Subtotal School Projects

Subtotal County Projects

Projects FY2015 FY2016 FY2017 Total This Period

FY2023 FY2024FY2018 FY2021FY2019 FY2022FY2020Agency Opening Date

Total Master Lease

Total Debt Service

1 Adjusted school infrastructure (bonds/cash) to reflect recommendation to meet 2% by FY2018

Debt Service

Total Bond Debt

SUMMARY OF BOND FUNDED PROJECTS (Funding for these projects is subject to Board's Principles of High Performance Financial Management Debt Limitations)