local government credit outlook— virginia and the us -- with an update on gasb 54 virginia gfoa...

LOCAL GOVERNMENT CREDIT OUTLOOK—VIRGINIA AND THE US --with an update on GASB 54

Virginia GFOA June 9, 2011SUSAN KENDALL, VICE PRESIDENT/SENIOR ANALYST

VIRGINIA GFOA JUNE 9, 2011

Today’s Agenda

» Fiscal 2012 National Perspective—Toughest Year Yet– Local Governments Facing Unprecedented Challenges

– Downgrades Outpace Upgrades

– Defaults are low but are expected to increase

– Debt is not the problem

– What are we watching? What could change?

» Virginia Outlook– Virginia is recovering slightly ahead of the nation

– Local governments remain pressured

– Unemployment has dropped and credit quality remains high

– Management is the key

» GASB 54 Fund Balance Restatement– No significant ratings impact expected

2


FY12--Toughest Year Yet


Unprecedented financial stress across municipal sectors• Recession is over, but economic recovery is tepid• State and local governments are lagging in recovery• End of federal stimulus will make 2011 an even more stressful year for state and local governments• Moody’s has had negative outlooks on state and local governments for 2 years• Downgrades have outpaced upgrades for 9 consecutive quarters

-250

-200

-150

-100

-50

0

50

100

150

200

Upgrades Downgrades

Rating Changes by Number

Source: Moody’s


Default Counts by Purpose

Purpose Ratings Outstanding Defaults

Housing 1,041 21

Health Care 650 21

Electric, Water or Sewer Enterprise 1,645 3

Higher Education 843 1

Recreation 93 1

City, Town, County – Non-General Obligation 2,342 4

General Obligation 8,610 3

Total 15,224 54

Very few rated municipal bonds have defaulted

» From 1970 to 2009, 54 Moody’s rated municipal issuers defaulted» 78% were in non-profit hospital or housing project sectors

» Average recovery on defaulted municipal bonds has been 59% of par, compared to 37% for defaulted corporate bonds


Defaults are higher among unrated bonds

Recent US Municipal Defaults2008 2009 2010 2011 YTD

Issuers (#)Rated by Moody's 5 1 2 0Unrated and Rated by Moody's 167 207 82 14

Volume ($millions)Rated by Moody's 3,678$ 24$ 40$ -$ Unrated and Rated by Moody's 8,518$ 1,688$ 3,233$ 605$

Source: Moody's and Income Securities Advisor, Inc.


Rated defaults expected to increase in 2011

Aaa

Aa1

Aa2

Aa3 A1 A2 A3

Baa1

Baa2

Baa3 Ba1

Ba2

Ba3 B1 B2 B3

Caa1

Caa2

Caa3

Ca-C

0%

5%

10%

15%

20%

25%

30%

35%

40%

Municipal vs. Global Corporate Ratings

Public Finance All Global Corporates

• Rated defaults expected to increase in 2011

• Could be 2-3x 2008 levels• Consistent with defaults implied by

our rating distribution• Depends on willingness to make

tough choices


Municipal spreads remain wider, post credit crisis

Source: Moody’s

0

50

100

150

200

250Baa - Aaa Spreads


Local governments face a revenue and spending crisis, not a debt crisis

2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

Total Personal Income Sales Property

Source: Bureau of Census

State and local government quarterly tax revenue performance


Low revenue growth + fragile recovery = challenges

U.S. Nonfarm Employment (000s)

Source: Bureau of Labor Statistics

124,000

126,000

128,000

130,000

132,000

134,000

136,000

138,000

140,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Baseline Economic Growth Assumptions, 2011-2015

2011 2012 2013 2014 2015

Real GDP Growth 3.2% 3.2% 3.3% 3.1% 2.8%

Non-farm Employment Growth 1.3% 1.6% 2.0% 2.6% 1.8%

Unemployment Rate 9.4% 8.3% 7.4% 6.3% 6.0%

Personal Income Growth 5.1% 6.1% 7.7% 5.8% 4.8%

Per Capita Personal Income $42,052 $44,187 $47,154 $49,405 $51,293

Source: Moody's Investors Service


FROM MOODY’S ECONOMY.COM

11F 12F 13F-2

0

2

4

6

8

10Local government State

Local governments will underperform states

Sources: Census Bureau, Moody’s Analytics

Tax revenues, fiscal yr, % change



78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10E

11F

-4

-2

0

2

4

6

8

10

Recession has finally hit property taxes

Source: Census Bureau, Moody’s Analytics


State and local debt growing, but slower than other sectors

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Q3 20

10 -

2

4

6

8

10

12

14

16

18

20

(trillions of dollars)

Households Business State & Local Govt Federal Govt Financial & Foreign


Total US public debt lower than other major economies

Japan* Italy France Germany US Spain Canada* Australia0

20

40

60

80

100

120

140

160

180

200

(% of GDP, 2009)

Central Regional and Local*Data as of 2008


Reduced state and local spending could threaten growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q3 2010-3

-2

-1

0

1

2

3

4

5

(Percentage Point Contribution to Change in GDP)

GDP Federal State and local


What are we watching? What could change?

» Local Governments: Small, weaker issuers will be most stressed, some distressed

– Risks:

» Further state aid cuts

» Some have exposure to enterprise risk with outsized debt levels

» Exposure to financial institutions, liquidity and credit facilities expiring

» Breakdown in political process that results in failure to pay debt, bankruptcy filing

» States: Revenues remain weak, but most will manage through spending cuts, use of reserves and federal stimulus money

– Risks:

» Expiration of federal stimulus funds in June 2011 creates large gaps

» Entitlement spending for pension, OPEBs, Medicaid continues to grow

» Material shift in market confidence


Virginia Outlook


Virginia is Recovering Slightly Ahead of the Nation

» Unemployment rates remain well below national levels

» Recession was mild

» Job growth is average

» Construction employment expected to grow faster than average as demand for housing resumes

» Virginia remains a desirable place to do business– Low cost of doing business

– Favorable regulatory environment

» Downside risks persist:– Failure to investment in transportation improvements

– Job losses in manufacturing accelerate

– Federal spending cuts are deeper than expected


Virginia Local Governments Remain Under Pressure

» Declining Assessed Valuations reduce Property Taxes

» Commonwealth of Virginia FY12 Budget

» State finances are under control but cuts will not be reversed

» Structural balance remains elusive

» What’s the future for state and federal aid?

» Local Revenues Recovering?

» Expenditure Management

» Layoffs, salary freezes and service reductions are still the norm

» Impact of Defense and Other Federal Spending Cuts

» Local economy and revenues could be affected



Public Sector Dragging on National Employment

Source: BLS

Total nonfarm (R)

State and local government (L)

Employment, ths


Virginia Unemployment is Dropping but Still Elevated

21

Source: Commonwealth of Virginia Employment Commission

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burg

Bristo

l

Charlo

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ille

Culpep

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Danvil

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Harris

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Lync

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Mar

tinsv

ille

Richm

ond

Roano

ke

Staun

ton

Virgini

a Bea

ch

Was

hingt

on D

C

Winc

hest

er

VIRGIN

IAUSA

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

March-08

March-09

March-10

April-11


High Credit Quality Reflected in Moody’s Local Government Ratings Distribution

22

US

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa30%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Counties

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa30%

5%

10%

15%

20%

25%

30%

35%

Cities

VIRGINIA


Management is the Key

» Strong management will be critical to maintaining long-term credit strength

– Adherence to management policies

– Prudent use of reserves along with plan to replenish

– Conservative long-range forecasting and monitoring of economically sensitive revenues

– Structural balance

– Maintenance of financial flexibility

– Thoughtful debt management and capital planning

23


GASB 54 Fund Balance Restatement


What does GASB 54 do?– New fund balance classifications affect accounting presentation

» Effective beginning fiscal year 2011 audit cycle

– Clarification of definitions for special revenue funds

A greater number of fund balance categories is intended to promote transparency

GASB 54 Implementation


Previous fund balance categories– Reserved - not available for appropriation, cannot be spent due to constraints

– Unreserved - available for appropriation, may be categorized as designated or undesignated

– Designated - available for appropriation, only internally-imposed limitations

– Undesignated - available for appropriation, no limitations

New fund balance categories– Non-spendable - not in spendable form (ex. prepaid item, long-term receivable)

– Restricted - externally-imposed constraints (ex. unspent bond proceeds, state dedicated funds)

– Committed - internally-imposed constraints (ex. contract commitments)

– Assigned - intended use expressed (ex. budget carryover for specific item)

– Unassigned - no constraints in any way

Reclassifications


An example…

Traditional Fund Balance Reporting Requirements – General Fund

2008 2007 2006

Reserved for encumbrances 9,196 15,309 15,196

Unreserved, designated expenditures 45,373 63,742 71,474

Unreserved, undesignated 9,991 28,912 32,126

Total 64,560 107,963 118,796

Restated GASB 54 Fund Balance Reporting Requirements – General Fund

2008 2007 2006

Committed 10,410 11,449 14,227

Assigned 1,551 18,985 19,246

Unassigned 52,599 77,529 85,323

Total 64,560 107,963 118,796

GASB 54 Restatement


What does it mean for Moody’s analysis?– Principles of credit analysis will remain unchanged

» Still emphasize trends of fund balance as percentage of revenues, operating flexibility, budget practices

– No significant ratings impact expected» Rating possibly affected if material operating issues not previously disclosed are somehow surfaced

» Some expect benefits post-implementation– Improved transparency in composition of fund balances

– More standardization in presentation of fund balances

» But, trend analysis more difficult in the short-term– Not all issuers will be able to complete an historic restatement of fund balances

» Some fund balances may “spike” from FY2010 to FY2011 due to GASB 54 reclassifications

» We will look at annual changes to discern a consistent operating trend

GASB 54 and Moody’s Analysis


Susan KendallVice President/Senior AnalystLead Analyst, Virginia Regional [email protected]

Julie BeglinVice President/Senior AnalystTeam Lead, Eastern Regional [email protected]

29

Dora LeeAssociate AnalystEastern Regional [email protected]

Jennifer RinacaAssociate AnalystEastern Regional [email protected]


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local government credit outlook— virginia and the us -- with an update on gasb 54 virginia gfoa...

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