Stafford County, Virginia

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2 Stafford County, Virginia Financial Advisor s Report February 17, 2015 Presented by Kevin Rotty, Managing Director Public Financial Management 901 East Byrd Street, Suite 1110 Richmond, VA

3 Stafford s General Obligation Ratings Moody s S&P Fitch Aaa AAA AAA Aa1 Aa2 (positive outlook) AA+ (stable outlook) AA AA+ (stable outlook) AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Moody s rating affirmed as of June 12, S&P rating affirmed as of June 11, Fitch rating affirmed as of June 18,

4 Moody s Investor Service (June 12, 2013) Aa2 Rating Positive Outlook Strengths Sound financial operations with adequate financial flexibility Sizable tax base with above-average wealth levels 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. Challenges Recent sizable assessed value declines Above average debt burden What Could Make the Rating Go Up? Sustained improvement in financial performance Continued tax base growth Decrease debt burden What Could Make the Rating Go Down? Reduction in reserve levels Tax base contraction Substantial increase in fixed costs as a percent of budget 3

5 Standard & Poor s (June 11, 2013) AA+ Rating Stable Outlook Strengths Diverse local economy with good access to the greater Washington metropolitan area Very strong wealth and income levels and historically below-average unemployment Strong financial policies and practices Strong reserves Challenges N/A 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.. Outlook on Stafford s Credit Rating The stable outlook reflects Standard & Poor's opinion of the county's diverse local economy with good access to the greater Washington metropolitan area, as well as to Richmond. The stable outlook also reflects our opinion that Stafford will likely maintain what we consider its strong financial position, including the maintenance of reserves at least equal to levels indicated according to county policy. 4

6 Fitch Ratings (June 18, 2013) AA+ Rating Stable Outlook Strengths Sound fiscal management Strong economic profile Strong reserve levels Challenges N/A Moderate concentration in the government and military sector exposes the county to risks arising from potential defense and other federal spending cuts. These risks are mitigated in part by the recognized essentiality of these facilities. Rating Sensitivities The rating is sensitive to shifts in fundamental credit characteristics, including the county s strong economy. Federal budget cuts under sequestration could result in a softening of the regional economy given the preponderance of direct and indirect federal funded employment. 5

7 Moody s New Local Government GO Methodology New methodology became effective January 15, 2014 Moody s objectives: Update prior methodology to reflect recent trends and key issues, including pensions Develop quantitative scorecards Final rating is still determined by a Rating Committee Purpose and Use of the Scorecard: Enhances the transparency of Moody s rating process Captures the key quantitative considerations with particular rating categories Not an exhaustive list of factors that Moody s considers in every local government rating Scorecards act as a starting point for a more thorough and individualistic analysis May notch up or down from scorecard-indicated rating based on additional factors Weighting Category Weight Economy/Tax Base 30% Finances 30% Management 20% Debt/Pensions 20% 6

8 Stafford Indicated Rating Scorecard from Moody s The final scores for each metric are assigned a numerical value, and averaged according to their individual weighting. The final value produces an indicated rating based on the schedule provided below. The County can receive a score anywhere within the numerical score range in each rating category Very Strong Strong Moderate Weak Poor Very Poor Rating Category Aaa Aa A Baa Ba B & Below Numerical Score Range ( ) ( ) ( ) ( ) ( ) ( ) Category Weight Score Indicated Rating A B A x B = C Economy/ Tax Base 30% Finances 30% Management 20% Debt/ Pensions 20% Indicated Score (Sum of Column C) 100% 1.89 Indicated Rating - Aa2 7

9 Stafford Indicated Rating from Moody s PFM s proprietary model closely replicates Moody s revised rating methodology and creates a metric based scorecard that calculates an indicated score of 1.89, which corresponds to a Aa2 rating for Stafford The indicated score does not account for any qualitative adjustments Overall Indicated Weighted Rating Score Aaa 0.5 to 1.5 Aa1 1.5 to 1.83 Aa to 2.17 Aa to 2.5 A to 2.83 A to 3.17 A to 3.5 Baa to

10 Moody s Non-Scorecard Qualitative Considerations In addition to the scorecard, Moody s has incorporated numerous below-theline adjustments to be considered within each overarching rating category. These additional circumstantial factors that may override the scorecard indication are primarily qualitative factors. Furthermore, Moody s has identified an extensive list of other considerations that can impact the metric-based scorecard rating where applicable. Moody s has clearly stated that the final rating may differ from the scorecard indicated rating based on additional qualitative factors. Positive Overriding Factors Institutional Presence Regional Economic Center Unusually strong willingness to balance budget Unusually strong security features Negative Overriding Factors Economic Concentration Outsized Unemployment or Poverty Levels Unusually weak willingness to balance budget Unusually weak security features Source: Moody s Report, US Local Government General Obligation Debt, January 15,

11 Example of Moody s Scorecard Methodology Economy/Tax Base Score: Stafford Analysis Scorecard Category Weight Economy/Tax Base 30% Finances 30% Management 20% Debt/Pensions 20% Stafford County s score in the Economy/Tax Base Section is 1.53 The tax base size of $15.4 billion receives a rating of Aaa The tax base per capita is $15,383m/138,423 = $111,131 and receives a rating of Aa The median family income as a percentage of the US Median is $106,322/$64,719 = % and receives a rating of Aaa Rating Very Strong Strong Moderate Weak Poor Very Poor Category Aaa Aa A Baa Ba B & Below Numerical Score Range ( ) ( ) ( ) ( ) ( ) ( ) Tax Base Size: Full Value Tax Base Per Capita Median Family Income as % of US Median Economy/Tax Base Aaa Aa A Baa Ba B and Below Weight > $12B > $150,000 > 150% of US median $12B n > $1.4B $150,000 n > $65, % to 90% of US median $1.4B n > $240M $65,000 n > $35,000 90% to 75% of US median $240M n > $120M $35,000 n > $20,000 75% to 50% of US median $120M n > $60M $20,000 n > $10,000 50% to 40% of US median $60M 10% $10,000 10% 40% of US median 10% 10

12 S&P Local Government GO Rating Methodology On September 12, 2013, S&P released its new methodology for rating U.S. Local Governments New methodology objectives: Add transparency and comparability to help market participants better understand S&P s approach to assigning local government ratings Enhance the forward-looking nature of rating Enable better comparison between U.S. local government rating, local government ratings in other countries, and all other ratings PFM s proprietary model closely replicates S&P s rating methodology and creates a metric based scorecard that calculates an indicated score of 1.80, which corresponds to a AA+ rating for Stafford The indicative rating can be adjusted upward or downward by the rating committee based on a series of qualitative factors. Score Table Score Weight Institutional Framework Score: 1 10% Economic Score: 2 30% Management Score: 1 20% Budgetary Flexibility Score: 1 10% Budgetary Performance Score 3 10% Liquidity Score: 1 10% Debt and Contingent Liability: 4 10% Weighted Average Score: 1.80 Indicative Rating: AA+ Weighted Score Mapping Indicative Rating AAA AA AA AA A A A BBB+ 11

13 S&P Scorecard Indicative Rating Comparison Stafford s scorecard results using PFM s proprietary model is compared to the peer group s score results obtained from respective S&P s rating reports. Stafford s scorecard does not reflect qualitative adjustments. Arlington Fairfax Loudoun Prince William Spotsylvania Stafford Rating: AAA AAA AAA AAA AA+ AA+ Institutional Framework Score (10%): Economic Score (30%): Management Score: (20%): Budgetary Flexibility Score (10%): Budgetary Performance Score (10%): Liquidity Score (10%): Debt and Contingent Liability (10%): Weighted Average Score: Most Recently Rated 5/22/ /7/ /12/2014 9/15/2014 8/12/2014 6/11/2013 Data as of: FY 2013 FY 2013 FY 2013 FY 2013 FY 2013 FY 2014 Weighted Score Indicated Rating AAA AA AA AA A A A- Albemarle Chesterfield Goochland Hanover Henrico James City York Rating: AAA AAA AAA AAA AAA AAA AAA Institutional Framework Score (10%): X 1 1 Economic Score (30%): X 1 1 Management Score: (20%): X 1 2 Budgetary Flexibility Score (10%): X 1 1 Budgetary Performance Score (10%): X 3 2 Liquidity Score (10%): X 1 1 Debt and Contingent Liability (10%): X 3 1 Weighted Average Score: X Most Recently Rated 10/25/2013 6/5/2014 2/6/2015 5/20/2014 9/7/2012 7/22/2014 1/27/2014 Data as of: FY 2012 FY 2013 FY 2014 FY 2013 FY 2014 FY 2013 FY 2013 Source: Factors noted above are from the latest associated S&P reports published in 2014 based upon data published by S&P in each report. 12

14 Conclusion Rating Process has become very quantitative Board actions can directly impact the County s ratings Attempt to control the controllable variables Available Funds (trend analysis) Conservative budgeting is important 13

15 Value of High Credit Ratings 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 14