Prince William County, Virginia; Appropriations; General Obligation

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1 Summary: Prince William County, Virginia; Appropriations; General Obligation Primary Credit Analyst: Danielle L Leonardis, New York (1) ; danielle.leonardis@standardandpoors.com Secondary Contact: Timothy W Barrett, Washington D.C. (1) ; timothy.barrett@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research MARCH 17,

2 Summary: Prince William County, Virginia; Appropriations; General Obligation Credit Profile US$ mil spl oblig sch fin and rfdg bnds ser 2016 due 08/01/2036 Long Term Rating AAA/Stable New Prince William Cnty GO Long Term Rating AAA/Stable Affirmed Rationale Standard & Poor's Ratings Services assigned its 'AAA' rating to Virginia Public School Authority, Va.'s series 2016 special obligation school financing and refunding bonds issued for Prince William County. At the same time, we affirmed our 'AAA' rating on the county's outstanding general obligation (GO) bonds and our 'AA+' rating on its outstanding appropriation backed debt. The outlook is stable. The series 2016 bonds are limited obligations of the authority and secured solely by principal and interest payments on the local school bonds issued by the county and held by the authority. The local school bonds are a general obligation of the county. The authority assigned all of its rights to receive payments on the local school bonds to the state treasurer, who will act as paying agent on the 2016 bonds. The county's unlimited property taxes secure the bonds. The certificates of participation (COPs) are payable solely from lease payments made by the county. The lease payments made pursuant to the lease agreement will be sufficient to pay scheduled debt service on the COPs. The county's ability to make its lease payments is subject to annual appropriation, and the county pledges its best effort to seek the appropriation's inclusion in the annual budget. We understand the county will use bond proceeds to finance various school-related capital improvements projects as well as refund a portion of the existing Prince William County special obligation school financing bonds. The rating reflects our assessment of the following factors for the county: Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA); Very strong management, with "strong" financial policies and practices under our Financial Management Assessment methodology; Adequate budgetary performance, with operating results that we expect could improve in the near term relative to fiscal 2015, which closed with an operating surplus in the general fund but an operating deficit at the total governmental fund level in fiscal 2015; Very strong budgetary flexibility, with an available fund balance in fiscal 2015 of 33% of operating expenditures; Very strong liquidity, with total government available cash at 46.0% of total governmental fund expenditures and 4.9x governmental debt service, and access to external liquidity we consider strong; Strong debt and contingent liability position, with debt service carrying charges at 9.4% of expenditures and net MARCH 17,

3 direct debt that is 108.3% of total governmental fund revenue, as well as low overall net debt at less than 3% of market value and rapid amortization, with 71.3% of debt scheduled to be retired in 10 years; and Very strong institutional framework score. Very strong economy We consider the county's economy very strong. Prince William County, with an estimated population of 440,234, is in the Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va. MSA, which we consider to be broad and diverse. The county has a projected per capita effective buying income of 144% of the national level and per capita market value of $132,299. Overall, the county's market value grew by 6.6% over the past year to $58.7 billion in The county unemployment rate was 4.8% in Located 25 miles southwest of D.C., Prince William County's economy continues to benefit, and grow, from its access to, and participation in, the Washington metropolitan area, which includes Northern Virginia, and factors in the county's more affordable cost of living. Population has increased 43% between the 2000 and 2010 U.S. Census and an additional 9% since the 2010 census to a current 440,234. Population is projected to increase to roughly 470,000 by 2020; reaching 520,000 by Despite its location, bookended by two significant military installations, the economy remains diverse. Marine Corps Base Quantico is in the county and Fort Belvoir is just outside the county's limits. The installations have gained about 30,000 relocated personnel due to the U.S. military's Base Realignment and Closure in The realignment has also attracted several defense contractors to the county. Despite sequestration, the effects have been nominal as economic development continues. The county also continues to diversify its employment base, and recent economic development has focused on such growing businesses as data centers, high-tech, and bio-tech industries, federal agencies and contractors, and advanced logistics and manufacturing facilities. Since 2010, $2.86 billion of capital investments with 57 new projects have come into the county, which have created 1,147 new jobs in just the federal agencies and contractors, data centers, and life-science sectors alone. In 2015, the county experienced a total of $685.5 million in intended capital investments with 13 projects creating 619 new jobs. In addition, overall commercial vacancy rates continue to decline and remain lower than the northern Virginia vacancy rate. On the residential side, economic growth continues as well with several mixed use facilities under construction, coupled with rising home values. Given the county's proximity and well educated work force, unemployment has remained below the commonwealth and national averages at 4.8% in The county's tax base continues to grow, increasing to $58.7 billion in 2016, and projecting additional growth for the next several years. Very strong management We view the county's management as very strong, with "strong" financial policies and practices under our Financial Management Assessment methodology, indicating financial practices are strong, well embedded, and likely sustainable. In 1988, the county adopted the Principles of Sound Financial Management (PSFM), which guide its financial management practices and policies. The PSFM have since been updated six times, most recently in Highlights of the PSFM include quarterly reporting of budget-to-actual results to the board of supervisors and use of a five-year budget plan, adopted by the board of county supervisors annually and integrated with the capital improvement plan. The use of a five-year budget is also mandated by a board adopted policy, and the plan must be balanced all five years without the use of unassigned general fund balance; a six-year capital improvement plan, updated annually, along with MARCH 17,

4 the budget plan and including all funding sources; a formal debt management policy, limiting debt service for tax-supported debt to 10% of annual revenues and total bonded debt to 3% of net assessed value; a formal investment policy that mandates quarterly reporting to the governing body; and a formal fund balance policy that mandates maintenance of unassigned general fund balance at 7.5% of general fund revenues and a revenue stabilization fund at 2% of general fund revenues (increased from 1% in March of 2016). Adequate budgetary performance Prince William County's budgetary performance is adequate in our opinion. The county had surplus operating results in the general fund of 2.7% of expenditures, but a deficit result across all governmental funds of negative 12.4% in fiscal Our assessment accounts for the fact that we expect budgetary results could improve from 2015 results in the near term. We consider the county's budgetary performance adequate, net of adjustments, following a surplus due to higher-than-budgeted property and other local taxes and despite the budgeted use of a portion of reserves to finance various capital projects. The county has an excellent history of conservative budgeting and forecasting practices. In turn, these conservative and well-adhered to fiscal policies have allowed for several years of surpluses, which has allowed the county to continue its pay-go financings. General revenues forecasted for fiscal 2015 came with a 99.2% degree of accuracy. At this time, given the county's historical budget-to-actual performance and known intent to continue to use modest levels of reserves to fund ongoing capital needs, it is likely general fund performance may fluctuate based on growth in revenues and the level of budgeted capital spending. Prince William County is estimating fiscal 2016 (at the end of the second quarter) to close with a roughly $5.5 million surplus. However, despite the use of a modest level of reserves, we expect total available reserves to remain in line with fiscal The fiscal 2016 adopted general fund operating budget totals $1.03 billion; a 3.7% increase over the fiscal 2015 budget. It includes funding for programs and services back to prerecessionary levels and also includes salary increases for county and school employees. The fiscal 2016 adopted general fund budget is balanced and does not include the use of reserves; as it has eliminated the long-standing practice of using year-end expenditure savings as a resource to fund the subsequent year's budget. It now includes a 2.5% savings built into each general fund agency (to account for turnbacks) and also included into the five-year forecast. The proposed fiscal 2017 general fund budget totals $1.106 billion--a 7.8% increase over the fiscal 2016 budget and includes an average residential tax bill increase of 3.9%, and the one-time capital funding of roughly $28 million--using $24.3 million of fiscal 2015 surplus. The budget is set to be adopted in April. Furthermore, the budget also includes the increase in the revenue stabilization fund to 2% of general fund revenues from 1% as a result of the most recent update to the PSFM. Very strong budgetary flexibility Prince William County's budgetary flexibility is very strong, in our view, with an available fund balance in fiscal 2015 of 33% of operating expenditures, or $326.6 million. We expect the available fund balance to remain above 30% of expenditures for the current and next fiscal years, which we view as a positive credit factor. The available fund balance includes $161.6 million (16.6% of expenditures) in the general fund and $165.0 million (17% of expenditures) that is outside the general fund but legally available for operations. Total available reserves include not only the assigned and unassigned portions of the general fund balance but also the MARCH 17,

5 committed portion, which contains the Revenue Stabilization Reserve, but also reserves outside the general fund. In total, audited fiscal 2015 reserves were $326.6 million or 33.5% of expenditures. Although the county will likely continue to budget the use of a portion of reserves to fund ongoing capital projects, it does not expect reserves to significantly decline, and, we believe, reserves will remain above 30% of expenditures in the near term. More than midway through fiscal 2016, management is projecting an operating surplus of roughly $5.5 million (revenues over expenditures). Property taxes remain the county's leading revenue source accounting for 68% of total general fund revenues. Very strong liquidity In our opinion, Prince William County's liquidity is very strong, with total government available cash at 46.0% of total governmental fund expenditures and 4.9x governmental debt service in In our view, the county has strong access to external liquidity if necessary. We believe the county has strong access to external liquidity as it has issued GO and appropriation-backed bonds frequently over the past 20 years. Management has confirmed it has no contingent liquidity risks from financial instruments with payment provisions that change upon the occurrence of certain events. In addition, the county does not hold any investments we deem aggressive. Strong debt and contingent liability profile In our view, Prince William County's debt and contingent liability profile is strong. Total governmental fund debt service is 9.4% of total governmental fund expenditures, and net direct debt is 108.3% of total governmental fund revenue. Overall net debt is low at 1.9% of market value, and approximately 71.3% of the direct debt is scheduled to be repaid within 10 years, which are in our view positive credit factors. Current net direct debt, at 108.3% of total governmental fund revenue is slated to moderately rise following two years of planned GO bond issuances as part of the county's capital plan; totaling $219.4 million (fiscal years 2017 and 2018). Following the planned issuances over the next two years, net debt is estimated at 128% of total governmental fund revenues. Over the past nine fiscal years, the county has internally financed roughly $235.0 million of capital projects, as well. Prince William County's combined required pension and actual other postemployment benefits (OPEB) contributions totaled 3.5% of total governmental fund expenditures in Of that amount, 2.6% represented required contributions to pension obligations, and 0.9% represented OPEB payments. The county made its full annual required pension contribution in Prince William County contributes to the Virginia Retirement System for its county and school employees. The county has historically budgeted 100% of the annual required contribution for all post retirement plans, which the commonwealth determines annually. As of June 30, 2014, the plan was 79.5% funded. It also maintains a supplemental pension plan for public safety employees that was 89.86% funded as of July 1, The county implemented GASB Statement No. 68 for the June 30, 2015, year. The county also offers OPEB to its employees, and established a trust fund in 2009 to fund this liability. As of July 1, 2014, the county's last actuarial report, the county's OPEB liability was 47.2% funded. This represents an increase from the July 1, 2012, report, which was funded at 29.2%, and takes into account the Line of Duty Act benefit now funded by the county per state mandate. MARCH 17,

6 Prince William County GO bonds are eligible to be rated above the sovereign because we believe the county can maintain better credit characteristics than the U.S. in a stress scenario. Under our criteria "Ratings Above the Sovereign: Corporate and Government Ratings--Methodology and Assumptions," U.S. local governments are considered to have moderate sensitivity to country risk. The county general obligation pledge is the primary source of security on the debt; this severely limits the possibility of negative sovereign intervention in the payment of the debt or in the operations of the county. The institutional framework in the U.S. is predictable for local governments, allowing them significant autonomy, independent treasury management and no history of government intervention. The county has considerable financial flexibility, as demonstrated by the very high fund general balance as a percentage of expenditures, as well as very strong liquidity. Very strong institutional framework The institutional framework score for Virginia counties is very strong. Outlook The stable outlook reflects the stability and diversity in the very strong economy, which remains an integral part of the Northern Virginia-Washington, D.C. metropolitan area. The outlook further reflects the county's very strong budget flexibility and liquidity position and consistent financial operations, which are guided by historically very strong management. As such, we do not expect the rating to change over our two-year outlook horizon. Conversely, if the county were to diminish reserves to low levels to finance ongoing capital needs, we might lower the rating. Related Criteria And Research Related Criteria USPF Criteria: Local Government GO Ratings Methodology And Assumptions, Sept. 12, 2013 USPF Criteria: Financial Management Assessment, June 27, 2006 USPF Criteria: Debt Statement Analysis, Aug. 22, 2006 USPF Criteria: Appropriation-Backed Obligations, June 13, 2007 USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015 Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009 Ratings Above The Sovereign: Corporate And Government Ratings Methodology And Assumptions, Nov. 19, 2013 Related Research 214. S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013 Institutional Framework Overview: Virginia Local Governments Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local Government GO Criteria, Sept. 2, 2015 Ratings Detail (As Of March 17, 2016) Prince William Cnty COPs Long Term Rating AA+/Stable Affirmed Virginia Pub Sch Auth, Virginia Prince William Cnty, Virginia MARCH 17,

7 Ratings Detail (As Of March 17, 2016) (cont.) Virginia Pub Sch Auth (Prince William Cnty) GO Long Term Rating AAA/Stable Affirmed Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. MARCH 17,

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