TABLE OF CONTENTS. A continuous monitoring process that offers a way to quantify a significant amount of information.

Transcription

1 TABLE OF CONTENTS The FITNIS Model A continuous monitoring process that offers a way to quantify a significant amount of information. Table of Contents... i Introduction... iii-xii Summary of Indicators... xiii Operating Position Indicators... 1 Fund Balance... 3 Unreserved Undesignated Fund Balance... 4 Unreserved Fund Balance... 6 Revenue Indicators... 9 Operating Revenue per Capita Real Estate Tax Revenue per Capita Change in Real Property Value Personal Property Tax Revenue per Capita Sales Tax Revenue per Capita Intergovernmental Revenues Expenditure Indicators Operating Expenditures per Capita Total Employees per Capita General Governmental Employees per Capita School Employees per 1,000 Students Debt Indicators Long-Term Debt as a Percent of Assessed Values Long-Term Debt per Capita Debt Service as a Percent of Operating Revenues Capital Plant Indicators Capital Project Expenditures Capital Investment and Operating Revenue Community Needs and Resource Indicators Population Trends School Age Population Personal Income Per Capita Employment Base Business Gross Receipts. 59 Relative Value of Housing Non-Quantifiable Indicators i

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3 INTRODUCTION I. Background Evaluating Financial Condition Can the local government continue to pay for what it is now doing? Are there adequate reserves for financial emergencies? Is there enough financial flexibility to allow the government to adjust to change? A. This report provides a framework for monitoring Prince William County's financial condition. 1. Financial condition can be broadly defined as a local government's ability to finance its services on a continuing basis. 2. Financial condition refers to a government's ability to: a). b). c). Maintain needed service levels, including the maintenance of capital facilities in a manner that protects the initial investment and keeps the facilities in usable condition. Withstand local and regional economic disruptions. Meet the demands of natural growth and change. B. The report s primary purposes are to: 1. Define Prince William County's financial condition, the forces that affect it and the obstacles associated with measuring it. 2. Identify existing and emerging financial problems. 3. Provide a basis for developing remedial actions to deal with these problems. iii

4 C. The model helps the local government officials: This report provides a framework for monitoring the County s financial condition. 1. Gain a better understanding of the government's financial condition. 2. Identify emerging problems before they reach serious proportions. 3. Identify existing problems of which local officials may be unaware. 4. Present a straightforward picture of the government's financial strengths and weaknesses to citizens, elected officials, credit rating agencies, and others. 5. Introduce long-range considerations into the annual budgeting and revenue forecasting processes. 6. Provide a starting point for local officials in setting financial policies. II. The Approach is based on a continuous monitoring system. A. This approach is generally that prescribed in Evaluating Financial Condition: A Handbook for Local Government published by the International City/County Management Association (ICMA). B. The continuous monitoring process utilized herein is a management tool that: 1. Pulls together information from a government's budgetary and financial reports, and 2. Combines it with economic and demographic data. iv

5 The FITNIS Model A continuous monitoring process that offers a way to quantify a significant amount of information. III. C. When plotted over time, can be used to monitor changes in financial condition and alert the government to emerging problems. The FITNIS Model A. The Financial Trending System identifies and organizes the factors that affect financial condition so they can be measured and analyzed. 1. The FITNIS Model offers a way to quantify a significant amount of information. 2. The FITNIS Model combines financial and non-financial data in the same analysis. 3. The FITNIS Model places the events of a single year into longer perspective and permits local officials to follow changes over time. B. The FITNIS Model sometimes cannot explain why a problem is occurring, nor does it provide a single conclusive index to measure financial health. C. All the indicators should be examined simultaneously, along with the political and administrative characteristics of the County. v

6 IV. How FITNIS Works How Does FITNIS Work? The model utilizes 11 factors representing primary influences on financial condition. Primary Tools of FITNIS: Twenty-four underlying indicators are used to quantify the six factors, which are measurable This is the majority of "The FITNIS Report" A. The FITNIS model is based on eleven "FITNIS factors, representing the primary forces that influence financial condition. 1. The eleven FITNIS factors, shown in Figure 1 (Page xi), are classified into three groups: a). b). c). environmental, organizational, and financial. 2. The environmental factors are external influences on the local government. They may create demands, provide resources, or both. 3. Organizational factors: the local government s response (management decisions) to the environmental factors. 4. The environmental and organizational factors can be measured by the financial factors. 5. The result is a series of financial factors that describe the internal financial state of the County government. B. Six of the FITNIS factors are associated with twenty-four "indicators" used to quantify changes in the factors. vi

7 1. These six are named the quantifiable factors, and encompass the majority of this report. 2. These factors address the County s operating position, revenue profile, expenditure profile, debt structure, condition of its capital plant, and community needs and resources. C. The remaining FITNIS factors do not have any quantifiable indicators, and are termed the nonquantifiable indicators. 1. These are a series of discussion points to assist decision-makers to think subjectively about their influences on the nonquantifiable indicators. 2. The nonquantifiable indicators are as follows: a). b). c). d). e). External Economic Conditions Intergovernmental Constraints Natural Disasters and Emergencies Political Culture Financial Management Practices and Policies V. Trend Analysis examines each indicator over a period of time. A. Trend analysis helps to identify unfavorable trends. 1. At the left-hand side of each written analysis is a block entitled Warning Trend. 2. If an indicator is moving in the direction described as the warning trend, it should be considered -- at this time -- potentially unfavorable. vii

8 Warning Trend: This box is at the left-hand side of each written analysis. Overall Trend: Financial Condition is strong in this area. Overall Trend: Neutral Flag for a possible problem. Watch for future trends. Overall Trend: Negative Flag for emerging problem(s) B. The trend analysis technique offers several advantages: 1. It allows the evaluator to determine how fast an indicator is changing and in which direction. 2. It permits one trend to be compared with another. 3. It permits the local trends to be compared with regional and national trends. 4. It provides a database that can be used to assist in making the two-to-five year projections necessary for effective budgeting, capital projections, capital facility planning, and general policy making. 5. In addition, the information will help demonstrate to bond rating agencies that the County is aware of and in control of its finances. C. The source of trend data is detailed below: 1. Unless otherwise indicated, the trend data for Prince William County comes from the County s Comprehensive Annual Financial Report (CAFR) and other financial and accounting records for the respective years shown. 2. The sources of trend data for the comparison jurisdictions included in this report are their respective CAFRs. 3. The comparison group in FY 2001 includes Chesterfield, Fairfax, Henrico, and Loudoun Counties. 4. All of the CAFRs used to prepare this report were awarded the Government viii

9 Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting indicating that the financial statements contained therein conform to generally accepted accounting principles. 5. FY 2003 information is utilized in preparing "Outlook" sections where appropriate, but not in the reportable data itself. 6. For financial reporting purposes, a government is not considered a single, integral entity. Rather, a government is viewed as a collection of smaller, separate accounting entities called funds. a). b). Unless otherwise noted, data used to construct the trends in this report include the financial results of the government s general operating fund, debt service fund, School Board fund, and other legally separate component units where the activity is not accounted for in the same manner as a private enterprise. In addition, the data includes all special revenue funds established to record the collection and disbursement of earmarked monies (other than expendable trusts or capital projects). 7. The modified accrual basis of accounting is used to determine the revenues, expenditures and operating results of the various funds included in the trends data. ix

10 VI. Constant Dollar Adjustment A. To show how much of what appears to be growth is due to inflation, many of the indicators require dollar figures be expressed in terms of constant dollars. 1. For purposes of this analysis, the CPI-U (Consumer Price Index: All Urban Consumers) was chosen to inflate the County's fiscal measures to the base year This adjustment is significant when comparing information from one year to the next. VII. Determining Financial Condition A. Government officials should ask themselves the following questions when reviewing this report: 1. Can the local government continue to pay for what it is now doing? 2. Are there adequate reserves for financial emergencies? 3. Is there enough financial flexibility to allow the government to adjust to change? B. If a government can meet these challenges, it is in sound financial condition. If it cannot, it is probably experiencing or can anticipate experiencing financial or operational problems. C. For FITNIS to be a valuable tool, government officials must be prepared to review, discuss, and take appropriate action. x

11 THE FITNIS MODEL Figure 1 xi

12 xii FITNIS

13 SUMMARY OF INDICATORS Operating Position Indicators Revenue Indicators Capital Plant Indicators Expenditure Indicators Community Needs and Resource Indicators Debt Incicators (None this Year) (None this Year) xiii

14 xiv FITNIS

15 OPERATING POSITION INDICATORS Overall Trend: Prior Year: Operating position refers to a local government s ability to balance its budget on a current basis, maintain reserves for emergencies, and have sufficient liquidity to pay its bills on time. The County has done an excellent job in balancing its budget, accumulating adequate reserves, and maintaining a positive cash flow or liquidity position. The County has successfully balanced its budget (had a surplus) for each year since fiscal year In addition, the County has a balanced 5-year operating plan. Since FY 1990, prior year s revenue surpluses have been used for designated one-time expenditures. Page 1

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17 Fund Balance Description: Fund Balance is the difference between assets and liabilities in the governmental funds. In evaluating the level of fund balance, it is important to understand its components. 1. Reserved Fund Balance includes items reported as assets such as prepaid bills, inventories, and encumbrances (approved purchase contracts). These items are not available for discretionary spending, and therefore are reserved. 2. Unreserved Fund Balance is used as a standardized measure of the amount of resources a jurisdiction has available for spending, including its ability to meet special needs and withstand financial emergencies. a. Designations of fund balance represent amounts the Board of County Supervisors has earmarked for certain spending purposes, such as subsequent year s budget. These funds are not available for other discretionary spending or emergencies. b. (Unreserved) Undesignated Fund Balance is neither earmarked nor reserved for other uses. It is available for discretionary spending. Perhaps most importantly, it is that portion of fund balance that the County, by policy, maintains above 5% of the general fund revenues. Page 3

18 Unreserved Undesignated Fund Balance A Warning Trend Would Be Declining Fund Balance Current Trend: Prior Year: Analysis: The Unreserved Undesignated Fund Balance is used to measure resources available for spending, especially for emergencies. For FY 2001, the County changed the basis for the calculation of the minimum Balance to 5% of the current year general fund revenue rather then an average of the five prior year s revenues. The first chart on page 5 has been recalculated to show both the old and new methodologies. Using the previous methodology, the County had been able to maintain the fund balance near the 5% policy goal, while also adhering to its 10% capital investment policy. Using the new methodology for FY 2001, the balance rose from 4.8% in FY 2000 to 6.3% in FY 2002 continuing to exceed the goal, even using the new methodology. The County has also established appropriate levels of reserves in other, non-general funds. Other fund balances also available for emergency spending include: Self-Insurance Workers Compensation Association Self-Insurance Casualty Pool Internal Service Funds County Capital Reserve Accordingly, these fund balances are included in a second calculation similar to other jurisdictions, e.g., Henrico. When added to the County s current measure of fund balance, the total balance available for emergencies exceeds 10%, as shown on the second chart on the following page. (Outlook is combined with the next indicator.) Page 4

19 Unreserved Undesignated Fund Balance as a Percent of General Fund Revenues 9% 8% 7.5% 8.0% 7% 6% 5.4% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.9% 5.9% 6.3% 5% 4% 4.5% 4.8% 4.9% 4.7% 4.6% 4.6% 4.5% 4.8% 3% 2% FY1993 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 PWC as % of Ave. GF Rev. for previous 5 yrs Policy Minimum 5% PWC as % of Gen Fund Rev. Modified Fund Balance as a Percent of General Fund Revenues 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 UnRes. UnDes. Internal Service Funds Workers Comp County Capital Reserve Casualty Pool Page 5

20 Unreserved Fund Balance Description and Purpose: A Warning Trend Would Be a Declining Unreserved Fund Balance as a Percent of Revenues Current Trend: Prior Year: Nonspecific or general reserves are usually recorded as a Unreserved Fund Balance in the general operating fund. The size of a jurisdiction's Unreserved Fund Balance can affect its ability to meet special needs and withstand financial emergencies. The level of fund balance also might be a function of the risk associated with the flexibility of its revenue base, and revenue sources affected by local and national economic conditions. Analysis: The County s Unreserved Fund Balance, composed of designated and undesignated fund balances, has grown over the past five years, as a percent of general fund revenues: a very positive trend. The County, during FY 2000, changed the basis for the calculation of the minimum Unreserved Fund Balance to 5% of the current year revenue rather then an average of the five prior year s revenues. The chart has been recalculated entirely on that basis. The comparison group, with the exception of Fairfax County, maintains a greater percentage of revenues in fund balance because they designate for such purposes as self-insurance, capital projects, and special service districts. The County maintains these items in separate funds. The chart on the following page includes these other funds in the County s measure of fund balance. Outlook: The County plans to increase to its Unreserved Fund Balance to 7.5% over the next few years from year end revenue surpluses or expenditure savings. Based on current revenue and expenditure forecasts included in the County s Five-Year Budget, this trend is expected to remain positive. Page 6

21 Unreserved Fund Balance as a Percent of Revenues (Designated and Undesignated) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% COMPARISON GROUP PRINCE WILLIAM COUNTY Jurisdiction/Fiscal Year Prince William County Unreserved Fund Balance: Designated 4.5% 4.8% 4.9% 4.7% 4.6% 4.6% 4.5% 4.8% 5.9% 6.5% Undesignated 9.4% 3.7% 4.2% 2.2% 3.5% 4.2% 4.5% 5.4% 9.4% 10.0% Prince William County 13.9% 8.4% 9.1% 6.9% 8.1% 8.7% 9.0% 10.2% 15.3% 16.5% Chesterfield County 14.3% 13.4% 12.7% 12.6% 12.9% 13.6% 15.4% 16.1% 15.5% 13.7% Henrico County 7.4% 15.8% 5.0% 17.5% 12.0% 15.3% 16.0% 18.7% 22.6% 23.9% Fairfax County 6.3% 8.9% 8.3% 5.0% 5.2% 5.1% 5.3% 5.6% 4.9% 4.9% Loudoun County 16.1% 20.1% 20.3% 19.9% 8.0% 15.2% 21.7% 22.5% 23.6% 17.5% Average for Comparison Group 11.0% 14.6% 11.6% 13.8% 9.5% 12.3% 14.6% 15.7% 16.7% 15.0% PWC as % of Comparison Group 126% 58% 79% 50% 85% 71% 62% 65% 92% 110.0% Page 7

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23 REVENUE INDICATORS Overall Trend Prior Year Revenues determine the capacity of a local government to provide services. revenue indicators would show growth at a rate equal to or greater than the combined effects of inflation and expenditure growth. Credit rating agencies carefully analyze the diversity of revenue sources, including dependence on residential, commercial, or other land uses. To determine the trend of revenue, the indicators were examined for the following: Change in the revenue base, Changes in the tax burden, Internal practices or legislative priorities that may adversely affect the tax base s ability to generate adequate revenue, and Over-dependence on intergovernmental revenue sources. This indicator is rated positive for its strong real estate tax base because the County has a very strong, vibrant, growing economy, and is a county with a diverse employment and tax base. When adjusted for inflation and population, real estate taxes on a per capita basis reflect a decade long positive trend despite rapid growth in recent years. The trend is expected to remain positive as long as the General Revenue growth predicted by the FY Revenue Estimate continues to exceed the combined effects of inflation and population growth. Page 9

24 Operating Revenues Per Capita Description and Purpose A Warning Trend Would Be Decreasing Operating Revenues per Capita Current Trend: Prior Year: Operating revenues are all general revenues plus revenues related to special purpose operations 1. Examining per capita revenues shows changes in revenues relative to changes in population size. As population increases, it might be expected that revenues and the need for services would increase proportionately, and therefore the level of per capita revenues would remain at least constant in real terms. Analysis: This indicator is determined by total operating revenues and population, and has increased over the past six years. That is, revenues have grown at a greater rate than population and inflation and have enabled the County to continue to meet its service and capital investment needs. Although the County s revenue per capita remains less than Fairfax and Loudoun, Prince William County has reduced its real estate tax rate and reduced or eliminated many of its personal property tax rates. Outlook: The County experienced a $13 million revenue surplus in FY 2003, and the most recent forecast of FY 2004 reflects a surplus due to economic development activity, new residential construction, increasing real estate values, and a healthy economy. The FY Revenue Estimate projected increases in total general revenue (the major portion of operating revenue) of 7.8% to 11.3% per year. With the implementation of the Tax Rate Reduction Trigger Policy, the Board reduced the real estate property tax rate for FYs 2001 through This policy balances the need for additional services, capital improvements, and tax rate reduction. Although the reductions will impact this indicator, the trend is expected to remain positive. 1 Operating revenues include revenues from all sources in the general, special, and debt service (where applicable) funds, excluding transfers and other financing sources. Beginning in FY 94, operating revenue also includes revenues from component units which previously were recorded as a governmental fund type. Page 10

25 Operating Revenues per Capita Constant Dollars FITNIS $2,800 $2,600 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1, Comparison Group Prince William County Jurisdiction/Fiscal Year Prince William County $2,388 $2,328 $2,342 $2,342 $2,370 $2,417 $2,477 $2,510 $2,528 $2,584 Chesterfield County 1,977 1,979 2,010 2,023 2,084 2,122 2,231 2,260 2,281 2,271 Henrico County 1,949 1,985 2,049 2,071 2,110 2,193 2,323 2,287 2,351 2,362 Fairfax County 2,545 2,548 2,571 2,609 2,677 2,676 2,785 2,785 2,861 2,974 Loudoun County 2,366 2,382 2,324 2,300 2,184 2,391 2,455 2,542 2,683 2,859 Average for Comparison Group 2,209 2,223 2,239 2,251 2,263 2,345 2,449 2,468 2,544 2,617 PWC as % of Comparison Group: 108% 105% 105% 104% 105% 103% 101% 102% 99% 99% Page 11

26 Real Estate Tax Revenue Per Capita Description and Purpose: A Warning Trend Would Be Decreasing Operating Revenues per Capita Current Trend: Prior Year: Real estate taxes are those taxes conditioned on ownership of, or a leasehold interest in, taxable real property and measured by its assessed value. Real estate tax revenue per capita is important to consider individually since it is the largest single source of revenue for the County (61.7% of total general revenue based on the FY Revenue Estimate). Analysis: From FY 1993 to FY 2001, the decline in real estate tax revenue per capita represented stagnant and falling property values on a per capita basis. (On average from FY depreciation of existing units averaged 1.9%, growth from new units averaged 2.8%, and population increased 2.8%.) The County was offsetting this impact with other revenue sources and expenditure savings. However, in FY 2001, the trend was halted. The table on the next page indicates that per capita revenue increased and has returned to approximately the 1999 level. This increase was driven by a larger than average increase in real property values, moderated by a reduction in the real estate tax rate. This indicator should be examined along with the next indicator: Change in Real Property Value. Outlook: Real estate tax revenue is expected to increase between 7.6% and 13.5% in future years based on a much stronger housing market as shown in the FY Revenue Estimate. Actual tax revenues will be moderated by any further BOCS reduction of the real estate property tax rate over that contemplated in the Revenue Estimate. The per capita portion of this calculation will then be affected by population growth, which is expected to be less than the growth in real estate value. Page 12

27 Real Estate Tax Revenue Per Capita Constant Dollars $1,200 $1,000 $800 $600 $400 $200 $ Real Estate Tax Revenue per Capita Fiscal Year Real Estate Tax Revenue 1993 $ $ $ $ $ $ $ $ $ $838 Page 13

28 Change in Real Property Value A Warning Trend Decline in Growth or Decline in Value of Taxable Property Current Trend: Prior Year: Description and Purpose: Changes in real property value are important because many local governments depend on the real property tax for a substantial portion of their revenues. This is especially true in a locality with a stable tax rate because the higher the aggregate property value, the higher the revenues. Increasing property values (constant dollars) are usually a result of short-run demand created by population growth that exceeds supply of available housing or commercial space. Declining property values (constant dollars) in an otherwise growing area are probably a symptom of regional trends over which local officials have no control. Analysis: The change in the assessable base of real property is shown at the top of the next page. The assessable base increased by 13.0% as of January 1, 2002, which was the base for taxing purposes. This is a significant increase and exceeds all but one of the comparison counties. This increase continues the positive growth of the last eight years. Outlook: Although growth rates are expected to slow, the real estate market has remained very active and continues to exceed all expectations. Growth rates in FY are expected to slow to more sustainable levels of 4% to 5.0% as stated in the FY Revenue Estimate. The continuing growth has occurred due to increased economic development efforts and new residential growth that has come with the rapid economic expansion in both the Washington Metropolitan area and the Northern Virginia region. Residential housing of all types is expected to continue to increase in value, but at a more moderate rate as shown in the chart at the bottom of the next page. Page 14

29 Change in Real Property Value Constant Dollars 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Comparison Group Prince William County Comparison Group without Loudoun Change in Residential Real Estate Value Current Dollars Average Annual Residential Real Estate Appreciation, % 15% 17.47% 17.52% CY80/05 Average 10% 5% 0% 7.60% 8.00% 4.00% -5% CY80, FY82 CY82, FY84 CY84, FY86 CY86, FY88 CY88, FY90 CY90, FY92 CY92, FY94 CY94, FY96 CY96, FY98 CY98, FY00 CY00, FY02 CY02, FY04 CY04, FY06 CY06, FY08 CY of Value, FY of Revenue Actual Residential Appreciation, then Forecast: Actual Ave. 4.3%, with Forecast, 4.9% Inflation Rate, Annual Ave. 3.9% Page 15

30 Personal Property Tax Revenue Per Capita A Warning Trend Would Be a Decline in Personal Property Revenue per Capita Current Trend: Prior Year: Description and Purpose: Personal property taxes are assessed on both individual and business personal property. The majority of these tax revenues are derived from vehicle and business equipment. Personal property tax revenue per capita is important to consider individually since it is the second largest source of revenue for the County. Analysis: Personal property tax revenues have been increasing greater than the rate of population and inflation. This steady growth pattern has largely been the result of a combination of the steady increase in average assessed vehicle value and the steady increase in number of vehicles in the County. This indicator decreased in FY 1999 for the one-time change in our automated systems, business practices, and due dates which delayed collection efforts for one year. The Personal Property Tax Relief Act, or PPTRA, became effective in FY 2000 and reduces the amount of personal property tax revenues citizens pay to their local government. The Commonwealth of Virginia reimburses the local governments for this amount which is reflected by the increase in the Intergovernmental Revenues received from the Commonwealth of Virginia. The average bill received by a citizen is expected to be lower by the amount of the increases in the State payment, the uncollectible portion of this revenue is similarly reduced. The personal property tax revenue, including the PPTRA revenue has increased in FY s 2000 through The Personal Property Tax per Capita when combined with the PPTRA revenue continues to reflect a very positive trend.. Outlook: This revenue source is sensitive to changes in consumer spending, the state of the economy (as reflected from the decrease in FY 1994), and the specific business cycle of the automobile industry. Recent growth has been influenced by strong vehicle sales due to incentive offers, a trend toward higher-valued new home construction whose residents tend to own higher valued vehicles, a reduction in the overall interest rate environment, and a perceived reduction in the cost of new vehicle ownership due to the reduction in PPTRA. The FY Revenue Estimate forecasts this revenue source to grow at a future rate between 7.2% and 10.9%. Page 16

31 Personal Property Tax Revenue Per Capita FITNIS Constant Dollars $250 $200 Per Capita $150 $100 $50 $ Years Prince William County Prince William County with PPTRA Fiscal Year Personal Property Tax Revenue Per Capita Personal Property Tax Revenue Per Capita with PPTRA 1993 $ $ $ $ $ $ $ $168 $ $137 $ $119 $251 Page 17

32 Sales Tax Revenue Per Capita A Warning Trend Would Be Decline in Sales Tax Revenue Per Capita Current Trend: Prior Year: Description and Purpose: A local sales tax is collected on the sale or rental of most tangible property in the County, the most notable exception being motor vehicle sales. Sales tax revenue per capita is important to consider since it is the third largest source of revenue for the County. Analysis: The County considers the sales tax revenue trend to be a leading indicator of economic conditions of the area. Sales tax revenue has steadily increased over the past four years at between 4.6% and 9.6%. Sales tax revenue is affected by such factors as inflation, population, and consumer spending. Even over a ten year period, sales tax revenue, when adjusted for inflation, has been steady to increasing in all years since FY On a per capita basis, Prince William receives 78% of the comparison group. Fairfax, Henrico and Loudoun, all, experienced significant decreases during the FY Outlook: Sales tax revenue increased 5.8% for FY 2002, and is expected to continue to increase when adjusted for inflation and population. The effects from the recession, terrorism, and global tensions have not provided the drag most expected. We believe this is due to the strong low- to mid-range retail base in the County, which does not appear to be as affected by cyclical factors as more discretionary spending. Based on the FY Revenue Estimate, this indicator is expected to remain positive. Page 18

33 Sales Tax Revenue Per Capita Constant Dollars FITNIS $160 $140 $120 $100 $80 $60 $40 $20 $ Comparison Group Prince William County Jurisdiction/Fiscal Year Prince William County $95 $103 $107 $104 $104 $104 $107 $108 $107 $107 Chesterfield County Henrico County Fairfax County Loudoun County Average for Comparison Group $98 $121 $124 $123 $124 $127 $136 $141 $145 $137 PWC as % of Comparison Group: 97% 85% 86% 84% 84% 82% 79% 77% 74% 78% Page 19

34 A Warning Trend Would Be Increasing Intergovernmental Revenues as a Percent of Operating Revenues Current Trend: Prior Year: Intergovernmental Revenues Description and Purpose: Intergovernmental Revenues are any revenues received from another governmental entity (primarily Commonwealth and Federal). An over-dependence on intergovernmental revenues introduces another element of risk. The primary concern is to determine whether the local government has the ability to reduce or fund from other sources the program costs which were previously supported by intergovernmental revenues. Analysis: During FYs , the Commonwealth component of Intergovernmental Revenues increased from 83% to 87.3%. Within the Commonwealth component, there was a gradual percentage decrease in revenue to Schools (70% to 63%) and a gradual percentage increase in revenue to the General Fund (10% to 21%). However, 11.7% of the latter increase was due to the accounting effect of moving the PPTRA revenue into the Intergovernmental Revenue category. Removing the effect of the PPTRA reallocation from consideration leaves Schools with a steady 71% to 72% of total Intergovernmental Revenues. Outlook: The non-pptra, non-schools components are low-dollar items and will continue to fluctuate only slightly and affect total Intergovernmental Revenue only slightly. The reallocation of PPTRA revenue into this category will grow through FY 2002 and level-off in FY 2003 pending further decisions based on the Commonwealth economy. The Schools FY 2003 Budget indicates that their revenue from the Commonwealth, after growing by 9% and 10% in FYs 2000 and 2001, respectively, grew by only 4.4% in FY 2002, but is expected to return to a 7% increase in FY 2003, and 8% increase in FY Page 20

35 Intergovernmental Revenues as Percent of Operating Revenues 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% COMPARISON GROUP PRINCE WILLIAM COUNTY Jurisdiction/Fiscal Year Prince William County 33.0% 31.0% 32.1% 32.7% 34.3% 34.2% 36.1% 38.4% 40.1% 40.5% Chesterfield County 36.6% 36.5% 36.9% 36.2% 36.8% 37.0% 40.0% 41.9% 50.0% 53.0% Henrico County 32.8% 33.2% 33.3% 86.1% 33.6% 33.8% 35.7% 38.3% 39.4% 41.0% Fairfax County 16.4% 17.2% 17.3% 18.1% 18.2% 18.0% 19.1% 21.8% 23.8% 25.7% Loudoun County 19.2% 19.5% 19.3% 19.5% 21.7% 20.3% 23.5% 26.1% 27.5% 26.2% Average for Comparison Group 26.2% 26.6% 26.7% 40.0% 27.6% 27.3% 29.6% 32.0% 35.2% 36.5% PWC as % of Comparison Group 126% 117% 120% 82% 125% 125% 122% 120% 114% 111% Page 21

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37 EXPENDITURE INDICATORS Overall Trend: Prior Year: Expenditures are a measure of the local government s service output. To determine whether a government is living within its revenues, the financial decision makers of the County need to consider the following issues: Growth rate of expenditures, Expenditure flexibility, and Effective and Efficient Service Output. The County s expenditure profile has been broken down into four indicators. The expenditure indicators are positive. Population in the County has been increasing at a greater rate than the expenditures of the County, while the County has maintained services desired by the citizens: The 2003 Prince William County Citizen Satisfaction Survey states "89.6% of the survey respondents described themselves as satisfied with County government services, continuing the high level of satisfaction which has been demonstrated in all years of this survey". The County has successfully balanced its budget each year, while also contributing to capital investment and reducing its real estate and other property tax rates. Page 23

38 Operating Expenditures Per Capita A Warning Trend Would Be Increasing Operating Expenditures Per Capita Current Trend: Prior Year: Description and Purpose: Changes in per capita expenditures reflect changes in non-capital expenditures relative to changes in population. Increasing per capita expenditures can indicate that the cost of providing services is exceeding the County's ability to pay, or services are being added. If a warning trend is observed (if increased spending is greater than can be accounted for by inflation or the addition of new services), it may indicate declining productivity -- that is, the government is spending more real dollars for the same level of services. Analysis: As cited in the Prince William County Citizen Satisfaction Survey, the citizenry is satisfied overall with County Services. As it was in FY 2001, the expenditure per capita in Prince William County is notably lower than Fairfax and Loudoun counties. And, as can be seen from the chart and last line of the data table, Prince William is increasing at a slower rate than the comparison group. The largest dollar increases in FY 2002 expenditures were in the areas of: Education ($36.5 million) Public Safety ($2.7 million) Together, these areas accounted for 79.7% of the increase between FY 2001 and FY Outlook: The FY 2004 Fiscal Plan continues the trend of large increases in education and public safety. Within the education area, the largest budget dollar increase is in the Operating Fund as staffing for new schools are added. Within public safety, the largest dollar increases are in Fire and Rescue Operations and Police Operations. Page 24

39 Operating Expenditures per Capita Constant Dollars $2,600 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1, Comparison Group Prince William County Jurisdiction/Fiscal Year Prince William County $2,076 $2,112 $2,071 $2,144 $2,098 $2,180 $2,155 $2,218 $2,202 $2,245 Chesterfield County 1,670 1,724 1,750 1,737 1,839 1,865 1,935 1,982 2,030 2,013 Henrico County 1,740 1,734 1,766 1,828 1,848 1,944 2,010 2,002 2,039 2,135 Fairfax County 2,211 2,305 2,342 2,324 2,347 2,377 2,412 2,509 2,587 2,682 Loudoun County 2,213 2,104 2,076 2,066 1,960 2,023 2,072 2,118 2,215 2,527 Average for Comparison Group 1,958 1,967 1,983 1,989 1,999 2,052 2,107 2,153 2,218 2,339 PWC as % of Comparison Group 106% 107% 104% 108% 105% 106% 102% 103% 99% 96% Page 25

40 Total Employees per Capita Description and Purpose: A Warning Trend Would Be Increasing Number of Employees Per Capita Plotting changes in the number of employees per capita is a good way to measure changes in expenditures because personnel costs are a major portion of a local government's operating budget. An increase in employees per capita might indicate services are being expanded, the government is becoming more labor intensive, or personnel productivity is declining. This computation includes both general government and school employees. Current Trend: Prior Year: Analysis: For the County, the number of employees per capita has stayed relatively constant over the ten year period while providing increased service levels and a high level of citizen satisfaction. Prince William County is below the average of the comparison group for FY 2002, as it has been at least since Outlook: The need for services or service levels typically increases as the population of the County continues to grow. The total number of employees will need to grow to maintain the same level of services. During the next two years, the County expects to maintain the ratio of employees to citizens at its current level. Page 26

41 Total Employees per Capita Full Time Equivalent ( FTE s ) per 1,000 populations Includes school employees COMPARISON GROUP PRINCE WILLIAM COUNTY Jurisdiction/Fiscal Year Prince William County Chesterfield County Henrico County Fairfax County Loudoun County Average for Comparison Group PWC as % of Comparison Group 100% 104% 99% 101% 101% 100% 98% 98% 93% 96% Page 27

42 General Government Employees per Capita Description and Purpose: A Warning Trend Would Be Increasing Number of General Government Employees Per Capita Plotting changes in the number of general government employees per capita is a good way to measure changes in expenditures because personnel costs are a major portion of a local government's operating budget. An increase in general government employees per capita might indicate services are being expanded, the government is becoming more labor intensive, or personnel productivity is declining. Analysis: Current Trend: Prior Year: The number of general government employees on a per capita basis has been decreasing slightly since FY 1999 and held at that level for FY The County is notably below the comparison group (79%), and this would imply the County is more efficient or provides less services. Based on the Citizen s Satisfaction Survey, we believe the County is providing effective services in a more efficient manner than the comparison group. Outlook: The population served is expected to continue to grow at its current level of 2.5% - 3% per year. The County is expecting its ratio of general government employees per capita to remain about the same as it has been over the past few years. Page 28

43 General Government Employees per Capita Full-Time Equivalent Employees per 1,000 Population COMPARISON GROUP PRINCE WILLIAM COUNTY Jurisdiction/Fiscal Year Prince William County Chesterfield County Henrico County Fairfax County Loudoun County Average for Comparison Group PWC as % of Comparison Group 81% 82% 82% 84% 85% 85% 86% 85% 81% 79% Page 29

44 School Employees per 1,000 Students A Warning Trend Could Be Decreasing Number of School System Employees per 1,000 Students Current Trend: Prior Trend: Description and Purpose: In the case of Prince William County, an increase in the number of school employees per 1,000 students is part of an overall strategic mission to provide quality services to its citizens. Plotting changes in the number of employees per 1,000 students is a good way to monitor changes in school expenditures because personnel costs are a major portion of a local school system's operating budget. An increase in employees per 1,000 students might indicate services are being expanded, the school system is becoming more labor intensive, or personnel productivity is declining. Analysis: The school system appears to have been doing more with less. While the number per 1000 students fluctuated between 114 and 120 during the last four years, The PWC Percent of Comparison Group has been gradually decreasing from 106% range to 93% At the same time, a standard measure of high school student knowledge, the Scholastic Aptitude Test (SAT), shows steadily increasing scores throughout the period. In addition, PWC students exceeded the Commonwealth average for the the similar Advanced Placement Tests (ACT). Outlook: Both the number of students and the number of school employees is expected to increase. The County is projecting expansions in the school system to accommodate 17,048 new students over the next 10 years. This will be a 28% increase in student population. On the employee side of the comparison, the FY 2003 Schools Budget points out that the increasing need, and general shortage of qualified applicants, have made it increasingly more difficult to find sufficient applicants. It further states that PWC salaries are significantly lower in the upper end of the pay scale (by $12,000 compared to Loudoun and Fairfax Counties) with similar disparities in other groups. The Schools are working to reduce this disparity, but attracting a growing number of qualified applicants will likely remain a continuing challenge for the future. Page 30

45 School Employees per 1,000 Students PRINCE WILLIAM COUNTY COMPARISON GROUP Jurisdiction/Fiscal Year Prince William County Chesterfield County Henrico County Fairfax County Loudoun County Average for Comparison Group PWC as % of Comparison Group 98% 106% 106% 102% 98% 96% 94% 95% 93% 93% Page 31

46 Page 32 FITNIS

47 DEBT INDICATORS Overall Trend: Prior Year: Debt provides current resources for public use that must be repaid (with interest) in the future. Borrowing thus commits future budgets. Long-term borrowing is appropriately done for long-life capital facilities. Economic growth requires expanded public-capital infrastructure, often before an associated expansion of revenue. The County s debt financing, County and Schools, has been broken down into three indicators that should be examined for the following: Increasing reliance on long-term debt, Decreasing expenditure flexibility (due to increased fixed debt service costs), and Affordability of additional debt. The County received bond rating upgrades to AA+ by Fitch Ratings in May of 2000 and to Aa1 by Moody s Investors Services in July of Furthermore, Fitch placed a positive outlook on the County s rating in June Fitch believes the County's moderate debt levels and manageable future capital needs with a sizable pay-as-you-go component is one of the County s strengths. Moody s believes that the moderate debt burden reflects conservative debt policies [that] will continue to support [a] high quality rating. The County now has the second highest credit rating possible for a local government from both rating agencies. The current credit ratings for the County and the comparison group are: Moody s Fitch PWC Aa1 AA+ Chesterfield Aaa AAA Fairfax Aaa AAA Henrico Aaa AAA Loudoun Aa1 AA+ In the most recent general obligation bond sale, the County's bonds sold close to the interest rate range of AAA rated bonds. Factors contributing to Prince William s credit rating include moderate debt ratios, high income levels, anticipated growth, diversifying economy, and the County s demonstrated sound financial management. The County has successfully managed its debt in accordance with its Principles of Sound Financial Management (PoSFM). Page 33

48 A Warning Trend Would Be Increasing Long-Term Debt as a Percent of Assessed Value Current Trend: Prior Year: Long-Term Debt as a Percent of Assessed Values Description and Purpose: An increase in long-term debt as a percentage of assessed valuation can mean that the government's ability to repay its debt is diminishing especially when the government depends heavily on the property tax to pay its debt. If this occurs, the government may have difficulty obtaining additional capital funds, may have to pay a higher interest rate for them, and may have difficulty repaying the debt. Analysis: Rating agencies consider 3% or less of debt to assessed values to be a low benchmark, and the County is well below that measure. The debt level has remained extremely stable at approximately 2.5% to 2.7% since The County s PoSFM policy requires that the debt level remain below 3.0%. This level of debt issuance for capital investment is well within the County s ability to pay and in accordance with its financial management policies while still supporting the Stragetic Plan goals established by the Board of County Supervisors. Since 1988, the County has continued a strategic position to finance road construction with GO Bonds. Local Transportation Referendums have been approved in 1994, 1998 and These projects have proven to significantly impact the Prince William County economy and the quality of life. Outlook: The County is below its 3% limitation cited in the PoSFM. Although future bond issues are planned, The FY 2004 Fiscal Plan shows that increases in the assessed value and debt maturities are expected to offset new debt issuance and gradually reduce the debt percent to approximately 1.75% in FY The addition of new facilities such as America-On- Line, Eli Lilly, and other new firms will contribute to increases in assessed value over the next several years; however, the most significant growth will be in residential housing. Page 34

49 Long Term Debt as a Percent of Assessed Values (With PoSFM 3 percent debt limit shown) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Comparison Group Prince William County PoSFM Policy Limit Jurisdiction/FY PWC 2% 2.5% 2.7% 2.5% 2.6% 2.6% 2.5% 2.6% 2.7% 2.7% Chesterfield County 3.2% 2.9% 2.7% 2.5% 2.4% 2.6% 2.7% 2.5% 2.6% 2.3% Henrico County 1.8% 1.9% 2.2% 1.9% 2.2% 2.3% 2.6% 2.3% 2.1% 2.1% Fairfax County 1.6% 2.0% 2.1% 2.0% 2.1% 2.1% 2.1% 2.0% 2.0% 2.2% Loudoun County Average of Comparison 1.0% 1.4% 1.5% 2.3% 2.4% 2.5% 2.8% 2.6% 2.4% 2.0% Group w/henrico 1.9% 2.0% 2.1% 2.2% 2.3% 2.4% 2.5% 2.4% 2.3% 2.2% PWC as % of Comparison Group 99% 124% 130% 115% 113% 109% 99% 111% 118% 125% Page 35

50 Long Term Debt Per Capita Description and Purpose: A Warning Trend Would Be Increasing Long-Term Debt Per Capita Current Trend: Prior Year: Long-term debt per capita relates debt increases to changes in population size. As the population increases, capital needs and, hence, long-term debt would be expected to increase. However, if long-term debt per capita is increasing as population stabilizes, increasing debt levels may mean the government's ability to pay is diminishing. Long-term debt should not exceed the local government's ability to pay the debt. If this occurs, the government may have difficulty obtaining additional capital funds, may have to pay a higher interest rate for them, and may have difficulty repaying the debt. Analysis: Both Fitch and Moody s believe the County debt level to be moderate. (The moderate range is defined by a Standard & Poors (S&P) measure of between $1,000 to $2,500.) This is reasonable for a population growing as fast as Prince William. The County has grown at an average annual growth rate of 3.3% since The FY 2002 growth rate was 4.5%, more than double the next highest growth rate in the comparison group except for Loudoun. This high growth has helped mitigate the moderately rising debt. As the chart illustrates, since 1997 the debt per capita has remained in an excellent position vis-à-vis the comparison counties. Henrico is the lowest with unusually low debt levels as also noted in the previous section Outlook: Based on the FY 2004 Fiscal Plan, debt per capita will continue to increase through FY 2005, and then begin a gradual decrease beginning in FY Page 36