Standard & Poor’s Presentation Virginia GFOA Nicole Ridberg Associate Standard & Poor’s June 9, 2011 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. S&P’s Overview of U.S. Public Finance In the aftermath of the recent economic recession, U.S. state and local governments face budget, policy and in some cases political crises but we do not believe they face a debt crisis where there will be widespread defaults. Recap of Our View of the Current Environment • Governments have experienced significant fiscal stress since 2008 • Most U.S. state and local governments issue amortizing debt for capital purposes and not to finance their budget • Debt obligations are secured either by a specific pledge of the government’s full taxing authority or dedicated taxes, user revenues or fees. In some cases, constitutional or statutory provisions may strengthen bondholders’ claims. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 2. Virginia Credits in General Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 3. Virginia in General • In our opinion, localities in Virginia have managed well throughout the recession • We believe that Virginia credits generally maintain strong credit characteristics including: – Diverse local economies that have performed well throughout the recession – Conservative budgeting practices that have resulted in solid financial positions – Strong management teams that have adopted comprehensive financial policies and procedures Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 4. Approximately 75% of Standard & Poor’s public GO ratings on Virginia localities are considered high investment grade: A 8% AAA 20% A+ 17% AA+ 14% AA19% AA 22% Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 5. Virginia’s Economy In our view, Virginia’s economy has several fundamental economic strengths, including: – A sizable and stable federal and military employment base, which has kept unemployment well below national levels throughout the recession; – Favorable business climate, including low costs, right-to-work laws and an extensive transportation network; – Highly educated workforce and extensive higher education system; – Growing population and above average income levels; Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 6. Pensions Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 7. Pensions: Overview • In our view, pensions are not presently jeopardizing issuers’ capacity to meet their debt service obligations; • Upward pressure on recommended contributions persists; • Lower discount rates would increase recommended contributions further; • Pension reforms efforts are underway in numerous states. Fiscal relief from these reforms remains to be seen; • Deteriorating funded ratios and a lack of full actuarial contributions introduce potential for negative pressure on credit. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 8. Virginia’s Pension Systems • Commonwealth operates 4 defined benefit pension funds: – Virginia Retirement System (VRS) – State Retirement System (SPORS) – Virginia Law Officer’s Retirement System (VaLORS) – Judicial Retirement System (JRS) • Membership is determined by age and years of service • Each localities’ contribution is determined by the commonwealth per an actuarial study performed every two years by the systems’ board of trustees • VRS is the largest fund, with approximately 331,000 active participants Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 9. Virginia’s Pension Systems • The most recent actuarial study was performed for June 30, 2009 • Funding levels dropped for all 4 funds compared to 2008; however, they remain below-average to average: – VRS: 80.2% funded – SPORS: 73.6% funded – VaLORS: 64.7% funded – JRS: 72.5% funded Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 10. Current Credit Implications Of Pension Funding • Long-term liability that would likely improve if it were managed now; • Governments that are not addressing their liabilities now could face credit pressure; • Instances of negative rating movement and rating outlook actions linked to management of pension liabilities exist; – Rating action linked to pension pressures to date is gradual in nature reflecting what we view as an erosion of credit quality due to poorly managed pension liabilities Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 11. GASB 54 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 12. GASB 54 • New classifications intended to make fund accounting in general, and fund balance reporting in specific, more consistent and transparent • New classifications: – Non-spendable--balances that cannot be spent because they are either illiquid or legally or contractually required to be maintained intact; – Restricted--constraints placed on these resources that were either externally imposed or mandated by law; – Committed--funds that can only be used for certain purposes as per a formal action by that government's highest level of decision-making authority; – Assigned--funds that are constrained by the government's intent of use for a certain purpose, but are neither restricted nor committed; and – Unassigned--the residual classification for the general fund. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 13. GASB 54 • How will this new rule affect Standard & Poor’s view of the creditworthiness of U.S. Public Finance issuers? – We expect to soon be updating the language in our credit analyses, and our opinion of the relative strengths of the respective issuer's reserve levels, to incorporate these new classifications. – Over time, we expect to have sufficient data to also update various statistical summary credit comments to include GASB 54. However, at this time, we do not believe the recharacterization of fund balance labels will, by themselves, materially affect credit. – For more information, please see our Credit FAQ published on February 24, 2011. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 14. Questions? Nicole Ridberg, Associate Phone: 212-438-4701 Email: nicole_ridberg@SandP.com Timothy Barrett, Associate Phone: 212-438-6327 Email: timothy_barrett@SandP.com Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 15. www.standardandpoors.com Copyright © 2011 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. 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