Standard & Poor’s Presentation
Virginia GFOA
Nicole Ridberg
Associate
Standard & Poor’s
June 9, 2011
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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.
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2.
Virginia Credits in General
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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
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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%
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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;
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6.
Pensions
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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.
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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
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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
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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
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11.
GASB 54
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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.
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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.
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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
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15.
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