Fund Balances and Reserves Christopher E. Martino Deputy County - - PowerPoint PPT Presentation

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Fund Balances and Reserves Christopher E. Martino Deputy County Executive Office of Executive Management Proposed FY2016 Budget | February 28, 2015 1 What Is Fund Balance? What is a Reserve? Fund balance measures the net financial

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Christopher E. Martino Deputy County Executive Office of Executive Management

Fund Balances and Reserves

Proposed FY2016 Budget | February 28, 2015 1

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 Fund balance measures the net financial

resources available to finance the government

– It is a measure of a government’s financial health; a reflection of the strength and stability of the

  • rganization

– In essence, it is the “bottom line”; an indication of

  • ur ability to pay our debt service on-time and in

full

 Reserves are monies set aside for one-time

expenditures, either planned or unexpected

– Reserves cannot be used for ongoing expenses

Fund Balances and Reserves | February 28, 2015 2

What Is Fund Balance? What is a Reserve?

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 Rating agencies examine fund balances

when considering:

– Overall economic health of the County – Credit quality of the County

 Fund balances:

– Provide working capital – Indicate our ability to meet our obligations – Allow the County to react to economic shocks and unforeseen impacts

3

Why Does Fund Balance Matter?

Fund Balances and Reserves | February 28, 2015

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General Fund Fire & Rescue Levy Fund Other Gov’t Funds Capital Projects Funds Enterprise Funds Internal Services Funds Adult Detention Center Fund Total Non- Spendable

$ 222,224

  • 240,788

5,005,234 35,853,280

  • 41,321,526

Restricted

$ 3,693,170 77,829,563

  • 31,169,683

2,528,527

  • 115,220,943

Committed

$ 67,732,757

  • 18,471,536

102,107,627

  • 40,992,072

3,100,136 232,404,128

Assigned

$ 6,442,293

  • 9,023,198

21,389,464 1,815,020 38,669,975

Unassigned

$ 69,669,000

  • (3,434,179)

17,617,074 5,857,950 89,709,845

Total

$ 147,759,444 77,829,563 18,471,536 102,348,415 41,763,936 118,380,417 10,773,106 517,326,416

CAFR Page #

44 45 45 44 47 149 160 N/A

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What are PWC’s Current Fund Balances?

Fund Balances and Reserves | February 28, 2015

Audited June 30, 2014 Fund Balances

CAFR = Comprehensive Annual Financial Report

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General Fund Balances

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  • Added $28.2 million to the Revenue Stabilization Reserve since FY 2005

(Note: Included as part of Committed/Assigned in CAFR)

  • FY 2015 projected ending Revenue Stabilization Reserve is $35.5 million
  • Equals 3.66% of general fund revenue; PSFM requirement is 1.0%
  • Fund balances and Reserves consistently exceed 15% of revenues

0% 5% 10% 15% 20% 25% FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014

Percent of General Fund Revenues Unassigned Committed/Assigned Revenue Stabilization Nonspendable/Restricted

Fund Balances and Reserves | February 28, 2015

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Why Maintain Fund Balances And Reserves At This Level?

6 Fund Balances and Reserves | February 28, 2015

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Principles of Sound Financial Management

 Principles of Sound Financial Management

(PSFM) updated and unanimously adopted by BOCS in December 2012

– Originally adopted in 1988 – Unassigned Fund Balance will not be less than 7.5% of General Fund revenue in every fiscal year – Revenue Stabilization Reserve will not be less than 1.0%

  • f the year’s General Fund revenue within each Five Year

Plan fiscal planning cycle

Fund Balances and Reserves | February 28, 2015

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Unassigned General Fund Balance is not a rainy day fund or a revenue stabilization fund – it is a catastrophic fund – the last level of resources from which the County would draw

If used for catastrophic emergencies, the County will take measures to prevent its use in the following fiscal year by increasing revenue or decreasing expenditures

– This was a major contributing factor to the County’s rating upgrade since we adhered to the policy even during the worst of the recent recession

Proposed FY2016 Budget | February 28, 2015 8

Unassigned General Fund Balance

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Revenue Stabilization Reserve

 Provides the County with sufficient

working capital and a margin of safety to withstand local and regional economic shocks and unexpected declines in revenue without borrowing

 With no year-end savings to replenish the

Revenue Stabilization Reserve due to zero based budgeting the BOCS should consider raising the minimum to 2%

Fund Balances and Reserves | February 28, 2015

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Healthy Reserves Form the Foundation for Triple AAA Credit Ratings

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 1986 1987 1988 1989 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Unassigned Fund Balance Revenue Stabilization

ʚ

Aa / AA- Aa2 / AA Aa1 / AA+

2010 Moody's Aaa 2011 S&P AAA

2004 Fitch AAA

Fund Balances and Reserves | February 28, 2015

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PWC Took Unassigned Fund Balance to Zero in 1988 Creating Fiscal Instability

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 1986 1987 1988 1989

Unassigned Fund Balance

Real Estate Tax Rate

$1.42 $1.42 $1.30 $1.38

Average Tax Bill

+15.7%

  • 1.6%

Fund Balances and Reserves | February 28, 2015 11

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Building the Fund Balances and Reserves

Fund Balances and Reserves | February 28, 2015

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Do We Have Enough Fund Balances and Reserves?

Rating Agencies have recently noted that the County’s reserve levels should be higher

– “Conversely, if the county were to diminish reserves to low levels to finance ongoing capital needs, we might lower the rating.” ~ Standard & Poor’s (Sept. 2014)

Fairfax County was recently put on “Negative Outlook” due in large part to insufficient reserve levels

– “Should Fairfax County fail to show progress in strengthening its reserves, it’s Aaa bond rating could be jeopardized” ~ Moody’s Investors Service (Feb. 2015)

Fund Balances and Reserves | February 28, 2015

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Standard &Poor’s Top 10 Management Characteristics of Highly Rated Credits

“…while the economy remains a key factor in assigning a rating level, our view

  • f the management and the institutional framework is usually one of the

deciding factors in fine tuning the rating…” ~ Standard & Poor’s

Updated Top 10 list

1. Focus on structural balance. 2. Strong liquidity management. 3. Regular economic and revenue updates to identify shortfalls early. 4. An established rainy day/budget stabilization reserve. 5. Prioritized spending plans and established contingency plans for operating budgets. 6. Strong long-term and contingent liability management. 7. A multi-year financial plan in place that considers the affordability of actions or plans before they are part of the annual budget. 8. A formal debt management policy in place to evaluate future debt profile. 9. A pay-as-you-go financing strategy as part of the operating and capital budget.

  • 10. A well defined and coordinated economic development strategy.

Fund Balances and Reserves | February 28, 2015

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Positives Negatives

Financial Condition Financial Condition

  • Strong financial flexibility
  • Prudent fiscal policies and multi-year planning
  • Ample reserve levels – over 30% with no plans to

significantly spend down

  • Weak budgetary performance, use of reserves to finance

capital projects

  • Diminished reserves to fund ongoing capital needs might

lower ratings

Debt Debt

  • Low to moderate debt burden (as determined by 2 of 3

rating agencies)

  • No contingent liquidity risks
  • Above average debt burden
  • Significant future capital needs

Economy & Demographics Economy & Demographics

  • Sizable, wealthy tax base far exceeding national averages
  • Efforts made to further diversify economy
  • Unemployment below national and state rates
  • Higher employment growth
  • Exposed to changes in defense spending
  • Uncertain impacts of federal budget cuts on local economy

Management Management

  • Strong financial management by conservative and

proactive team

  • Prudent fiscal policies and multi-year planning
  • None noted

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Prince William Key Rating Factors

Sources: Moody’s Investors Services’ report dated September 11, 2014 Standard & Poor’s report dated September 15, 2014 Fitch Ratings’ report dated September 12, 2014

Fund Balances and Reserves | February 28, 2015

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Summary of Key Credit Trends

How Prince William County Compares

Metric Relative to Selected Peers Relative to AAA Median

Full Value per Capita

Underperforms

Selected Peers

Comparable

to AAA Median General Fund Balance as a % of Revenues

Comparable

to Selected Peers

Underperforms

AAA Median Unassigned General Fund Balance as a % of Revenues

Outperforms

Selected Peers

Underperforms

AAA Median Debt Service as a % of Expenditures

Underperforms

Selected Peers

Underperforms

AAA Median Direct Net Debt as a % of Full Value

Comparable

to Selected Peers

Underperforms

AAA Median

Fund Balances and Reserves | February 28, 2015

Source: Public Financial Management (PFM)

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 The selected peer group has a median

rating of Aaa/AAA/AAA

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Peer Group for Prince William County

Peer Group Ratings Population Total Assessed Value ($000) Total General Fund Revenues ($000) Fairfax County, VA Aaa*/AAA/AAA 1,118,602 $201,139,048 $3,508,884 Wake County, NC Aaa/AAA/AAA 965,833 $121,931,754 $959,405 Anne Arundel County, MD Aa1/AAA/AA+ 554,875 $76,847,974 $1,252,144 Arlington County, VA Aaa/AAA/AAA 221,045 $65,784,905 $1,078,755 Loudoun County, VA Aaa/AAA/AAA 338,897 $65,382,323 $1,139,680 Prince William County, VA Aaa/AAA/AAA 430,289 $47,946,579 $916,267 Howard County, MD Aaa/AAA/AAA 297,732 $44,201,087 $912,281 Henrico County, VA Aaa/AAA/AAA 321,867 $35,304,376 $627,179 Chesterfield County, VA Aaa/AAA/AAA 323,000 $35,169,045 $659,433 Hanover County, VA Aaa/AAA/AAA 102,623 $14,196,001 $200,002

Fund Balances and Reserves | February 28, 2015

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18 9.2% 9.4% 14.7% 17.3% 18.5% 19.3% 20.5% 22.1% 31.0% 38.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Anne Arundel County, MD Fairfax County, VA Howard County, MD Prince William County, VA Arlington County, VA Loudoun County, VA Wake County, NC Hanover County, VA Henrico County Chesterfield County, VA Peer Median Aaa County Median 18

General Fund Balance as a % of General Fund Revenues

Source: Moody’s Financial Ratio Analysis Database.

FY13 Peer Group Median = 18.9% FY13 Aaa County Median = 35.4% Fund Balances and Reserves | February 28, 2015 18

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19 0.0% 0.0% 1.0% 2.2% 3.5% 4.5% 7.5% 8.1% 12.6% 18.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Wake County, NC Arlington County, VA Howard County, MD Fairfax County, VA Anne Arundel County, MD Loudoun County, VA Prince William County, VA Chesterfield County, VA Hanover County, VA Henrico County Peer Median Aaa County Median

Unassigned General Fund Balance as a % of General Fund Revenues

Source: Moody’s Financial Ratio Analysis Database; Prince William County Dept. of Finance

FY13 Peer Group Median = 4.0% FY13 Aaa County Median = 19.5% Fund Balances and Reserves | February 28, 2015 19

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 Assuming hypothetical downgrades of the

County’s credit ratings, the cost of future debt issuances would likely increase

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The Value of Triple-A Ratings

Hypothetical Rating Estimated Increase in Average Annual Debt Service Estimated Increase in Total Debt Service (In Today’s Dollars)

BBB $15,141,000 $189,179,000 A $ 7,091,000 $ 93,633,000 AA $ 2,126,000 $ 28,974,000

Note: Cost estimate based on $928.9 million of planned borrowings during the FY2015-2020 CIP. Source: Public Financial Management (PFM)

Fund Balances and Reserves | February 28, 2015

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Addressing Rating Agency Concerns

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Rating Agency Results

 County was rated by Moody’s, Standard &

Poors’ and Fitch in September 2014

 The County’s three Aaa bond ratings were

reaffirmed

 Information provided to the Board of

County Supervisors (BOCS) in September 2014

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Rating Agency Results- Presentation to the BOCS

  • n September 16, 2014

 Rating agencies noted the County has a

structural imbalance in its budget and diminishing reserves

– “The County’s budgetary performance has been weak overall in our view…..…primarily due to the budgeted use of a portion of reserves to finance various capital projects.”

~ Standard & Poors’

– “If the County were to diminish reserves to low levels to finance

  • ngoing capital needs, we might lower the rating”

~ Standard & Poors’

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Rating Agency Results- Presentation to the BOCS

  • n September 16, 2014 (cont’d)

 The BOCS asked the County Executive how

the rating agency concerns would be addressed in terms of building the County’s reserves

– We noted that this would need to be done over time but we would provide information during the budget process – Year-end savings were used in the past to replenish the Revenue Stabilization Reserve and to fund the subsequent years’ budget – Year-end savings have been essentially eliminated through Zero Based Budgeting which identified $29m in savings over the past five years to fund items in the County’s budget

Fund Balances and Reserves | February 28, 2015 24

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Steps We Have Taken To Address Rating Agency Concerns

Eliminated turnback to resolve structural imbalance in budget

– A 2.5% reduction ($13m) to the General Fund agency budgets has been made to reduce year-end expenditure savings

Proposed FY 2016-2020 Proposed Budget reduces the reliance on the Revenue Stabilization Reserve (RSR) and the RSR no longer funds ongoing costs

– The proposed use of the RSR can be tied to one-time items in the budget – the larger amounts originally proposed were funding ongoing uses – Supports our Capital Investment and Cash to Capital Policy

At the end of the Five-Year Plan there is 2% in the RSR vs. the 1% in the Adopted Five-Year Plan

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Revenue Stabilization Reserve – Staff Recommendations

Build up the Revenue Stabilization Reserve:

– Any year-end savings at the end of the external audit must first meet the Unassigned Fund Balance requirements – Any remaining balance should be:

 50% to the Economic Development Opportunity Fund- to

address BOCS economic development goals

 50% to the Revenue Stabilization Reserve

Change the policy to keep RSR at a minimum of 2% vs. 1% as that is more in line with rating agency expectations as well as being more fiscally conservative

If the RSR gets above 2%, funds should only be used for one-time capital items, not for ongoing expenditures or to reduce the tax bill

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Projected Revenue Stabilization Reserve FY 2016-2020 Proposed Five Year Plan

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Beginning Balance $34,933,772 $33,794,927 $30,132,595 $27,146,673 $24,761,971 Contribution To/(Use of) (1,138,845) (3,662,332) (2,985,922) (2,384,702) (573,294) Ending Balance $33,749,927 $30,132,595 $27,146,673 $24,761,971 $24,188,677 % of Revenues 3.39% 2.95% 2.59% 2.31% 2.20% $ Needed to Maintain @ 1% $9,968,801 $10,210,547 $10,471,588 $10,734,621 $11,000,475

Fund Balances and Reserves | February 28, 2015