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

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

Why Does Fund Balance Matter?  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 Fund Balances and Reserves | February 28, 2015 3

What are PWC’s Current Fund Balances? Audited June 30, 2014 Fund Balances Fire & Adult Rescue Other Capital Internal Detention General Levy Gov’t Projects Enterprise Services Center Fund Fund Funds Funds Funds Funds Fund Total Non- $ 222,224 -- -- 240,788 5,005,234 35,853,280 -- 41,321,526 Spendable 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 $ 6,442,293 -- -- -- 9,023,198 21,389,464 1,815,020 38,669,975 Assigned $ 69,669,000 -- -- -- (3,434,179) 17,617,074 5,857,950 89,709,845 Unassigned 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 44 45 45 44 47 149 160 N/A CAFR Page # CAFR = Comprehensive Annual Financial Report 4 Fund Balances and Reserves | February 28, 2015

General Fund Balances 25% Percent of General Fund Revenues 20% 15% 10% 5% 0% FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Unassigned Committed/Assigned Revenue Stabilization Nonspendable/Restricted • 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 Fund Balances and Reserves | February 28, 2015 5

Why Maintain Fund Balances And Reserves At This Level? Fund Balances and Reserves | February 28, 2015 6

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% of the year’s General Fund revenue within each Five Year Plan fiscal planning cycle Fund Balances and Reserves | February 28, 2015 7

Unassigned General Fund Balance 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

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 9

Healthy Reserves Form the Foundation for Triple AAA Credit Ratings 2010 2011 Moody's S&P 14.0% Aaa AAA 2004 Fitch 12.0% AAA Aa1 / AA+ 10.0% Aa2 / AA Aa / AA- ʚ 8.0% 6.0% 4.0% 2.0% 0.0% 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 Fund Balances and Reserves | February 28, 2015 10

PWC Took Unassigned Fund Balance to Zero in 1988 Creating Fiscal Instability 7.0% Real Estate Tax Rate $1.42 $1.42 $ 1.30 $ 1.38 6.0% Average Tax Bill 5.0% -1.6% +15.7% 4.0% 3.0% 2.0% 1.0% 0.0% 1986 1987 1988 1989 Unassigned Fund Balance Fund Balances and Reserves | February 28, 2015 11

Building the Fund Balances and Reserves Fund Balances and Reserves | February 28, 2015 12

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 13

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 of 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 14

Prince William Key Rating Factors Positives Negatives Financial Condition Financial Condition • • Strong financial flexibility Weak budgetary performance, use of reserves to finance • Prudent fiscal policies and multi-year planning capital projects • • Ample reserve levels – over 30% with no plans to Diminished reserves to fund ongoing capital needs might significantly spend down lower ratings Debt Debt • • Above average debt burden Low to moderate debt burden (as determined by 2 of 3 • Significant future capital needs rating agencies) • No contingent liquidity risks Economy & Demographics Economy & Demographics • • Exposed to changes in defense spending Sizable, wealthy tax base far exceeding national averages • • Uncertain impacts of federal budget cuts on local economy Efforts made to further diversify economy • Unemployment below national and state rates • Higher employment growth Management Management • • None noted Strong financial management by conservative and proactive team • Prudent fiscal policies and multi-year planning 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 15

Summary of Key Credit Trends How Prince William County Compares Metric Relative to Selected Peers Relative to AAA Median Underperforms Comparable Full Value per Capita Selected Peers to AAA Median Comparable Underperforms General Fund Balance as a % of Revenues to Selected Peers AAA Median Outperforms Underperforms Unassigned General Fund Balance as a % of Revenues Selected Peers AAA Median Underperforms Underperforms Debt Service as a % of Expenditures Selected Peers AAA Median Comparable Underperforms Direct Net Debt as a % of Full Value to Selected Peers AAA Median Source: Public Financial Management (PFM) Fund Balances and Reserves | February 28, 2015 16