Current Landscape for Credit Ratings

Current Landscape for Credit Ratings p p prepared for Fairfax County, VirginiaBoard of Supervisors Retreat February 6, 2012 p presented by y JoAnne Carter, Managing Director The PFM Group 4350 North Fairfax Drive, Suite 580 Arlington, VA 22203 (703) 741-0175 www.pfm.com

Value of Our Triple-A Ratings • Fairfax County’s Triple-A ratings history – Aaa Moody’s rating since 1975 – AAA S&P rating since 1978 – AAA rating from Fitch since 1997 • County savings from its triple-A rating is estimated to be $538.1 million • As of January 2012, the “Triple-Triple” Group has Triple Triple – 8 States – 39 Counties – 34 Cities 2

Fairfax’s General Obligation Credit Profile Positives Negatives Economy & Demographics Economy & Demographics • Local economy one of key anchors of Washington DC • Recent declines in assessed value regional economy - "Strong, deep, and affluent" • Low historical unemployment rate • One of the highest income levels for all counties in the US • Assessed value appears to be stabilizing pp g Financial Condition Financial Condition • Modest General Fund reserves balanced by history of • Revenue performance slowed meeting budget and maintenance of unreserved balances • Slight decline in General Fund balance • $103.8 million Revenue Stabilization and $68 million • Continued pressure on budget in near term Managed Reserve accou ts fully funded a aged ese e accounts u y u ded • Net surplus in 6 of 7 past fiscal years Debt Debt • Reasonable overall debt burden of 1.3% of full valuation • Significant CIP, including sizable transit-related borrowing • Average 68.9% rate of principal retirement within 10 years • D bt service affordable at 8 5% of general f d spending Debt i ff d bl t 8.5% f l fund di Management Management • Financial management practices "strong" under S&Ps • None • Financial Management Assessment methodology • Adherence to Ten Principles of Sound Financial Management since 1975 • Strong debt management guidelines • Conservative approach to budgeting and financial managementSource: Summarized from reports by Moody’s, Standard & Poors and Fitch Ratings. 3

Moody’s Current Rating PostureFederal Government Linkage • Affirmed the U.S. Aaa rating and assigned a negative outlook on August 2, 2011 • Affirmed a negative outlook on the Aaa rating of 39 state and local governments on December 7, 2011 Linked Triple-As: Alabama Pennsylvania Montgomery County Lower Merion School District (Montgomery City of Huntsville Prince Georges County Co.) Colorado Texas City of Rockville City & County of Denver Alamo Community College District Washington Suburban Sanitary District El Paso County School District Bexar County Virginia Indiana Dallas County Commonwealth of Virginia Hamilton County City of San Antonio City of Alexandria Missouri San Antonio River Authority Arlington County City of Chesterfield Tarrant County City of Fairfax St. Louis County Tarrant County Hospital District Fairfax County New Mexico Maryland Fairfax County Water Authority State of New Mexico Baltimore County Town of Herndon Albuquerque M t Alb Metropolitan A lit Arroyo Fl d Flood City of Bowie Loudoun County Control Authority Bernalillo County Harford County Prince William County Oklahoma Howard County Town of Vienna Oklahoma County State of Maryland City of Virginia Beach City of Oklahoma City 4

Moody’s Federal Linkage AnalysisSovereign Methodology • Moody’s linkage analysis placed particular emphasis on the following factors: – Federal employment as a % of total employment – Federal procurement as a % of total employment – Healthcare employment as a % of total employment – Exposure to federal transfers as measured by public hospital expenditures as a % of an issuers’ total revenues – Capital markets exposure as measured by short-term and puttable debt as a % of available resources • Downgrade of the U.S. rating will trigger a ratings g g gg g downgrade of all “linked Triple-As” 5

Moody’s Current Rating PostureLocal Government Outlook • Moody’s has maintained a negative outlook on the entire US local government sector since April, 2009 (most recently reaffirmed in February 2012) − The national economy continues to expand slowly while showing renewed signs of weakness − P Property taxes and state aid remain under pressure t t d t t id i d − Budgetary tradeoff decisions are getting tougher − E t Enterprise and d bt structure risks continue t cause fi i d debt t t i k ti to financial i l strain 6

Did the Moody’s Negative Outlook Cost Us? 20-Bond GO Index 20-Bond GO 7.00% Maximum 6.01% 6 01% Minimum 3.60% Average 4.52% As of 1/30/12 3.60% 6.00% Series 2007A (1/18/2007) 20-Bond 4.21% 20 Bond – 4 21% TIC – 4.11% 5.00% 4.00% te Series 2008A Interest Rat (1/15/08) Series 2009E BABs Series 2011A 20-Bond – 4.21% Series 2009A (10/14/2009) (1/25/2011) TIC – 3.77% (1/13/2009) 20-Bond – 4.32% 20-Bond – 5.41% 3.00% 20-Bond – 4.54% TIC – 3.02%* TIC – 3.71% TIC – 3.57% Series 2009C Series 2012A (10/8/2009) (1/18/2012) 20-Bond – 4.06% 20-Bond – 3.62% 2.00% TIC – 2.40% TIC – 2.43% Series 2009B Series 2012B (1/14/2009) (1/19/2012) 20-Bond – 4.54% 1.00% 20-Bond – 3.62% TIC – 1 47% 1.47% Series 2009D TIC – 1.77% (10/14/2009) 20-Bond – 4.32% TIC – 1.47% 0.00%*TIC is net of the BABs Subsidy. 7

S&P’s Current Rating Posture • Between 2008 and 2011, upgraded 20 counties to AAA rating based on – Change in rating criteria, which places more emphasis on management – Economic, financial, and managerial strength exhibited through the recession • Only one of the three rating agencies to downgrade the US sovereign rating to AA+ (negative outlook) • Rating criteria allows for a higher rating on a state or local government rating than the sovereign rating, subject to 1-notch difference – Ability to maintain stronger credit characteristics than the sovereign – An institutional framework that is predictable and that is likely to limit the risk of negative sovereign intervention – The projected ability to mitigate negative sovereign intervention by a high degree of financial flexibility and independent treasury management 8

Fitch’s Current Rating Posture • Fitch anticipates the number of downgrades to continue to outpace upgrades • In 2011, Fitch identified six broad themes that are currently impacting general obligation credit 1. Primary importance of management 2. Negative assessed valuation trends 3. Declining state funding and the shifting of responsibilities from states to local governments 4. Declining reserves 5. Reliance on negotiated labor savings 6. Escalating pension responsibilities • Management’s ability and willingness t respond t expenditure M t’ bilit d illi to d to dit demands and declining revenue is key 9

Summary of Key Credit Trends How Fairfax Compares Five-Year Trend (FY06 to Fi Y T d t Relative t S l t d R l ti to Selected Relative to Aaa Median FY10) Peers Assessed Value per Increased, however, Outperforms Outperforms Capita recent reductions General Fund Balance as Increased after modest Underperforms Underperforms a % of Revenues declineUnreserved General Fund Increased after modest Balance as a % of Underperforms Underperforms decline Revenues Debt as a % of Assessed Remained flat Comparable Underperforms Value Debt Service as a % of Modest increase Outperforms Outperforms Expenditures Peer group includes: Arlington County, VA, Baltimore County, MD, Chesterfield County, VA, Howard County, MD, King County, WA, Loudoun County, VA, Montgomery County, MD, Palm Beach County, FL, and Prince William County, VA 10

Assessed Value per Capita Assessed Value per Capita 300 $273 250 200 $192 $187 ollars $175 $176 $177 FY10 Peer Group Thousands of Do Median = $175.4k 150 $143 $115 $117 $111 FY10 Aaa Median = 100 $113.7k 50 0 Baltimore Chesterf ield Prince Palm Beach Howard Montgomery King County, Loudoun Fairf ax Arlington County, MD County, VA William County, FL County, MD County, MD WA County, VA County, VA County, VA County, VASource: Moody’s Financial Ratio Analysis database, all data is as of FY2010. 11

Unreserved General Fund Balanceas a % of General Fund Revenues Unreserved General Fund Balance as a % of Revenues 30.0% 25.0% FY10 Aaa Median = 22.9% 20.0% 15.0% FY10 Peer Group Median = 13.6% 10.0% 9.2% 7.8% 7.7% 7.4% 7.1% 6.9% 6.1% 5.4% 4.9% 4.9% 5.0% 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year Fairf ax County Peer Median Aaa MedianSources: Moody’s Financial Ratio Analysis database. Peer group and median data as of 6/30/10. 12

Unreserved General Fund Balanceas a % of General Fund Revenues Unreserved General Fund Balance as a % of Revenues 25.0% 23.3% FY10 Aaa Median = 22.9% 20.0% 19.3% 18.8% 16.7% 15.0% 14.4% 12.7% 12 7% FY10 Peer Group 11.3% Median = 13.6% 10.0% 9.2% 5.0% 1.3% 1.5% 1 5% 0.0% Howard Montgomery Fairf ax King County, Baltimore Arlington Loudoun Palm Beach Prince Chesterf ield County, MD County, MD County, VA WA County, MD County, VA County, VA County, FL William County, VA County, VA Peer Median Aaa MedianSource: Moody’s Financial Ratio Analysis database, all data is as of FY2010. 13

Debt Service as a % of Operating Expenditures Debt Service as a % of Operating Expenditures 12.0% 10.0% Policy = 10.0% FY10 Aaa Median = % 9.2% 7.9% FY10 Peer Group 8.0% 7.6% 7.7% 7.4% 7.5% Median = 9.1% 7.3% 6.8% 6.2% 6 2% 6.0% 5.4% 5.2% 4.0% 2.0% 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year Fairf ax County Peer Median Aaa Median Fairf ax County Policy LimitSources: Moody’s Financial Ratio Analysis database. Peer group and median data as of 6/30/10. 14

Triple A’s Under PressureCautionary Tales • Since 1/1/2006, 6 County and State triple-As have been downgraded – Anne Arundel County, MD – Clark County, NV – Dekalb County, GA – Macomb County, MI – Marin County, CA – State of Minnesota 15

Triple A’s Under PressureLessons Learned • When problems arise, the rating agencies can reduce ratings by more than one “notch” at a time • Rating agencies expect timely budget adjustments to offset g g p y g j potential structural budget imbalances • Structural imbalance in enterprise funds and internal service funds can become an important GO rating criteria • A lack of readily available information can contribute to negative ratings actions 16

Adapting to the “New Normal” • Continue to manage carefully the County’s “controllable” credit factors – Policy compliance – Structural balance – Reserves – Debt burden • Proactive financial management of emerging factors supports credibility, i.e. pension analysis • Engaging County investors more important today than in past • Monitor value of three ratings and the long-term impact of g g Moody’s negative outlook 17

Current Landscape for Credit Ratings

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