The Rating Agencies' Perspective - 2012 Board Retreat
The Fairfax County Board of Supervisors held a retreat on Monday and Tuesday, Feb. 6-7. The two-day meeting, at the Workhouse Arts Center in Lorton, was an opportunity for the Board to consider its priorities and set a course of action for a sustainable future.
It was announced that no votes would be taken during the retreat, and some issues may be discussed again at future venues.
Day 1 - Session 3 of 4: Fairfax County: The Rating Agencies' Perspective
This session addressed what rating agencies look at when they are evaluating Fairfax County. The discussion was led by Joanne Carter, Managing Director of the PFM Group, which provides independent financial advice to local, state and regional governments.
- Outlined where things stand at the moment with all three rating agencies.
Fairfax County’s Triple-A ratings history.
- Aaa Moody’s rating since 1975.
- AAA S&P since 1978.
- AAA rating from Fitch Ratings since 1997.
- County savings from its triple-A rating is estimated to be $538.1 million since 1975.
- Being a “triple-triple” is a very exclusive group (8 states, 39 counties, 34 cities).
General Obligation Credit Profile.
Four major areas agencies consider when rating a jurisdiction.
- Economy and Demographics.
- Financial Condition.
- Fairfax County is rated positively in each of the four areas.
Negatives are things agencies are keeping their eye on and
where they may not be out of the woods yet on a particular
- Example - there is a continued need for the CIP, which is negative because it is ongoing, but the overall debt service is affordable, which is positive.
- Four major areas agencies consider when rating a jurisdiction.
Moody’s Current Rating Posture.
- Affirmed the U.S. Aaa rating and assigned a negative outlook on Aug. 2, 2011.
- Affirmed a negative outlook on the Aaa rating of 39 state and local governments, including Fairfax County, all Triple A jurisdictions in Northern Virginia, and the state of Virginia, on Dec. 7, 2011.
Moody’s linkage analysis placed particular emphasis on the
following factors (the first two impact the County the most):
- Federal employment as a % total employment.
- Federal procurement as a % of total employment.
- Health care employment as a % of total employment.
- Exposure to federal transfers as measured by public hospital expenditures as a % of an issuers’ total revenues (not much of a factor for Fairfax County as Inova is a nonprofit hospital and not part of Fairfax County’s governing structure).
- 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 downgrade of all linked triple-As.
- Moody’s has maintained a negative outlook on the entire U.S. local government sector since April 2009.
Did the Moody’s negative outlook cost Fairfax County?
- No, not according to Joanne Carter.
Standard and Poor’s Current Rating Posture.
Between 2008 and 2011, upgraded 20 counties to AAA rating based
- 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 U.S. 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 a 1-notch difference.
- Between 2008 and 2011, upgraded 20 counties to AAA rating based on:
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:
- Primary importance on management.
- Negative assessed valuation trends.
- Declining state funding and the shifting of responsibilities from states to local governments.
- Declining reserves.
- Reliance on negotiated labor savings.
- Escalating pension responsibilities.
- Management’s ability and willingness to respond to expenditure demands and declining revenue is key.
Summary of Key Credit Trends.
- 5-year trends of County financial service compared to selected peer groups and compared to the Aaa median.
According to the most recent credit assessment of the County,
there were five areas evaluated:
Assessed Value per Capita.
- 5 year trend – Increased, however, recent reductions.
- Outperforms relative to selected peers, outperforms Aaa median.
General Fund Balance as a % of revenues.
- 5 year trend – Increased after modest decline.
- Underperformed relative to selected peers, underperforms Aaa median
Unreserved General Fund balance as a % of revenues.
- 5 year trend – Increased after modest decline
- Underperformed relative to selected peers, underperforms Aaa median.
- This fund could be considered how big a “cushion” the County has.
- Although the County has a small reserve, it is balanced with the fiscal management of the Board of Supervisors and County staff, according to County Executive Tony Griffin.
Debt as a % of Assessed Value.
- 5 year trend – remained flat
- Comparable relative to selected peers, underperforms Aaa median.
Debt Service as a % of Operating Expenditures.
- 5 year trend – modest increase.
- Outperforms relative to selected peers, outperforms Aaa median.
- Assessed Value per Capita.
Cautionary Tales and Lessons Learned.
- Since 2006, six County and state triple-As have been downgraded.
- 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 potential structural budget imbalances.
Structural imbalance in enterprise funds and internal service
funds can become an important GO rating criteria.
- Fairfax County’s revenue stabilization reserve is seen as a positive by the agencies.
- A lack of readily available information can contribute to negative ratings actions.
Adapting to the “new normal” – tips to maintain the triple-A
Continue to manage carefully the County’s “controllable” credit
- Policy compliance.
- Structural balance.
- 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 Moody’s negative outlook.
- Continue to manage carefully the County’s “controllable” credit factors:
Moody’s negative watch rating
After the presentation, discussion was focused on the impact on
Moody’s current rating.
- The rating is linked to the federal government – it won’t be fixed until it’s resolved on the federal level regardless of what Fairfax County does.
- The negative watch is not costing the County right now. It is recommended the County not take any action at the moment.
- After the presentation, discussion was focused on the impact on Moody’s current rating.