County of San Diego Rating Agency Presentation May 2006
Introductions - Participants County of San Diego Presenters Donald F. Steuer, Chief Financial Officer Lisa Keller-Chiodo, Capital Finance Manager Dan McAllister, Treasurer-Tax Collector Additional County Resources Tracy Sandoval, Auditor and Controller/Assistant Chief Financial Officer Christopher Gilmore, Deputy Controller Janel Pehau, Director, Office of Financial Planning Lisa Marie Harris, Deputy Treasurer Rob Castetter, Chief Investment Officer Finance Team Chris Mukai, Citigroup
Objectives • Demonstrate that San Diego County is the best run County Government in California. • Demonstrate that the County is financially well-positioned and well-prepared to manage future challenges, including economic slowdowns, State budget risks and changing demands of our citizens. • Obtain a credit rating upgrade.
Credit Highlights • San Diego County has one of the strongest and most diversified economies in the nation. • Disciplined financial management has enabled the County to weather the State’s fiscal crisis and simultaneously improve its financial position. • The County is allocating growth in General Purpose Revenue to fund projects. • The County has low and manageable debt levels. • The County has pro-actively managed its labor and retirement costs.
Strong Financial Management Practices • The County has maintained strong fund balances and reserves • $878.6 million (35% of General Fund Revenues) can be accessed if needed • The County Budget is structurally balanced • One-time revenues only used for one-time expenditures • Conservative budgeting consistently produces net operating surplus • The County has institutionalized debt policies • Debt Advisory Committee (DAC) oversees debt management • Debt and Swap Policies in place • Strong record of early debt repayment / cash funding of projects • Comprehensive financial reporting and forecasting • Two-year Operational Plan and five-year long-range financial forecast • Quarterly Variance Reports disclosed on County website • Comprehensive financial disclosure in Appendix A
Table Of Contents • Economic Overview & Highlights • FY05-06 Financial Results • FY06-07 Operational Plan • County Retirement System • County Investment Pool • Long-Term Obligations • FY06-07 Tax and Revenue Anticipation Notes • Closing Remarks Appendix - Cashflows
Economic Highlights • San Diego County has experienced positive economic growth every year since 1994. • San Diego County is recognized as having one of the most diversified economies in the U.S. • The multi-billion dollar Visitor Industry is San Diego’s third largest economic sector. Visitors spent $5.8 Billion during the 2005 calendar year. • San Diego has the largest number of military personnel in the nation. • Median single-family resale prices have moderated but are still strong at $560,000. Building permits continue to be strong. • Property Tax Base has increased 9.9% a year since 1997.
Diverse Economy and Employment Base • San Diego continues to be a hub for research and development. • The International border between San Diego and Mexico is the busiest in the world. • Entertainment employment has risen mostly due to the Indian casinos. • Diversified economy insulates County from downturns in any specific economic sector.
Real Estate Market and Tax Base • The County’s property tax base is insulated/hedged from any potential “real estate bubble” in the housing sector due to diversification of the economy over the past 15 years. Assessed Valuations (1997-2006) "While real estate activity has continued to soften in California in early 2006, the declines so far have been orderly, reflective of a settling down of activity rather than the bursting of a real estate bubble." - California Legislative Analyst Office
Financial Highlights FY05-06 • Property Tax in lieu of VLF approximately $60 million over adopted budget • Consolidation of Realignment Funds, bringing cash into General Fund • $41 million Pension System contribution above and beyond required payment for a total additional contribution of $66 million over 2 years • $3.5 million appropriated for completing the design of the Medical Examiner/ County Veterinarian Facility • New IT outsourcing contract awarded to Northrop Grumman with 7-year flat pricing • $9 million to institute uniform fire prevention services in unincorporated areas
General Fund Financial Results * FY04-05 Balances by Group: Public Safety ($41.9mm); Health and Human Services Agency ($10.8mm); Land Use and Environment ($18.1mm); Community Service ($7.4mm); Finance & General Gov. ($51.0mm). **As reported in the Third Quarter Fund Balance Report.
Additional Reserves and Resources ($ in millions) (1) Does not include additional proceeds for proposed tobacco bond restructuring.
Conservative Budgeting & Strong Financial Performance • The County has consistently generated a net operating surplus. (1) Third Quarter Fund Balance Report for each respective fiscal year, Excess Ongoing Revenues over Ongoing Expenditures
FY06-07 Operational Plan Highlights • Allowance for salary and benefit increase • Labor negotiations under way • Active Health Care management • Cash financing $80mm for a new Medical Examiner/ County Veterinarian Facility • Increase in Contingency Reserve from $15.6mm to $20mm • General Fund balance ($97.7mm) used as the funding source for various one-time or project specific purposes • Identified $17.2mm of major maintenance projects to preserve and extend the useful life of County facilities • Prudent FTE Management
Ongoing and Future Challenges • Prudent FTE management • Rising cost of employee benefits • Labor negotiations • Investment performance of retirement fund • State structural budget issues • Emergency preparedness
FY06-07 Proposed Operational Budget $ 4.329 Billion – Appropriations by Fund
FY06-07 General Fund Proposed Operational Budget $3.147 Billion Revenues (in millions) Appropriations (in millions)
FY06-07 General Fund Revenue Composition By Source – (in millions) 10.2% increase General Purpose Revenue of $906.3M – 25.7% increase
Historical General Purpose Revenue Composition ($ in millions) ($ in millions) $963.6 $906.3 $721.0 $657.4 $646.6 $608.0 Totals may not add up due to rounding.
Impact of Governor’s May Revise Primary areas to follow over the next few weeks: • Proposes that $40 million be granted to counties by the State each year for the operation, renovation, and construction of local detention facilities in lieu of booking fees being paid to counties by cities: may not be revenue neutral to San Diego depending upon allocation formula. • Proposes restructuring of funding for AB 3632 Mental Health Services to schools from a mandated program to a categorical program: not possible to implement required changes by July 1. • Proposes CalWORKS Administration reform to avert federal penalties for low recipient participation rates: moving forward in legislature. • No appropriations were included to cover reimbursement for counties’ November 2005 election costs: separate bill being pursued ($4.0 million cost provided to the State for San Diego County). • Proposes increasing Citizens Option for Public Safety (COPS) and Juvenile Justice Crime Prevention Act (JJCPA) funding by 21% (restores to original FY 2000-01 level). • Proposes paying both year 1 and year 2 of the 15 year SB 90 payback: Senate has rejected paying year 2.
Pension Plan Investment Performance SDCERA Historical Annualized Investment Returns 8.25% Earnings Rate • 10-yr average investment return = 10.85% • $411.2 million in unrecognized net investment gain as of June 30, 2005.
Historical and Projected Pension Funding Status • The County’s projected funding status is expected to improve measurably. Historical & Projected Funding Ratio Projected ($ in millions) *Projected Source: Please see County of San Diego 2006-07 TRANs POS for complete details on assumptions underlying table.
County Policy Objectives for Pension System • Ensure that the County Retirement System is appropriately funded. • Pay the full annual contribution required by the Retirement System’s Actuary. • Additional cash contribution of $66mm over past 2 years • Additional cash contribution of $28mm proposed for FY06-07 • Target minimum funding ratio of 80%. • Take advantage of low interest rates to lower Unfunded Actuarial Accrued Liability (UAAL) and save money by periodically issuing POBs. • Maximize flexibility to prepay and refinance POBs. • Maintain strong, pro-active relationship with SDCERA.
Other Post-Employment Benefits (OPEBs) • SDCERA has conducted three retiree healthcare workshops between December 2005 and March 2006. • SDCERA completed most recent actuarial valuation of retiree health care obligations in November 2005. • As of June 30, 2005, the actuarial accrued liability for post-employment healthcare benefits was approximately $639.5 million. • As of June 30, 2005, approximately $216.2 million was on deposit in the SDCERA Health Reserve, representing approximately 34% of the actuarial accrued liability. • The County intends to fully comply with GASB 45 beginning in 2007/08. • The County has retained a consultant to help explore funding options.
Investment Pool Strength & Stability • Portfolio focus is Safety, Liquidity, Return • Market value of County Pool as of 4/30/06 = $4.7 Billion • Highly Liquid • Approximately 90% of securities mature within one year • Portfolio positioned to take advantage of rising rates given low weighted average maturity • Weighted average yield of 4.08% • The Pool portfolio has a .331 duration • High credit quality • 100% of securities are rated AAA or A-1/P-1/F-1 • Pool has been rated AAA every year since 1999 • Professionally managed—over 50 years of experience • Strong cash flow model • Voluntary Depositors represent only 1.87% of Pool
Highlights • Board policy B-65 • Formation of the Debt Advisory Committee • Variable Rate Policy • Swap Policy • Semi-annual review of Swap performance by the Debt Advisory Committee • Continue the discipline of paying off debt when possible: • 2000 San Pasqual, $19mm • 2001 Interim Justice, $18.4mm • 1993 Series A, $4.2mm • 1993 Vista, $7.8mm • Economic Defeasance of 1994 POBs, $63.3mm • $100mm 2002 Taxable Pension Obligation Bonds, Series C (PINES) • Cash financing Capital Projects when possible: • East Mesa Juvenile Hall, $52mm • Assessor/Recorder/County Clerk San Marcos Building ($9mm) and Kearny Mesa Building ($7mm) • Property Tax System, $32.1mm • $80mm for a new Medical Examiner/ County Veterinarian Facility • Long range capital planning through the Capital Improvement Needs Assessment
Long-Term Obligations – Payable from the General Fund • * Excludes economically defeased 1994 Taxable Pension Obligation Bonds Long-Term Debt By Entity Long-Term Debt By Type
Fiscal Year 06-07 Budgeted Payments • * Excludes economically defeased 1994 Taxable Pension Obligation Bonds • Total 06-07 Debt Payments Bonds/(General Fund Revenues – Fund Balance)
General Fund Debt Profile – Debt Service Principal and Interest payments all years remaining
Upcoming County Bond Issuances • 2001 Tobacco Bond Restructuring ($570 million) • Additional $120 million generated for tobacco endowment • Increases annual HHSA funding to approximately $27 million • Extends life of endowment fund and transfers an additional 12 years of tobacco risk • Conversion of 2004 Auction Rate POBs • Mitigate against interest rate volatility • Create future variable rate capacity • Secure an attractive long-term fixed rate of interest
FY06-07 Tax and Revenue Anticipation Notes • Preliminary Size = $240 million • Includes maximum cash deficit and working capital reserve • In lieu of commercial paper, TRANs will fund Teeter Plan for first time since 1993 • Final Maturity • 12 or 13-month maturity - to be determined • Investment of Note Proceeds and Set-asides • Investment Agreement vs. County Pool - to be determined
Available Cash for Short Term Interfund Advances As of May 2006
TRANs Financing Schedule* Date Activity May 16 County Board Approved Financing June 1 Receive Ratings June 2 Post / Mail Preliminary Official Statement June 6 Price Transaction (Tentative) July 3 Closing * Preliminary, subject to change.
County of San Diego Deserves an Upgrade Because: • Consistent with our strategic plan and financial objectives, we have maintained a structurally balanced budget through good and bad times. • We are able to retire debt early. • We are able to cash finance large projects. • We are well-positioned to manage future challenges, including economic slowdown, potential impact of State budgetary actions, and changing demands of our citizens. • We maintain a Fund Balance cushion. • We are allocating a portion of growth in GPR to one-time projects and thus could sustain a loss in those revenues without impacting ongoing services. • We maintain prudent reserves for unanticipated events and have other set-asides for known risks and commitments. • We operate within a strong, diversified economy.