Rating Agency Changes and Updated Guidelines

Transcription

1 Rating Agency Changes and Updated Guidelines North Carolina Local Government Investment Association 2015 Winter Conference Member NYSE FINRA SIPC February 10, 2015

2 Rating Agency Changes and Updated Guidelines I. Introduction II. Standard and Poor s US Local Governments General Obligation Ratings Methodology III. Moody s Investor s Service US Local Government GO Methodology IV. Round-Table Discussion V. Navigating the Rating Process as an Issuer VI. Questions and Answers February 10, 2015 North Carolina Local Government Investment Association 1

3 Introduction February 10, 2015 North Carolina Local Government Investment Association 2

4 Introduction I. Introduction a. New General Obligation Credit Rating Methodologies b. Evolution of Credit Rating Methodologies and Rational for Change c. Projected Impact of New Rating Methodologies on Issuer Ratings and Actual Results February 10, 2015 North Carolina Local Government Investment Association 3

5 Standard and Poor s U.S. Local Governments General Obligation Ratings Methodology February 10, 2015 North Carolina Local Government Investment Association 4

6 S&P s Local Government Criteria - Analytical Framework Institutional Framework 10% Economy 30% Management 20% Financial Measures Liquidity 10% Budgetary Performance 10% Budgetary Flexibility 10% Debt & Contingent Liabilities 10% Indicative Rating Positive Overriding Factors High income levels (one- or two-notch adjustment) Sustained high fund balances (one-notch adjustment) Potential one-notch adjustment (but not higher than cap) Final Rating Negative Overriding Factors Low market value per capita (one-notch adjustment) Low nominal fund balance (one-notch adjustment) Weak Liquidity (caps ratings at BBB+ or BB+ ) Weak management (caps rating at A or BBB- ) Lack of willingness to pay obligations (caps rating at BBB- for leases and B for debt) Large or chronic negative fund balances (caps rating at A+, A-, or BBB ) Budgetary flexibility score of 5 (caps rating at A+ Structural imbalance (caps rating at BBB+ ) Source: Standard & Poor s Ratings Services. 5

7 Comparison: S&P Rating Actions based on Criteria Implementation (NC vs. US) Rating Actions All Credits North Carolina Affirmed Upgraded Downgraded Source: Standard & Poor s Ratings Services. 6

8 Comparison: S&P s Current Local Government Rating Distribution (as of Jan. 17, 2015) Rating Level U.S. North Carolina AAA 11% 29% AA+ 15% 15% AA 23% 19% AA- 22% 23% A+ 15% 12% A 7% 2% A- 3% 0% BBB+ 1% 0% BBB 1% 0% BBB- 1% 0% BB+ & Lower <1% 0% Source: Standard & Poor s Ratings Services. 7

9 For more information on Standard & Poor s Ratings Criteria Please visit: 8

10 Moody s Investor s Service US Local Government GO Methodology February 10, 2015 North Carolina Local Government Investment Association 9

11 GENERAL OBLIGATION METHODOLOGY AND RATING PROCESS OVERVIEW Ted Damutz, Senior Credit Officer North Carolina Local Government Investment Association Winter Conference Pinehurst February 10, 2015

12 Moody s NC Local Government Team Julie Beglin Vice President-Senior Credit Officer/Manager, Eastern Local Government Team Ted Damutz Vice President-Senior Credit Officer, Lead Analyst for NC Local Governments Tiphany Lee-Allen Analyst, Back-Up Lead Analyst for NC Local Governments Edna Marinelarena Analyst Valentina Gomez - Analyst John Incorvaia Senior Vice President Robert Weber Vice President Senior Analyst February

13 Updated GO Bond Methodology and Introduction of Scorecard February

14 NC Local Government GO Ratings Compare Favorably to Nation 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 and lower North Carolina United States February

15 New Local Government GO Methodology & Scorecard Goals of New Methodology: Update prior methodology to reflect recent trends & key issues, including pensions Develop quantitative scorecard Purpose and Use of the Scorecard: Enhances the transparency of our rating process Captures the key considerations that correspond to particular rating categories Not an exhaustive list of factors that we consider in every local government rating Each subfactor is a quantitative metric May notch up or down from scorecard-indicated rating based on additional factors Scorecard acts as a starting point for a more thorough and individualistic analysis Final rating is determined by a Rating Committee February

16 New GO Scorecard Changes from Previous Methodology: Factor 1 Economy/Tax Base Factor 2 Finances Factor 3 Management Factor 4 Debt/Pensions 30% 30% 20% 20% Was 40% Unchanged Unchanged Was 10% Change in Weightings: Factor 1 weighting lowered to reduce the influence of tax base size Factor 4 weighting increased to include a specific quantitative measure for pensions February

17 GO Scorecard Factors, Sub-factors and Weights Factors & Sub-Factors Weights Factor 1: Economy/Tax Base 30% Full Value (market value of taxable property) 10% Full Value per Capita 10% Median Family Income 10% Factor 2: Finances 30% Fund Balance as % of Operating Revenue 10% 5-Year Dollar Change in Fund Balance as % of Revenues 5% Cash Balance as % of Revenues 10% 5-Year Dollar Change in Cash Balance as % of Revenues 5% Factor 3: Management 20% Institutional Framework 10% Operating History: 5-Year Average of Operating Revenues / Operating Expenditures 10% Factor 4: Debt/Pensions 20% Net Direct Debt / Full Value 5% Net Direct Debt / Operating Revenue 5% 3-Year Average of Moody s Adjusted Net Pension Liability / Full Value 5% 3-Year Average of Moody s Adjusted Net Pension Liability / Operating Revenues 5% February

18 Scorecard Factor 1: Economy/Tax Base 30% Very Strong Strong Moderate Weak Poor Very Poor ECONOMY/TAX BASE (30%) Aaa Aa A Baa Ba B & Below Weight Tax Base Size: Full Value > $12B $12B n > $1.4B $1.4B n > $240M $240M n > $120M $120M n > $60M $60M 10% Full Value Per Capita > $150,000 $150,000 n > $65,000 $65,000 n > $35,000 $35,000 n > $20,000 $20,000 n > $10,000 $10,000 10% Socioeconomic Indices: MFI > 150% of US median 150% to 90% of US median 90% to 75% of US median 75% to 50% of US median 50% to 40% of US median 40% of US median 10% The tax base is the source of most local government revenues The tax base scorecard weight is reduced to 30%, which is still a significant weight February

19 Scorecard Factor 2: Finances 30% FINANCES (30%) Fund Balance as % of Revenues Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight > 30.0% > 25.0% for School Districts 30.0% n > 15.0% 25.0% n > 10.0% for SD 15.0% n > 5.0% 10.0% n > 2.5% for SD 5.0% n > 0.0% 2.5% n > 0.0% for SD 0.0% n > -2.5% 0.0% n > -2.5% for SD -2.5% -2.5% for SD 10% 5-Year Dollar Change in Fund Balance as % of Revenues > 25.0% 25.0% n > 10.0% 10.0% n > 0.0% 0.0% n > -10.0% -10.0% n > -18.0% -18.0% 5% Cash Balance as % of Revenues > 25.0% > 10.0% for School Districts 25.0% n > 10.0% 10.0% n > 5.0% for SD 10.0% n > 5.0% 5.0% n > 2.5% for SD 5.0% n > 0.0% 2.5% n > 0.0% for SD 0.0% n > -2.5% 0.0% n > -2.5% for SD -2.5% -2.5% for SD 10% 5-Year Dollar Change in Cash Balance as % of Revenues > 25.0% 25.0% n > 10.0% 10.0% n > 0.0% 0.0% n > -10.0% -10.0% n > -18.0% -18.0% 5% February

20 Scorecard Factor 3: Management 20% MANAGEMENT (20%) Institutional Framework Operating History: 5-Year Average of Operating Revenues / Operating Expenditures Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight Very strong legal ability to match resources with spending Strong legal ability to match resources with spending Moderate legal ability to match resources with spending Limited legal ability to match resources with spending Poor legal ability to match resources with spending Very poor or no legal ability to match resources with spending > 1.05x 1.05x n > 1.02x 1.02x n > 0.98x 0.98x n > 0.95x 0.95x n > 0.92x 0.92x 10% 10% February

21 Strong Institutional Framework North Carolina is one of 6 states with strong state oversight of local governments The Division of Local Government Commission (LGC) reviews budgets and requires timely financial reporting LGC can appoint a fiscal comptroller Number of States with Strong Oversight Strong Moderate Limited None Total Cities and Counties No local government can file bankruptcy without LGC approval February

22 Scorecard Factor 4: Debt/Pensions 20% DEBT/PENSIONS (20%) Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight Net Direct Debt / Full Value < 0.75% 0.75% n < 1.75% 1.75% n < 4% 4% n < 10% 10% n < 15% > 15% 5% Net Direct Debt / Operating Revenues 3-Year Average of Moody's Adjusted Net Pension Liability / Full Value 3-Year Average of Moody's Adjusted Net Pension Liability / Operating Revenues < 0.33x 0.33x n < 0.67x 0.67x n < 3x 3x n < 5x 5x n < 7x > 7x 5% < 0.9% 0.9% n < 2.1% 2.1% n < 4.8% 4.8% n < 12% 12% n < 18% > 18% 5% < 0.4x 0.4x n < 0.8x 0.8x n < 3.6x 3.6x n < 6x 6x n < 8.4x > 8.4x 5% Overall factor weight increased to 20% from 10% (to capture pension risks more fully) Pensions: Utilize Moody s adjusted net pension liability metrics February

23 GO Scorecard Notching Factors Adjustments/Notching Factors Description Economy/Tax Base Institutional presence Regional economic center Economic concentration Outsized unemployment or poverty levels Other analyst adjustment to Economy/Tax Base factor (specify) Finances Outsized contingent liability risk Unusually volatile revenue structure Other analyst adjustment to Finances factor (specify) Management State oversight or support Unusually strong or weak budgetary management and planning Other analyst adjustment to Management factor (specify) Debt/Pensions Unusually strong or weak security features Unusual risk posed by debt/pension structure History of missed debt service payments Other analyst adjustment to Debt/Pensions factor (specify) Other Credit event/trend not yet reflected in existing data sets Direction up up down down up/down down down up/down up/down up/down up/down up/down down down up/down up/down February

24 Applying the Analytical Factors Grid-Indicated Rating Notching Factors Adjusted Scorecard Rating Analysts score each subfactor in the grid The weighted average of the analyst-assigned scores will determine a raw score that maps to Moody s rating scale the grid-indicated rating Analyst and Rating Committee will determine any notching factors the adjusted scorecard rating The final public rating may differ from the adjusted scorecard rating February

25 Rating Process: New Sales and Annual Surveillance February

26 Monitoring Framework: Annual Review of Rating Many local governments do not issue debt annually, so we review their ratings outside of the sales calendar to ensure that they remain correct. We review all public ratings at least once a year, upon receipt of audited financial statement. Not all ratings go to a committee But for those that do, committee process for surveillance is same as for new sales Financial Advisors are welcome to participate in the surveillance process; and the Lead Analyst will confirm if Issuer is working with an FA. Surveillance Processes: Quantitative screens (Threshold Filtering and Analyst Batch Review) Review by an analyst (Individual Review) Rating Committee February

27 What to Expect During the Rating Process Issuers can expect the Lead Analyst to: Be informed about the Issuer and prepared to discuss its credit strengths/challenges Be familiar with issues specific to North Carolina local governments Send rating questions/topics in advance of the rating call Explain the rating process Give Issuers feedback prior to committee on key drivers of the rating Provide complete rationale for the rating after committee Give Issuers an opportunity to review the draft report for factual accuracy Ted Damutz, Tiphany Lee-Allen and Julie Beglin are available to address any questions or concerns. February

28 The 6-Step Rating Process Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Assignment Methodology Analysis Discussions Committee Publication The rating process starts with the assignment of a Lead Analyst The Lead Analyst identifies the appropriate methodology The Lead Analyst gathers information and begins to analyze the credit The Lead Analyst holds a credit discussion with the Issuer (inperson/conference call) The Lead Analyst develops a recommendation and presents it to a committee of senior analysts The Lead Analyst informs the marketplace of any rating actions by publishing a report February

29 Step 1: Assigning an Analyst Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Team of analysts have experience and expertise in analyzing NC local governments Dedicated Lead and Backup Analyst assigned to all higher profile issuers including all counties and many cities Others assigned on a rotational basis February

30 Step 2: Selecting a Methodology Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Commonly Used Local Government Methodologies: General Obligation Debt Municipal Utilities Water, Sewer, other Lease-Backed Obligations Special Tax Pool Financings Bond Anticipation Notes Short-Term Cash Flow Notes Ratings Based on Credit Substitution State Aid Intercept Programs and Financings February

31 Step 3: Information Gathering and Preliminary Analysis Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Lead Analyst gathers and reviews key information: At least three years of audited financial results Current debt statement and financing plans Pension position and pension plans Economic and demographic information (from the OS, Census, and Moody s Analytics) Budgets/financial plans and capital improvement plans Legal documents Lead Analyst also reviews Moody s previous reports on the Issuer (if one exists), previous meeting notes, the methodology scorecard, and peer comparison data February

32 Step 4: Credit Discussions with Issuers Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Opportunity for Issuer to tell its story to help the Lead Analyst prepare for rating committee Lead Analyst will send topics/questions in advance to help guide the discussion Usually helpful for the Issuer to begin with an overview, addressing matters such as governance practices, strategic plans or priorities, and other relevant credit factors. Productive meetings tend to follow a written agenda or presentation while also allowing for open dialogue about the Issuer s strengths and challenges. Lead Analyst will explain the rating process and highlight key issues that are likely to drive the rating outcome February

33 When In-Person Meetings Are Most Valuable Credit discussions may occur in person or by telephone In-person meetings typically occur when:» Moody s is assigning a rating to an Issuer for the first time» The Issuer s borrowing plans are large or complex» The borrowing is for an unexpected or unusual project» There have been significant positive or negative changes in the key rating factors that could result in a rating or outlook change» Moody s has not met with the management team or visited the Issuer in several years February

34 Step 5: Committee - Preparing for Committee (1 of 2) Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication After discussions with the Issuer, the Lead Analyst: Looks at all of the Issuer-specific information in its entirety. Reviews peer comparisons. Completes the methodology scorecard including adjustment factors specific to the Issuer. Arrives at a rating recommendation. Drafts a rating committee memo that highlights the pertinent issues to go over in rating committee. February

35 Preparing for Committee (2 of 2) Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication The Lead Analyst and a Committee Chair typically a senior analyst or manager overseeing the sector being rated determine the composition of the Committee. Committees consist of analysts with relevant and complementary areas of expertise, and a diversity of opinions. Geographic diversity Subject matter expertise, e.g. Corporate Finance Group gaming analyst to Atlantic City committee Lead Analyst circulates memo and supporting materials to committee members. February

36 What Happens During the Committee Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Lead Analyst presents his/her recommendation and supporting documentation and answers questions. Chair guides committee discussion; members express and formulate their views. full consideration and debate of all relevant credit factors, from a range of perspectives. Committee ends with a vote on the rating and outlook; majority required. February

37 What Happens Immediately After the Committee Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication After committee, the Lead Analyst informs the Issuer verbally of the rating and rationale. By policy, we do not disclose specific committee details: Lead Analyst s rating recommendation, names of committee participants, or committee s vote tally Appeals, which are rare, require Issuer to present new material information that could change the rating outcome February

38 Step 6: Publishing the Rating and Report Step 1: Assignment Step 2: Methodology Step 3: Analysis Step 4: Discussions Step 5: Committee Step 6: Publication Before we publicly disseminate rating and rating report, Lead Analyst provides a draft rating report to the Issuer for review. Issuers have a window of up to two hours to review draft reports, to identify any inaccuracies that should be corrected or any confidential information that should be deleted prior to publication. Lead analyst agrees with Issuer and/or its advisors in advance on time period for review Rating actions must remain confidential until they are published. After issuer review and any resulting edits, the rating and report are publicly posted on moodys.com and disseminated to various financial news outlets. Issuer receives a copy of the announcement, to know when it is public. February

39 Moody s Issuer Guide February

40 Julie Beglin Manager/VP-Senior Credit Officer Ted Damutz VP-Senior Credit Officer Tiphany Lee-Allen Analyst February

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42 Round-Table Discussion February 10, 2015 North Carolina Local Government Investment Association 41

43 Round-Table Discussion IV. Round-Table Discussion IV. Round-Table Discussion (continued) a. Rating Surveillance Process i. Logistics ii. Time Frame / Frequency iii. Published Reports iv. Rating Analyst b. Rating Outlooks i. Definition ii. Criteria iii. Time Frame c. Family of Ratings i. Relationship to General Obligation Credit ii. iii. Appropriation Credits Security and Collateral Requirements Revenue Credits - New Methodology Initiatives d. Debt and Contingent Liabilities i. Bank Loan Disclosure ii. Key Documentation Provisions iii. Contingent Liability Enterprise Risk iv. OPEB / Pension Liabilities February 10, 2015 North Carolina Local Government Investment Association 42

44 Navigating the Rating Process as an Issuer February 10, 2015 North Carolina Local Government Investment Association 43

45 Navigating the Rating Process as an Issuer V. Navigating the Rating Process as an Issuer a. Understand the Rating Factors b. Self Assessment of Credit Strengths and Weaknesses c. Develop Multi-year Planning Process d. Effective Communication Strategies February 10, 2015 North Carolina Local Government Investment Association 44

46 Percent (%) Credit Quality and the Rating Agencies Since the financial downturn, the credit quality of a local government has become more important than in previous market environments. Credit rating agencies, banks and investors have increased the level of due diligence performed on transactions. A local government should not manage itself exclusively for rating agencies; however, often times good planning and rating agency strategies are aligned. Multi-year Financial Planning Formalized Management Practices / Policies Economic Development (locally and regionally) Year MMD AAA AA A BBB Credit Spreads (%) vs the 30-yr AAA MMD Nov Dec 2008 Rating Min Max Average AA A BBB Dec January 2015 Rating Min Max Average AA A BBB Note: credit spreads compared to the 'AAA' equivalent February 10, 2015 North Carolina Local Government Investment Association 45

47 Moody s Investor s Service US Local Government GO Methodology Implemented in January 2014 Category Rating Percentage Short Term Control Long Term Control Economy / Tax Base 30% Finances 30% Management 20% Debt / Pensions 20% February 10, 2015 North Carolina Local Government Investment Association 46

48 S&P U.S. Local Governments General Obligation Ratings Methodology Implemented in September 2013 Category Rating Percentage Short Term Control Long Term Control Institutional Framework 10% Economy 30% Management 20% Budget Flexibility 10% Budgetary Performance 10% Liquidity 10% Debt and Contingent Liabilities 10% February 10, 2015 North Carolina Local Government Investment Association 47

49 Billions Economy Economic strength plays a large role in the credit quality of a local government and is measured by a number of indicators including: Tax Base Consumer Spending Wealth Levels Employment Improvement of economic conditions is often accomplished through longer term planning and initiatives % 10.0% 8.0% 6.0% 4.0% 2.0% North Carolina Retail Sales YTD North Carolina State Retail Sales Unemployment Rate 0.0% N.C. U.S. February 10, 2015 North Carolina Local Government Investment Association 48

50 Financial Policies Financial policies can provide benefits to a number of parties by: Establishing a policy / decision making framework for staff and elected officials. Providing comfort to Rating Agencies, Banks and Investors that a local government will mange itself in a responsible fashion. Offer transparency to citizens /customers. A Financial Policy and Procedures Document may include: Cash Management and Investment Policies Budgeting Policies Capital Improvement Planning Policies Tax-Supported and Utility-Supported Debt Policies Fund Balance Policies 30% 25% 20% 15% 10% 5% 0% Unassigned Fund Balance as a % of Expenditures Unassigned Fund Balance as a % of Expenditures Policy February 10, 2015 North Carolina Local Government Investment Association 49

51 Benchmarking Develop a meaningful peer group to evaluate key financial ratios and economic indicators such as: Debt Ratios Fund Balance / Liquidity Ratios Wealth Metrics Unemployment Tax-Payer/Customer Concentration Peer Groups may include Credit Rating Categories Population Range Neighboring Jurisdictions Unassigned General Fund Balance as a % of Revenues Nat'l 'Aaa' Counties Nat'l 'Aa' Counties Nat'l 'A' Counties NC 'Aaa' Counties NC 'Aa' Counties NC 'A' Counties Percent Water and Sewer Unrestricted Cash as a % of O&M Nat'l 'Aaa' W&S Median Nat'l 'Aa' W&S Median Nat'l 'A' W&S Median Resources for benchmarking include: Credit Rating Agency Publications Local Government Commission Reports School of Government Dashboard NC 'Aaa'' W&S Median NC 'Aa' W&S Median NC 'A' W&S Median Percent February 10, 2015 North Carolina Local Government Investment Association 50

52 Millions Millions Debt Profile - Overview Model existing debt obligations by credit and repayment source: Tax-Supported Debt. Utility-Supported Debt. General Obligation. Appropriation Backed (e.g. Installment Purchase, Limited Obligations, etc.). Revenue Pledge Existing Debt Service Principal Interest Analyze debt structure to identify: Debt Capacity Debt Affordability Project the impact of future debt issuance consistent with the adopted Capital Improvement Program Existing Debt Service by Type GOs LOBs IPCs February 10, 2015 North Carolina Local Government Investment Association 51

53 Debt Profile- Key Ratios Calculate Key Debt Ratios to provide perspective on current debt burden and future capacity. Key Tax-Supported Debt Ratios Include: Debt to Assessed Value 10-Year Payout Ratio Debt Service vs. Expenditures Debt vs. Governmental Revenue Debt Per Capita 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 10-Year Payout Ratio 10-Year Payout Ratio Key Utility-Supported Debt Ratios Include: Debt Service Coverage Debt to Net Plant 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Debt Service vs. Expenditures Debt Service vs. Expenditures February 10, 2015 North Carolina Local Government Investment Association 52

54 Millions Millions Debt Profile- Affordability Aggregate annual tax-supported debt service and other capital funding requirements: Existing Debt Service Payments Estimated CIP Debt Service Pay-as-you-go Capital Operating Impacts of Capital Projects Decline in Debt Service Identify Revenue Sources in current Fiscal Year budget dedicated to debt service and capital: Sustainable General Fund Budget Revenues. Fund Balance / Reserves. State Revenues (e.g. Sales Tax, Lottery, etc.). Federal Revenues / Subsidies For Utility-Supported projects, develop a forward looking Pro-Forma Financial model to forecast future revenues, operating / capital expenses and existing / future debt service payments Existing Debt Service Cumulative Decline Utility Revenues vs. Expenditures Budget Operating Expense Debt Service Revenue February 10, 2015 North Carolina Local Government Investment Association 53

55 Long-Term Planning Capital Improvement Program The development of a multi-year Capital Improvement Program ( CIP ) includes: Education 20% 5-Year CIP: Uses of Funds Admin 10% Identifying realistic capital and maintenance needs (not a wish list). Assigning funding sources for all projects with a balanced approach of pay-as-you-go cash, grants, reserves and debt. Streets & Sidewalks 20% Police / Sheriff 20% Parks & Recreation 30% Analyzing potential operating budget impacts associated with planned capital projects. Revisiting this process at regular intervals. Adopting a plan at the governing level. Installment Purchase Contracts 25% Capital Reserve Fund 10% 5-Year CIP: Sources of Funds GO Bonds 15% Grants 40% Pay-As-You- Go Capital 10% February 10, 2015 North Carolina Local Government Investment Association 54

56 Millions Millions Long-Term Planning- Budget and Finance Considerations Review historical financial performance to identify key trends. Forecast future operating revenues and expenses. Setting rates/charges to achieve structural balance for operations Operating Revenues vs. Operating Expenditures Strategic growth and/or appropriation of fund balance. Annual appropriation of reserves to balance the Budget. Use of reserves for capital and other one-time expenditures. Regular Reporting to Elected Officials on various finance and investment related activities / performance Historical Expenditures Projected Expenditures Historical Revenues Projected Revenues General Fund Balance Unassigned Assigned Committed Restricted February 10, 2015 North Carolina Local Government Investment Association 55

57 Effective Communication Strategies Issuer Initiated Rating Request Choose the proper setting for the discussion. In-person meetings. Conference call. Site visit. Preparation and Discussion Materials. - Audits, Budgets, Capital Improvement Plans and related publications (e.g. economic development, planning documents). - Bond Offering and other related legal documents (e.g. Preliminary Official Statement, Trust Indenture, etc.) - Comprehensive Credit Presentation to serve as a guide for the conversation. - Location and Demographic Information. - Tax and Employment Base Profile. - Financial and Debt Overview. - Economic Development. Follow-up with additional materials, as appropriate, based on initial discussion with Analyst. February 10, 2015 North Carolina Local Government Investment Association 56

58 Effective Communication Strategies Rating Agency Initiated Rating Surveillance Discuss the timing requirements and constraints upfront. Understand the nature of the request (e.g. routine surveillance vs. event driven). Indentify the time period for review such that the supporting information provided addresses the proper time period. Coordinate with the Rating Analyst. Written responses to questions. Conference Call. Comprehensive Credit Presentation. Issuer Initiated Disclosures Major Economic Development Announcements. Significant Changes to Financial or Debt Profile. Direct Purchase or Bank Placement Debt Issuance. February 10, 2015 North Carolina Local Government Investment Association 57

59 Richmond Office One James Center 901 East Cary Street 11th Floor Richmond, VA Charlotte Office Independence Center 101 N. Tryon Street Suite 1220 Charlotte, NC Ted Cole Senior Vice President Mitch Brigulio First Vice President Raleigh Office Glenwood Plaza Glenwood Ave. Suite 390 Raleigh, NC February 10, 2015 North Carolina Local Government Investment Association 58

60 Municipal Advisor Disclosure The U.S. Securities and Exchange Commission (the SEC ) has clarified that a broker, dealer or municipal securities dealer engaging in municipal advisory activities outside the scope of underwriting a particular issuance of municipal securities should be subject to municipal advisor registration. Davenport & Company LLC ( Davenport ) has registered as a municipal advisor with the SEC. As a registered municipal advisor Davenport may provide advice to a municipal entity or obligated person. An obligated person is an entity other than a municipal entity, such as a not for profit corporation, that has commenced an application or negotiation with an entity to issue municipal securities on its behalf and for which it will provide support. 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Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. You should consider this material as only a single factor in making an investment decision. The value of and income from investments and the cost of borrowing may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions or companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance and estimates of future performance are based on assumptions that may not be realized. 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