HomeMy WebLinkAboutI. C. DEBT MANAGEMENT UPDATE 12.10.2024Member NYSE|FINRA|SIPC
December 10, 2024
City of Virginia Beach, Virginia
Financial State of the City
Davenport & Company LLC (“Davenport”) serves as Financial Advisor to the City of Virginia Beach (the
“City”).
Davenport serves as Financial Advisor to the City in the following ways, amongst others:
–Reports to the City Council and Senior City Leadership;
–Complements City Staff with annual Budgetary Planning, Capital Planning, and general Financial
Planning; and,
–Interacts with the National Credit Rating Agencies, Banks, and Brokerages on behalf of the City.
Davenport does not:
–Determine which projects will be financed;
–Underwrite any bond issues or lend the City any money; or
–Hold a financial interest in how a project is funded.
Roughly one year ago, Davenport presented a Comprehensive Debt Management Update to brief the City
Council on an array of capital funding scenarios focused on debt capacity and debt affordability. These
discussions led to a strategic Plan of Finance.
December 10, 2024 Financial State of the City 1
Introduction
Davenport advised the City through the successful issuance of bonds in support of the CIP and for
refinancing / debt service savings purposes. A high-level summary of the debt issuances from early
calendar year 2024 is below:
General Obligation Bonds:
Public Facility Revenue Bonds:
December 10, 2024 Financial State of the City 2
Introduction (cont.)
Series Amount ($)Purpose
TIC
("Interest Rate")
Refunding
Savings ($)
2024A 143,260,000 General Capital / Schools 3.40%--
2024B 118,000,000 Flood Protection Program 3.41%--
2024C 39,130,000 Refunding 2.80%3,348,121
Total 300,390,000
Series Amount ($)Purpose
TIC
("Interest Rate")
Refunding
Savings ($)
2024A 33,435,000 Tax-Eempt Econ. Dev. / Schools 3.55%--
2024B 27,225,000 Refunding 2.95%1,349,575
2024C 128,070,000 Taxable Econ. Dev.5.04%--
Total 188,730,000
December 10, 2024 Financial State of the City 3
Credit Rating Overview
The City enjoys ‘Aaa’ credit ratings from all three of the National Credit Rating Agencies. These credit
ratings were affirmed as part of the issuance process earlier this calendar year. ‘Aaa’ credit ratings are
the highest possible credit ratings a local government can achieve.
Credit ratings serve as a barometer for the Financial, Economic, Demographic, and Management standing
of the City.
Top Tier “Highest Possible
Rating”
2nd Tier “Very Strong”
3rd Tier “Strong”
4th Tier “Adequate
Capacity to Repay”
5th – 10 th Tiers “Below
Investment Grade”
Considered
Investment
Grade
Below
Investment
Grade
Moody's S&P
Aaa AAA
Aa1 AA+(Highest)
Aa2 AA (Middle)
Aa3 AA-(Lowest)
A1 A+(Highest)
A2 A (Middle)
A3 A -(Lowest)
Baa1 BBB+(Highest)
Baa2 BBB (Middle)
Baa3 BBB-(Lowest)
BB, B, CCC, CC, C, D
Fitch
AAA
AA+
AA
AA-
A+
A
A -
BBB+
BBB
BBB-
December 10, 2024 Financial State of the City 4
Rating Agency Commentary | Moody’s Report May 3, 2024
“The credit profile of Virginia Beach, VA (Aaa stable) is sound, and reflects the city's solid economy,
anchored by several military bases, and steady tourism.”
“Credit Strengths
–Sizeable and diverse local economy that benefits from stabilizing institutional presence.
–Healthy property wealth levels and above-average growth of taxable base.
–Comprehensive financial policies and conservative budgeting practices.”
“Credit challenges
–Reserve and liquidity levels are below those of similarly rated cities nationwide (as a percentage of
revenues).
–Some exposure to funding reductions/cuts at the federal level, specifically department of defense.”
“The city's financial position is strong and is expected to remain so given strong revenue growth,
conservative budgeting and prudent management of expenditures. Reserves have largely increased in line
with revenues and the city's operations, net of transfers to the capital fund, have consistently been
structurally balanced.”
“Virginia Beach's long-term liabilities are manageable and despite a robust six-year capital improvement
program (CIP), are expected to remain so given management's strict adherence to formal debt policies as
well as rapid amortization of principal.”
Source: Moody’s Rating Report published as of May 3rd, 2024.
December 10, 2024 Financial State of the City 5
Rating Agency Commentary | S&P Report May 2, 2024
S&P affirmed the City’s ‘AAA’ (Stable) credit rating.
“The city's large, diverse, high-value property tax base and, what we consider, strong finances, achieving
balanced current fund operations, support the rating.”
The rating reflects S&P’s assessment of the following factors for the City of Virginia Beach:
–“Affluent, expanding community within the Virginia Beach-Norfolk-Newport News metropolitan
statistical area with several ongoing housing; industrial; and commercial projects, supporting our view
of a very strong economy;
–Very strong management with strong financial-management policies, practices under our Financial
Management Assessment (FMA) methodology, with a focus on long-term planning, and very strong
Institutional Framework score;
–Positive operations expected in fiscal 2023 and projected for fiscal 2024, supporting very strong
budgetary flexibility and liquidity; and
–Manageable debt and robust roughly $1.7 billion capital-improvement plan that focuses on resiliency
and other necessary capital projects--Pension and other postemployment benefit (OPEB) costs remain
manageable and do not pressure operations.”
Source: S&P Rating Report published as of May 2nd, 2024.
December 10, 2024 Financial State of the City 6
Rating Agency Commentary | Fitch Report May 6, 2024
“The City's 'AAA’ Issuer Default Rating and GO rating reflects the city 's historically strong operating
performance…Fitch's expects Virginia Beach will continue to maintain healthy financial flexibility throughout
economic cycles.”
“Demographic and economic trend metrics are considered 'strong' by Fitch, as demonstrated by a low
unemployment rate relative to the national average, high level of educational attainment and median
household income levels.”
“The ratings also incorporate the city's relatively stable revenue and population trends and midrange long-
term liability burden.”
“The ratings additionally reflect the application of one positive analytical factor that recognizes the city's role
as the center of an important and growing MSA in the Commonwealth of Virginia that makes a notable
contribution to the national economy.”
“Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–An approximate 40% increase in long term liabilities without a commensurate growth in personal
income or governmental resources.
–Although not expected, a sustained decline in available general fund balance below 7.5%of spending
would reduce the city's financial resilience assessment to 'aa' from 'aaa'.
–A material erosion of the city's demographic and economic trends and levels prospects.”
Source: Fitch Rating Report published as of May 6th, 2024.
The City has experienced multiple years of strong financial results driven by the health, stability, and growth
of the national and regional economy.
General fund revenues have grown roughly 5.0% annually, on average, over the last six fiscal years
(FY 2019 – FY 2024(1)).
General fund expenditures have grown roughly 4.7% annually, on average, over the last six fiscal years
(FY 2019 – FY 2024(1)).
The City’s Unassigned Fund Balance continues to be in compliance with the City’s Adopted Financial
Policies.
As the national economic outlook continues to evolve, it will continue to be integral to maintain structural
balance (i.e. recurring revenues meeting / exceeding recurring expenditures).
December 10, 2024 Financial State of the City 7
Financial Management Summary
(1) FY 2024 estimates reflects draft audited financials. Preliminary, subject to change.
December 10, 2024 Financial State of the City 8
Unassigned Fund Balance – Financial Policy Compliance
Following the Government Finance Officers Association recommendation that general purpose
governments maintain Unassigned Fund Balance in their General Fund of no less than 5% to 15% of
regular General Fund operating revenues, the City shall maintain an Unassigned Fund Balance of 8% to
12% of the following year’s projected revenues. This level equates to approximately one month of
operating expenses.
Unassigned Fund Balance Policy
Source: Historical City Audits and Budgets.
(1) FY 2024 estimates reflects draft audited financials. Preliminary, subject to change.
Unassigned FB FY 2024 ($) Figure:
~$186 million(1)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2019
Audited
2020
Audited
2021
Audited
2022
Audited
2023
Audited
2024 Draft
Audit¹
Unassigned as a % of Revenues
Reserve Policy - Lower Bound (8%)
Reserve Policy - Upper Bound (12%)
December 10, 2024 Financial State of the City 9
Peer Comparative – Unassigned Fund Balance vs. Revenue
Source: Respective City 2023 Audits. (1) FY 2024 estimate. Preliminary, subject to change.
Note: Revenues comprise of General Fund Revenues plus School Fund Revenues (excluding Transfers from the General Fund).
Credit Rating Key: (Moody’s/S&P/Fitch)
12.6%
18.3%
8.0%
8.1%
10.9%
17.1%
19.5%
25.0%
25.7%
44.3%
0%5%10%15%20%25%30%
Virginia Beach¹
Hampton Roads Cities Median
Chesapeake (Aaa/AAA/AAA)
Norfolk (Aa2/AAA/AA+)
Newport News (Aa1/AA+/NR)
Hampton (Aa1/AA+/AA)
Poquoson (Aa2/AAA/NR)
Suffolk (Aaa/AAA/AAA)
Portsmouth (Aa2/AA+/AA-)
Williamsburg (Aa1/AAA/NR)
Unassigned Fund Balance vs. Revenues
December 10, 2024 Financial State of the City 10
Tax-Supported Debt Profile
Source: Davenport Debt Model
As of FY 2025 (July 1, 2024), the City had roughly $1.1 billion of Tax-Supported debt outstanding (including
$118 million of Flood Protection Program debt).
All of the City’s outstanding debt is fixed-rate.
The City’s 10-year Payout Ratio is approximately 68%.
$-
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
20252026202720282029203020312032203320342035203620372038203920402041204220432044Millions Principal Interest
December 10, 2024 Financial State of the City 11
Debt Management Financial Policies
The City has several Debt Management Financial Policies which were most recently updated in the early
part of calendar year 2023.
These policies are summarized below:
Policy/Metric Existing Policy
Net Debt to Assessed Real Estate Value Not to exceed 3.0%.
Debt Service to General Government
Expenditures Not to exceed 10.0%.
Fixed Costs to General Government
Expenditures Not to exceed 20.0%.
10-Year Payout Ratio Remain above 50%.
December 10, 2024 Financial State of the City 12
Debt Capacity | Issuance Assumptions
The table below highlights the estimated amount and timing of debt for the City’s three (3) tax-supported
borrowing programs in support of the City’s CIP over the next six fiscal years. The debt issuances translate
into debt service payments which affect the City’s operating budget.
The issuance schedule is directly affected by the City’s cash flow spending to fund approved CIP projects.
The estimated schedule was developed in concert with City Finance & Budget Staff using historical results
and future projections.
FY Charter PFRB Flood Total
2025 -$ -$ -$ -$
2026 120,820,635 121,239,294 150,970,927 393,030,856
2027 - - - -
2028 175,820,635 176,239,294 298,529,073 650,589,002
2029 - - - -
2030 145,820,635 186,239,294 - 332,059,929
2031 - - - -
Total 442,461,905$ 483,717,882$ 449,500,000$ 1,375,679,787$
December 10, 2024 Financial State of the City 13
Debt Capacity | Financial Policy Projections
Debt vs. Assessed Value Debt Service vs. Budget
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2025 2026 2027 2028 2029 2030 2031 2032
Existing Tax-Supported Debt vs. AV Projected Charter Debt vs. AV
Projected PFRB Debt vs. AV Projected Flood Debt vs. AV
Debt Policy Limit (3.0%)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2025 2026 2027 2028 2029 2030 2031 2032
Existing Tax-Supported DS vs. Budget Projected Charter DS vs. Budget
Projected PFRB DS vs. Budget Projected Flood DS vs. Budget
Debt Service Policy Limit (10%)
Estimated results are preliminary, subject to change.
Note: Assessed Value is assumed to grow annually at 3.0%.Note: Budget is assumed to grow annually at 3.0%.
December 10, 2024 Financial State of the City 14
Debt Capacity | Financial Policy Projections (cont.)
Fixed Costs Ratio Payout Ratio
Estimated results are preliminary, subject to change.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2025 2026 2027 2028 2029 2030 2031 2032
Existing Tax-Supported DS Projected Pension Cost
Projected OPEB Cost Projected Charter DS
Projected PFRB DS Projected Flood DS
Fixed Costs Policy Limit (20%)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2025 2026 2027 2028 2029 2030 2031 2032
Existing 10 Year
Payout Ratio
Projected 10 Year Payout Ratio
Minimum 10 Year Payout Ratio (50%)
Note: Budget is assumed to grow annually at 3.0%. Pension and OPEB Expenses are assumed to
grow annually at 3.5%.
The City’s financial standing is very strong as described by the independent credit rating agencies.
The City is in the process of undertaking a generational amount of capital investment as evidenced by the
Flood Protection Program as well as capital projects affected by inflationary pressures.
Based on current assumptions, the City has additional debt capacity (as measured against the City’s
adopted Debt Management Financial Policies), however, the repayment of the incremental additional debt
(i.e. debt affordability) will need to be pro-actively addressed during the annual budget process.
A key component of maintaining the strength and sustainability of the City’s finances while undertaking its
capital program will be revenue growth commensurate with, at a minimum, debt service and expenditures.
Davenport, in concert with the City’s Senior Administration, will continue to monitor and evaluate the City’s
debt capacity and debt affordability as City Council determines its capital funding priorities.
December 10, 2024 Financial State of the City 15
Concluding Observations
December 10, 2024 Financial State of the City 16
Next Steps
Timing Action
Tuesday, December 10, 2024 Davenport to present Financial State of the City briefing to City Council.
Balance of 2024 City Council to provide feedback and request any supplemental additional
information from City Staff and Davenport.
January, 2025 City Council to evaluate capital funding priorities and goals in anticipation of
the FY 2026 Budget and Capital Improvement Program process.
Spring, 2025 Davenport to analyze additional capital funding scenarios based on direction
received from City Council and Senior City Leadership (as required).
Appendix
City of Virginia Beach, Virginia
December 10, 2024 Financial State of the City 17
December 10, 2024 Financial State of the City 18
Key Drivers to a Credit Rating
[Moody’s = 10% / S&P = 20%]
Financial Forecasting
and management
Consistent and prudent
budgeting practices
Range and growth of services
provided in relation to
capacity to provide services
Adherence to long-range financial
planning and policies
Revenue & Expenditure
structure and patterns
Annual Operating & Budgetary
performance
Financial flexibility/Fund
Balance position
Long-Term Financial Plan
Nature of the pledged
security & debt structure
Balance between
accelerated debt issuance and
under-investment in capital
facilities
Debt Burden measured against:
Tax Base & Total Budget
Demographic Characteristics
Tax Base
Industry Mix & Composition
Local and Regional
Growth patterns
[Moody’s = 30% / S&P = 20% /
Fitch = 44%]
Note: %’s are from Moody’s updated methodology November 2022/ S&P updated methodology September 2024 / Fitch updated methodology April 2024.
[Moody’s = 30% / S&P = 20% /
Fitch = 21%]
[Moody’s = 30% / S&P = 40% /
Fitch = 35%]
Economic
Base
Financial
Performance
& Flexibility
ManagementDebt
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Financial State of the City
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19December 10, 2024