Enhancing the Analysis of Local Government Pension Obligations and An Update on Virginia’s Economic Indicators Barbara Ruth Rosenberg, Director U.S. Public Finance, Tax Supported June 9, 2011

9/13/ Overview Role of pensions in credit analysis Factors reviewed when analyzing pensions Assessing the burden on an issuer’s resources Standardizing investment returns Governmental responses and ramifications for credit quality Virginia statistics

9/13/ The Role of Pensions in Credit Analysis Debt ratios: bonded debt and analogous obligations Outstanding debt instruments Obligations to employees and retirees for future pension and health benefits

9/13/ Pension Analysis Factors Type of plan: SE versus AME versus CSME Single-employer (SE): single plan which covers single government Agent multi-employer (AME): single plan in which each participating government has separately tracked assets, liabilities, contributions, and actuarial assumptions Cost sharing multi-employer (CSME): single plan which pools the assets, liabilities, and contributions of numerous governments Responsibility – contributions & benefits Magnitude of liability Unfunded actuarial accrued liability (UAAL) = actuarial accrued liability (AAL) less actuarial assets Funded ratio Size of resource base Contributions as percent of budget Funding history

9/13/ Actuarial Assumptions Basic idea: meet a future obligation by setting aside funds now Who is and will become eligible? How long will they receive payments, how much will they be? What is the payment now to cover payments in the future? What will the investment pool earn over time? Norm: 7.5% - 8.5% Changes to asset valuation Norm: 5 year smoothing

9/13/ Analysis of Funded Ratio Has there been stabilization? Effect of most recent market declines What is the issuer’s commitment to funding ARC? ARC often set at a fixed percentage of payroll by law – regardless of actuarial need, or periodically changes due to some other mechanism, i.e. corridor Often changed as a policy decision – i.e., underfunding for budget relief How will the issuer ensure adequate pension funding?

9/13/ Assessing Burden on Governmental Resources Contribution as percent of budget over time Noteworthy: pension funding >10% of operating budget UAAL as percent of market value for local governments (excluding state-wide CSME allocation)

9/13/ Enhanced Analytics: Standardized Investment Return Improve comparability Fitch to consider funded ratio utilizing 7% investment return assumptions Relatively conservative assumption due to uncertain economic outlook, increased risk and volatility, and weaker returns over the past decade Adjust AAL by 11% for each 1% adjustment to investment return Funded ratio ≥ 70% adequate; <60% weak

9/13/ Governmental Responses Long history of pension payments Evidence of governmental efforts to improve pensions Fitch believes public support to moderate benefits Vast majority of governments will withstand pressures, albeit by taking difficult steps

9/13/ Virginia Retirement System Actuarial Date 6/30/086/30/09 ARC Funded (%) Reported Funded Ratio (7.5% return on investment) Fitch Adjusted Funded Ratio (7% return on investment)

9/13/ GO Rating Distributions – Virginia Versus Nation Excludes school districts and special districts

9/13/ Job Growth in Past Year Source: BLS, April 2011 YOY % Δ in Nonfarm Payrolls

9/13/ Personal Income

9/13/ Housing Starts

9/13/ Housing Price Change Source: FHFA Home Price Index, YOY % Δ Q

9/13/ Median Home Price

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