1. 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

2. 9/13/2015 2 www.fitchratings.com 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

3. 9/13/2015 3 www.fitchratings.com 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

4. 9/13/2015 4 www.fitchratings.com 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

5. 9/13/2015 5 www.fitchratings.com 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

6. 9/13/2015 6 www.fitchratings.com 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?

7. 9/13/2015 7 www.fitchratings.com 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)

8. 9/13/2015 8 www.fitchratings.com 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. 9/13/2015 9 www.fitchratings.com 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

10. 9/13/2015 10 www.fitchratings.com Virginia Retirement System Actuarial Date 6/30/086/30/09 ARC Funded (%)81.366.6 Reported Funded Ratio (7.5% return on investment) 84.080.2 Fitch Adjusted Funded Ratio (7% return on investment) 79.676.0

11. 9/13/2015 11 www.fitchratings.com GO Rating Distributions – Virginia Versus Nation Excludes school districts and special districts

12. 9/13/2015 12 www.fitchratings.com Job Growth in Past Year Source: BLS, April 2011 YOY % Δ in Nonfarm Payrolls

13. 9/13/2015 13 www.fitchratings.com Personal Income

14. 9/13/2015 14 www.fitchratings.com Housing Starts

15. 9/13/2015 15 www.fitchratings.com Housing Price Change Source: FHFA Home Price Index, YOY % Δ Q 1 2011

16. 9/13/2015 16 www.fitchratings.com Median Home Price

17. 9/13/2015 17 www.fitchratings.com Disclaimer Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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