2002 Pension Obligation Bonds Rating Agency Presentation

2002 Pension Obligation Bonds

Rating Agency Presentation

June 2002

County of San DiegoCounty of San Diego

A. Introductions

B. Objectives

C. Financial Results and FY 2002-03 Operating Plan

D. Investment Pool

E. Economic Highlights

F. 2002 Pension Obligation Bonds

G. Conclusion

Table of ContentsTable of ContentsTable of ContentsTable of Contents

County of San Diego William J. Kelly, Chief Financial Officer Lisa Keller-Chiodo, Capital Finance Manager Neil Rossi, Chief Deputy Treasurer Mark Friedrich, Investment Officer

Senior Manager Chris Mukai, Director, Salomon Smith Barney George Leung, Director, Salomon Smith Barney

Financial Advisor Miriam Maxian, Vice President, Program

IntroductionsIntroductionsIntroductionsIntroductions

ObjectivesObjectivesObjectivesObjectives

Demonstrate – through our organized, structured and disciplined focus on prevention, continuous improvement, strategic planning and performance monitoring – that San Diego County is the best run county government in California.

Demonstrate that the County is well-positioned and prepared to manage future challenges, including State budget risk.

Attain the highest rating of any county in the State of California.

Financial Highlights FY 2001-02Financial Highlights FY 2001-02Financial Highlights FY 2001-02Financial Highlights FY 2001-02

In fiscal 2001-2002, the County maintained structurally balanced operations. Annual recurring revenues have exceeded recurring spending.

Conservative budgeting practices again led to favorable variances between original budget estimates and actual revenues and spending. First three quarter expenditures are $256 million below original budget estimates.

Historic five-year labor agreements reached with employee unions, providing future certainty for largest expenditure item. Good labor relations maintained.

County has absorbed higher utility costs caused by the State’s energy crisis without cutting services.

Reduction in welfare cases in San Diego County has far exceeded other California counties over a five-year period beginning in 1995, County case load dropped 58% while rest of State dropped 41%

County sold its Tobacco Settlement Revenue stream for $467 million and funded an endowment to fund certain health programs, reducing its exposure to the tobacco industry.

Reduction of Long-Term Debt: San Pasqual and Interim Justice Refunding

Enhanced retirement benefits settled the Post-Ventura litigation and created competitive salaries and benefits with City of San Diego for a longer term

Projected FY 2001-2002 Financial ResultsProjected FY 2001-2002 Financial ResultsProjected FY 2001-2002 Financial ResultsProjected FY 2001-2002 Financial Results

* Balances for the year ended June 30, 2001 were significantly affected by the implementation of GASB 33, which requires equity that was previously classified in certain agency funds to be consolidated with the General Fund. In fiscal year 2000-2001 the effect of GASB 33 was an additional $26.6 million in the unreserved and $152.2 million in the reserved fund balances.

Fund Balance Available:

Group Balances:

Public Safety 35.2Health and Human Services Agency 13.6Land Use & Environment 12.7Community Services 9.6Finance & General Government 34.0 General Revenue Balances 46.0

151.1

FY 1999-2000 FY 2000-2001 FY 2001-2002

(Audited) (Audited) (Estimated)

Group Balances $96.9 mm 146.1 mm $ 105.1mm

General Revenue Balances

60.4 mm 79.8 mm 46.0mm

Total Available/Undesignated

Fund Balance*

$157.3 mm $225.9 mm $ 151.1mm

County General Reserve $50.0 mm $50.0 mm $53.0 mm

Conservative estimates for FY2001-02.

FY 2002-2003 Proposed Operating PlanFY 2002-2003 Proposed Operating PlanFY 2002-2003 Proposed Operating PlanFY 2002-2003 Proposed Operating Plan

$795.80

$1,408.97

$298.20 $16.10

$40.50$84.90

Public Safety

Health & Human Services

Land Use & Environment

Community Services

Finance & General Government & Other

Contingencies and Designation

$2.64 Billion General Fund Operating PlanFY 2002-2003(in Millions)

Appropriations

$326.60

$1,409.49

$207.98

$560.92 $57.09

$20.60$33.30$28.44

Current Property Taxes

Other Taxes

Licenses, Permits & Franchises

Fines & Forfeitures

Use of Money & Property

Intergovernmental Revenue

Charges for Current Service

Other Revenues (Other, Fund Balance,Misc. Revenue & Reserve/Designations)

Revenues

County of San Diego FY 2002-2003County of San Diego FY 2002-2003Proposed Operating Plan – General FundProposed Operating Plan – General Fund

County of San Diego FY 2002-2003County of San Diego FY 2002-2003Proposed Operating Plan – General FundProposed Operating Plan – General Fund

Total Public Health and Human Land Use & Community Finance & Finance County Safety Services Agency Environment Group Services Group General Gov Other

ExpendituresSalaries & Employee Benefits 1,059,021,225 558,113,349 338,479,473 56,121,155 19,050,229 87,257,019 Services & Supplies 966,684,577 161,126,569 680,188,663 26,089,819 11,328,555 63,723,702 24,227,269 Other Charges 516,655,191 92,629,323 380,662,190 883,202 6,000 108,000 42,366,476 Fixed Assets - Equipment 4,442,604 2,501,863 1,028,741 477,000 45,000 390,000 Expend, Transfers & Reimbursements (19,005,102) (18,564,550) (277,187) (163,365) Reserves 11,000,000 11,000,000 Reserve/Designation Increase 17,016,000 11,916,000 5,100,000 Operating Transfers 63,385,123 3,766,594 211,324 2,993,220 70,510 56,343,475 Management Reserves 25,334,202 5,079,728 1,130,620 7,090,742 12,033,112

Total 2,644,533,820 795,806,554 1,408,928,202 84,913,120 40,513,746 175,334,978 139,037,220

RevenuesReserves/Designation 112,000 112,000 Fund Balance 73,011,429 5,606,722 10,000,000 3,611,563 5,876,836 32,816,308 15,100,000 Taxes Current Property 326,639,437 Taxes Other Than Current Secured 57,093,532 907,532 Licenses Permits & Franchises 28,445,286 306,000 714,507 22,028,029 1,966,750 430,000 Fines Forfeitures & Penalties 33,304,658 17,581,265 3,518,940 276,428 9,000 664,525 Revenue Use of Money & Property 20,621,616 4,371,115 379,437 457,264 13,800 Intergovernmental Revenue 1,409,498,218 158,904,505 1,040,886,481 8,767,674 10,593,588 543,183 Charges for Current Services 207,981,126 99,606,837 34,894,333 16,246,356 8,626,689 42,826,198 Miscellaneous Revenue 19,379,084 781,288 10,428,338 926,879 835,962 5,906,617 500,000 Other Financing Sources 468,447,434 208,531,873 258,040,166 1,850,395 25,000 General Revenue Allocation 300,116,949 50,066,000 29,729,000 12,604,921 92,109,347 123,437,220

Total 2,644,533,820 795,806,554 1,408,928,202 84,913,120 40,513,746 175,334,978 139,037,220

FY 2002-2003 Reserves and Resources FY 2002-2003 Reserves and Resources FY 2002-2003 Reserves and Resources FY 2002-2003 Reserves and Resources

* source: 02-03 Operational Plan, as of July 1, 2002 .

**Can be redirected by supermajority vote of Board of Supervisors or substitution with replacement facility

Reserves and Resources* (in millions)

Undesignated Fund Balances 151.10County General Reserve 53.00 Subtotal - Unrestricted Reserves 204.10

Debt Service Reserves 28.60Public Liability Reserve 19.50Workers Compensation Reserve 32.00Environmental Trust Fund Reserve 91.20Endowment Fund 389.00Non-Endowment Tobacco 34.00 Subtotal - Restricted Reserves** 594.30

County has significant reserves and financial flexibility.

Analysis of Governor’s May ReviseAnalysis of Governor’s May ReviseAnalysis of Governor’s May ReviseAnalysis of Governor’s May Revise

Minimal Impact on General Purpose Revenues

Estimated Total Impact to County = $68.5M

20% reduction in funding for administration of various HHSA programs: $19.74M

Cost shift to counties of 10% share of funding for growth in Early Periodic screening, Diagnosis and Treatment (EPSDT): $4.2M

Cost shift to counties of Child Support Penalties: $3.5-7M

Elimination of Juvenile Crime Prevention Program: $10.29M

Suspension of funding for Reimbursable Mandates (SB 90): $5.32M

County operating efficiencies minimize impact of reductions targeted at administrative costs.

Spring of 2002, County prepared contingency plans for $200 million reduction in General Purpose Revenues or State Program Reductions or cost shifts from the State

San Diego County Rated Among Best in Government Service

A February 2002 study conducted by the Maxwell School and Governing Magazine ranked San Diego County as the top County in the nation in terms of Financial Management, Capital Management and Managing for Results

Golden Watchdog Award for the Securitization of the Tobacco Settlement Revenue

Financial Management A-

Capital Management A-

Human Resources B-

Information Technology B+

Managing for Results A-

OVERALL B+

Excellence in GoverningExcellence in GoverningExcellence in GoverningExcellence in Governing

Financial Management (A-) Weakness in IT have restricted effective use of financial data

Capital Management (A-) Old financial management information system has impeded good data flow about capital Some departments still submit “wish lists” in capital requests $200 million backlog of planned road projects

Human Resources (B-) Too many employees at top of pay grade – makes compensation increases difficult Too many classification titles Multiple bargaining units impede change Many salary increases still based on step system, so-called “pay for breathing” Discipline process cumbersome Weak individual appraisals

Managing for Results (A-) More citizen participation needed Agency strategic plans need improvement

Information Technology (B+) Current entity-wide information systems antiquated, although new ones coming on line soon Procurement slightly slow Behind the curve with online citizen transactions

Opportunities for Improvement Opportunities for Improvement Opportunities for Improvement Opportunities for Improvement

Challenges and Potential ResponsesChallenges and Potential ResponsesChallenges and Potential ResponsesChallenges and Potential Responses

Risk of local discretionary revenue shifts Operating Plan assumes full local discretionary revenue

Risk of State Responsibility Shifts EPSDT

Factors affecting San Diego economic prosperity High cost and uncertain supply of energy Rising housing costs State budget

Regional economy San Diego’s employment growth remains strong, though it has slowed from previous

levels Local sales tax transactions continue to do well Real estate market continues to be strong due to high demand and low financing costs

Budget impact General Purpose Revenues are expected to be between 6.5% and 7% vs. fiscal year 99-

00 and 00-01 where growth was 9.2% and 10.8% respectively General Management System matured to handle adversity

San Diego County Investment Pool Strength and StabilitySan Diego County Investment Pool Strength and StabilitySan Diego County Investment Pool Strength and StabilitySan Diego County Investment Pool Strength and Stability

Highly Liquid Vast majority of funds are mandatory Low weighted average maturity 32% of securities mature within 180 days

Portfolio focus is Safety, Liquidity, Return

High Credit Quality High credit quality (100% of securities are rated AAA or A1/P1/F1) Weighted average yield of 3.20%

Professionally managed

Varied Pool Participants Only 2.39% comprised of Voluntary Depositors

Strong cash flow model

San Diego County Investment Pool Asset AllocationSan Diego County Investment Pool Asset Allocationas of April 30, 2002as of April 30, 2002

San Diego County Investment Pool Asset AllocationSan Diego County Investment Pool Asset Allocationas of April 30, 2002as of April 30, 2002

0.01%

37.97%

1.64%15.45% 9.57%

6.23%

29.13%

Time Deposits .01%

C. P. 37.97%

Med. Term Notes 1.64%

Negotiable CD's 15.45%

Repo 9.57%

Money Market 6.23%

Agencies 29.13%

San Diego County Investment Pool Credit QualitySan Diego County Investment Pool Credit Qualityas of April 30, 2002as of April 30, 2002

San Diego County Investment Pool Credit QualitySan Diego County Investment Pool Credit Qualityas of April 30, 2002as of April 30, 2002

55.74%

44.26%

AAA 44.26%

A-1/P-1/F-1 55.74%

San Diego County Investment Pool Pool ParticipantsSan Diego County Investment Pool Pool Participantsas of April 30, 2002as of April 30, 2002

San Diego County Investment Pool Pool ParticipantsSan Diego County Investment Pool Pool Participantsas of April 30, 2002as of April 30, 2002

44.87%

38.38%

2.39%

4.75% 9.61%

County Funds 38.38%

Voluntary Depositors2.39%Schools 44.87%

Community Colleges4.75%Unapportioned Tax/Int.Funds 9.61%

San Diego County Investment Pool StatisticsSan Diego County Investment Pool Statisticsas of April 30, 2002as of April 30, 2002

San Diego County Investment Pool StatisticsSan Diego County Investment Pool Statisticsas of April 30, 2002as of April 30, 2002

Percent Of Market Accrued Unrealized Yield ToPortfolio Book Value Price Interest Market Value Gain/(Loss) Maturity

Federal Farm Credit Bank Notes 0.68% 25,003,947 100.06% 281,250 25,015,750 $11,803 2.22%Federal Home Loan Bank Notes 9.79% 354,941,008 101.00% 7,633,080 358,532,747 $3,591,739 5.73%Federal Nat'l Mortgage Assoc. Notes 10.53% 380,535,770 101.35% 2,171,969 385,681,221 $5,145,450 4.64%Federal Home Loan Mortg. Corp. Notes 7.04% 254,964,941 101.05% 2,963,403 257,685,350 $2,720,409 4.57%Student Loan Marketing Assoc. Notes 1.37% 50,017,375 100.02% 368,750 50,008,000 ($9,375) 2.20%Corporate Medium Term Notes 1.64% 60,000,000 99.88% 21,452 59,930,400 ($69,600) 1.84%Money Market Funds 6.23% 228,000,000 100.00% 596,977 228,000,000 $0 1.85%Repurchase Agreements 9.56% 350,000,000 100.00% 18,896 350,000,000 $0 1.94%Negotiable Certificates Of Deposit 15.44% 564,973,419 100.12% 4,949,236 565,655,750 $682,331 2.28%Commercial Paper 37.72% 1,381,114,609 99.48% 0 1,381,596,726 $482,117 2.02%Collateralized Certificates of Deposit 0.01% 490,000 100.00% 631 490,000 $0 2.75%Totals For April 2002 100.00% $3,650,041,069 100.13% $19,005,645 $3,662,595,943 $12,554,875 2.86%

Totals For March 2002 100.00% $2,968,810,141 100.07% $21,834,702 $2,975,753,846 $6,943,705 3.20%

Change From Prior Month $681,230,928 0.06% $686,842,097 $5,611,170 -0.35%

Overall Portfolio Effective Duration 0.42 years

Fiscal YearApril '02 To Date Calendar YearReturn Annualized Return Annualized To Date Return Annualized

Book Value 0.243% 2.951% 3.358% 4.031% 1.089% 3.313%Market Value 0.414% 5.032% 3.473% 4.170% 0.866% 2.635%

San Diego County region exhibited stronger economic performance than other California counties in 2001

Property tax valuation increased 9.6% for 2001-02 from the prior year

Gross Regional Product (GRP) climbed to $120.5 billion in 2001, a record for total economic production in the region

County employment and population have continued to rise and unemployment remains below State average

Economic HighlightsEconomic HighlightsEconomic HighlightsEconomic Highlights

San Diego’s Gross Regional Product (GRP) is expected to reach $126.7 billion in 2002

County currently contributes 8.5% towards California’s GRP

Gross Regional ProductGross Regional ProductGross Regional ProductGross Regional Product

San Diego GRP(Billions Percentage of:

Year of Dollars) Calif. U.S. 1990 $64.737 8.10% 1.12% 1991 $66.733 8.19% 1.11% 1992 $67.857 8.16% 1.07% 1993 $69.222 8.16% 1.04% 1994 $71.838 8.17% 1.02% 1995 $75.109 8.11% 1.01% 1996 $79.562 8.17% 1.02%1997 $86.086 8.24% 1.03%1998 $93.627 8.32% 1.07%1999 $103.316 8.41% 1.11%2000 $113.727 8.38% 1.15%

2001e $120.526 8.49% 1.18% 2002f $126.675 8.65% 1.19%

*Adjusted by GDP/GSP implicit price deflator. e: estimate f: forecastSource: Bureau of Economic Analysis, U.S. Department of Commerce; UCLA Anderson Forecast;Economic Research Bureau, San Diego Regional Chamber of Commerce.

Diverse Economy and Employment BaseDiverse Economy and Employment BaseDiverse Economy and Employment BaseDiverse Economy and Employment Base

The County possesses a diverse economic base consisting of manufacturing (electronics, technology, ship building), defense-related industries, and a large tourist industry bolstered by the favorable climate of the region.

San Diego is recognized as having one of the most diversified economies in the U.S.

Employer Service/Product

10,000 OR MORE EMPLOYEES:Federal Government GovernmentState of California GovernmentUniversity of California, San Diego Higher EducationCounty of San Diego GovernmentSan Diego Unified School District EducationCity of San Diego Government

5,000-9,999 EMPLOYEES:Sharp Healthcare Corp. HealthcareU.S. Postal Service Postal ServiceQUALCOMM, Inc. TelecommunicationsKaiser Permanente Medical Group HealthcareScripps Health HealthcarePacific Bell Telecommunications

3,000-4,999 EMPLOYEES:Science Applications International Corp. Technology ServicesAlbertson's Inc. Retail Food ChainSempra Energy UtilitiesSan Diego State University Higher EducationSony Technology Center Communication/WirelessPalomar Pomerado Health Systems HealthcareUnited Parcel Service Mail Delivery ServiceNational Steel & Shipbuilding Co. Shipbuilders and RepairersAce Parking Parking Stations and Garages

Source: San Diego County Chamber of Commerce.

1993-99SAN DIEGO

San Jose

Los Angeles/ Long Beach

Orange

County

San

Francisco

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Significant Growth in Manufacturing and ExportsSignificant Growth in Manufacturing and ExportsSignificant Growth in Manufacturing and ExportsSignificant Growth in Manufacturing and Exports

Among California’s major metropolitan areas, exports have grown significantly faster in San Diego than other areas.

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1997 1998 1999 2000 2001 (e) 2002 (f)

U.S. California County of San Diego

High Employment LevelsHigh Employment LevelsHigh Employment LevelsHigh Employment Levels

Labor Force - Unemployment*Annual Averages 1997-2001

Source: State Data - California Employment Development Department; National Data - U.S. Department of Labor, Bureau of Labor Statistics.* Data not seasonally adjusted and through December 2001.

High Employment = Low Welfare & Strong Tax Base

Economic Overview: Strong Tax Base GrowthEconomic Overview: Strong Tax Base GrowthEconomic Overview: Strong Tax Base GrowthEconomic Overview: Strong Tax Base Growth

Assessed Valuation of PropertyFY 1994-1995 through 2001-2002

Source: County of San Diego Auditor and Controller. Secured tax roll statistics.Note: Net Assessed Valuation for Tax Purposes figures include local secured, unsecured, state unitary and redevelopment valuation.

9.6% growth for 2001-02 Expectation of 8.5% growth for 2002-03

Bill

ions

$144

.20

$145

.68

$146

.00

$149

.61 $1

60.1

0

$176

.11

$191

.19

$209

.28

$130

$140

$150

$160

$170

$180

$190

$200

$210

$220

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

Enhanced Retirement Package (Approved March 2002) Will consolidate existing tiers and proactively resolve both Ventura Litigation and

PERS parity issue (2% @ 50)

County planning for “worst case” Elimination of surplus (107% as of 6/30/2001 actuarial valuation) Net Funding Ratio of approximately 80%

County in FY 02-03 sets aside $5M annually, which together with future freed up debt capacity from maturing 1994 POBs, will be sufficient to satisfy UAAL, which by SDCERA policy would be amortized over 10 years.

Vested deferred explosion defused with enhanced retirement plan

2002 POB Financing Plan2002 POB Financing Plan2002 POB Financing Plan2002 POB Financing Plan

-

500

1,000

1,500

2,000

2,500

3,000

3,500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

2002 POB Financing Strategy Estimated unfunded accrued actuarial liability (UAAL)

UAAL from Benefits Enhancements (1/31/02) $ 870.8 mmEstimated Additional Increases 129.2 mm Total $ 1,000.0 mmExcess Assets Over Liabilities (6/30/01) (238.8) mmNet $ 761.2 mm

Financing Approach Prepay a portion of Net UAAL ($400 - $500mm). Eliminate UAAL payments to SDCERA through at least FY08. Wrap new POB debt service around existing 1994 POBs. Refund 1994 POBs if debt service neutrality can be achieved. Create future prepayment and refinancing flexibility for POBs. Target funding ratio of 90%-95% and minimize risk of over-funding pension system.


UAAL Funded: $400 - $500 mm

Term: 30 Years

Indicative Yield: 6.85%

Structure(s): Current Interest BondsCapital Appreciation BondsAuction Rate BondsAuction Rate Bonds with Swap

1994 POBs Refunded: Subject to market conditions. County will refund 1994 POBs only if it lowers overall POB debt service.

Prepayment Flexibility: Yes



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Existing 1994 POBs New Additional POB D/S from 2002 Issue*

Resources Available for POB and UAAL Payments

San Diego County Pension Bond AnalysisTotal Unfunded Liability Payments

Sufficient resources and capacity to prepay or issue more POBs in future if necessary.

*Assumes County Issues POBs to fund $500 million of UAAL at current market rates.


SDCERA Historical Average Investment Returns

1-year -8.40%

3-year 5.97%

5-year 8.24%

10-year 9.58%

15-year 10.22%

San Diego County Pension Bond Analysis$500 Million Deposit (Assuming 9.50% Return on Assets)

78%90%

91%92%

93%94%

95%96%

97%98%

99%

100%

102%

103%

104%

(2,000,000)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Market Value of Assets Unfunded Liability Actuarial Accrued Liability

2002 POBs sized to achieve targeted funding ratios.


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Existing County Debt Service Total County Debt Service with 2002 POBs (1)

(1) Assumes County Issues POBs to fund $500 million of UAAL at current market rates.

San Diego County Long Term Debt Obligations

Manageable impact on County debt service burden.

No Impact on Net General Fund Debt ServiceNo Impact on Net General Fund Debt ServiceNo Impact on Net General Fund Debt ServiceNo Impact on Net General Fund Debt Service

Total FY 02-03 Lease Payments Budgeted $118,853,017

Total Offsets $ 37,137,062Net Cost to County $ 81,715,955 General Fund

ReimbFed/State/City

AB189Districts/Funds

Special

Fees/Other

County Debt Service Burden * = 4.49%

Debt Service Burden with offsets = 3.09%

Debt Service Burden net of POB’s = 2.36%

* % of County budget

Financing ScheduleFinancing ScheduleFinancing ScheduleFinancing Schedule

Date Activity

June 11 Bond Insurance Bids Received

June 14-17 Rating Agency Conference Calls

June 18 County Board Approves Financing

June 21 Receive RatingsPost / Mail Preliminary Official Statement

July 8-11 Launch and Price Transaction

July 30 Closing

ConclusionsConclusionsConclusionsConclusions

County continues to exercise fiscal prudence and build reserves

Consistent with its strategic plan and financial objectives, the County has maintained a structurally balanced budget

County continues to maintain strong cash position

County is well positioned to manage future challenges, including potential impact of State budgetary actions

Abundant reserves and resources available No public hospital system Diversified economy

County is proactively addressing Ventura, PERs parity and City of San Diego competitive issues with enhanced retirement benefits

County debt burden is manageable. POB financing plan is conservative and affordable

2002 Pension Obligation Bonds Rating Agency Presentation

Documents

Transcript of 2002 Pension Obligation Bonds Rating Agency Presentation