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2002 Pension Obligation Bonds Rating Agency Presentation

County of San Diego. 2002 Pension Obligation Bonds Rating Agency Presentation. June 2002. Table of Contents. 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.

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2002 Pension Obligation Bonds Rating Agency Presentation

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  1. County of San Diego 2002 Pension Obligation Bonds Rating Agency Presentation June 2002

  2. Table of Contents 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

  3. Introductions 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

  4. Objectives • 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.

  5. Financial 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

  6. Projected 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. • Conservative estimates for FY2001-02.

  7. FY 2002-2003 Proposed Operating Plan $2.64 Billion General Fund Operating Plan FY 2002-2003(in Millions) Revenues Appropriations

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

  9. FY 2002-2003 Reserves and Resources • County has significant reserves and financial flexibility. * 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

  10. Analysis 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

  11. Excellence in Governing • 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+

  12. Opportunities for Improvement • 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

  13. Challenges 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

  14. San 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

  15. San Diego County Investment Pool Asset Allocationas of April 30, 2002

  16. San Diego County Investment Pool Credit Qualityas of April 30, 2002

  17. San Diego County Investment Pool Pool Participantsas of April 30, 2002

  18. San Diego County Investment Pool Statisticsas of April 30, 2002

  19. Economic Highlights • 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

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

  21. Diverse 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.

  22. SAN DIEGO 120.0% Orange 100.0% San Jose County 80.0% Los Angeles/ 60.0% Long Beach 40.0% San Francisco 20.0% 0.0% -20.0% Significant Growth in Manufacturing and Exports • Among California’s major metropolitan areas, exports have grown significantly faster in San Diego than other areas. 1993 - 99

  23. High Employment Levels • High Employment = Low Welfare & Strong Tax Base 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.

  24. Economic Overview: Strong Tax Base Growth Assessed Valuation of Property FY 1994-1995 through 2001-2002 Billions 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

  25. 2002 POB Financing Plan 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

  26. 2002 POB Financing Plan 2002 POB Financing Strategy • Estimated unfunded accrued actuarial liability (UAAL) UAAL from Benefits Enhancements (1/31/02) $ 870.8 mm Estimated Additional Increases 129.2 mm Total $ 1,000.0 mm Excess Assets Over Liabilities (6/30/01) (238.8) mm Net $ 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.

  27. 2002 POB Financing Plan UAAL Funded: $400 - $500 mm Term: 30 Years Indicative Yield: 6.85% Structure(s): Current Interest Bonds Capital Appreciation Bonds Auction Rate Bonds Auction 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

  28. 2002 POB Financing Plan • Sufficient resources and capacity to prepay or issue more POBs in future if necessary. San Diego County Pension Bond Analysis Total Unfunded Liability Payments *Assumes County Issues POBs to fund $500 million of UAAL at current market rates.

  29. 2002 POB Financing Plan • 2002 POBs sized to achieve targeted funding ratios.

  30. 2002 POB Financing Plan • Manageable impact on County debt service burden. San Diego County Long Term Debt Obligations (1) Assumes County Issues POBs to fund $500 million of UAAL at current market rates.

  31. No Impact on Net General Fund Debt Service Total FY 02-03 Lease Payments Budgeted $118,853,017 Total Offsets $ 37,137,062 Net Cost to County $ 81,715,955 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

  32. Financing Schedule DateActivity June 11 Bond Insurance Bids Received June 14-17 Rating Agency Conference Calls June 18 County Board Approves Financing June 21 Receive Ratings Post / Mail Preliminary Official Statement July 8-11 Launch and Price Transaction July 30 Closing

  33. Conclusions • 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

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