Fiscal Year 2004 Proposed Budget

DEBT SERVICE
BUDGET SUMMARY

The FY 2004 Proposed Budget includes outstanding and planned debt service on the County's General Obligation (G.O.) bonds, as well as other expenses associated with bond program administration. The FY 2004 proposed General Fund debt service budget is $35,570,135, which excludes debt service on School and Utilities bonds. Payment of School bonded indebtedness is provided for in the School Debt Service Fund and is supported by a transfer from the General Fund. Payment of Utility bonded indebtedness (which includes sewer, advance wastewater and water bonds) is provided for in the Utilities Enterprise Fund, and supported by user fees.

FY 2004 PRIORITIES: The FY 2004 priorities for the debt management are:

• To preserve the County's credit ratings at Aaa/AAA/AAA from Moody's, Standard & Poor's, and Fitch Ratings, respectively.

• To continue adhering to the County's prudent debt management policies.

• To issue approximately $85.6 million in general obligation bonds in CY 2003 approved in the referenda from CY 1998, CY 2000 and CY 2002.

SIGNIFICANT BUDGET CHANGES: The FY 2004 proposed General Fund debt service budget is $35,570,135 a 5% increase over the FY 2003 adopted. This amount includes debt service on G.O. bonds issued for general governmental purposes and the County's WMATA obligations, but excludes debt service on School and Utilities bonds. This increase is attributable to:

• Proposed issuance of new General Fund-supported bonds in CY 2003, resulting in projected new FY 2004 debt service payments of approximately $2.3 million.

DEBT POLICY & CREDIT RATINGS: The County's debt service budget reflects County fiscal policies regarding the prudent use of tax-exempt bond financing. These policies, which serve as the foundation for the County's high grade credit ratings and which underlie the assumptions made in the existing Capital Improvement Program (CIP), include:

• Rapid payback of general obligation debt.

• Maintenance of low ratio of general obligation debt to the market value of taxable property (projected to be approximately 1.60 at the end of FY 2004).

• Greater reliance on the use of pay-as-you-go funding than similar communities around the country.

• Moderate ratio of debt service to general expenditures.

Charts A – E on the following pages demonstrate the County's historical and planned adherence to these fiscal policies.

By continually observing these policies, the County has maintained its high credit ratings of Aaa/AAA/AAA from Moody's Investors Services, Standard and Poor's Corporation, and Fitch Ratings. These ratings were again confirmed in conjunction with the County's issuance of $39.5 million in general obligation bonds in June of 2002. These are the highest credit ratings awarded and reflect the confidence that the rating agencies share in the County's prudent debt management, economic environment, sound financial position and stable tax base. These ratings have also allowed the County to receive lower interest rates than it would otherwise have achieved.

PROPOSED GENERAL OBLIGATION BOND ISSUE: The County is currently planning to issue approximately $85.6 million in general obligation bonds in the spring of 2003. The initial debt service payment on this bond issue would be due in FY 2004 and includes approximately $2.3 million in the General Fund; $3.2 million in the School Debt Service Fund. The bond issue would be used for purposes as shown in the chart below, although the amount could change depending on project funding needs and scheduling.

INTEREST EARNINGS & STATE JAIL REIMBURSEMENT: Interest earned on unexpended bond proceeds is used to pay debt service. The cash balances that produce interest earnings are based on the timing of bond sales and the cash demand of the construction schedules. State law does not allow the County to enter into construction contracts until cash funds are available. This requires the County to issue bonds at the beginning of the 18 to 36 month project life cycle.

The County also receives $1.8 million annually from the Commonwealth for reimbursement of a portion of jail debt service. Gross debt service on the jail bond is included in the County's outstanding debt summaries, although the General Fund tax support will be reduced by the amount of the Commonwealth reimbursement.

SUBJECT TO APPROPRIATION OBLIGATIONS: A "subject to appropriation" or "moral obligation" pledge represents a promise by the County to seek future appropriation, if needed, for debt service payments on certain financing. The County utilized this type of pledge for a variety of projects, as shown on Chart C. In the majority of cases, the County's moral obligation pledge has been used as credit enhancement, thereby allowing the project to be financed at a lower cost. In these cases, actual debt repayment will be made from project revenues and should not require General Fund support.

FUTURE BUDGET CONSIDERATIONS: The Capital Improvement Program (CIP) and the adoption of future CIPs will impact the General Fund, School Fund, and Utility Fund debt service budgets.