Financial Update September 2015

Financial Update September 2015

The Authen c Urban Experience: Our Compe ve Advantages The City of Norfolk is a vibrant, historic port city where diverse citizens, military, and businesses are building the economy, neighborhoods, and culture into the most livable urban waterfront in America.

Norfolk offers a truly authentic urban experience. At more than 4,500 people per square mile, Norfolk has by far the highest population density in the Hampton Roads region. Walkable communities, The Tide—Virginia’s first light rail system, a comprehensive public transit service, the Norfolk International Airport, a new Amtrak station, Virginia’s only cruise terminal, and a network of bike‐friendly roads make Norfolk the most multi‐ modal city in Hampton Roads.

Norfolk is unquestionably the center for commerce in the region. Norfolk has more jobs per square mile and the highest paying jobs in the region. Norfolk is home to the world’s largest naval base, one of the busiest ports on the east coast, five institutions of higher learning, and six general, acute care, and specialized hospitals. As a result of recent economic development ini a ves the city expects to add approximately 5,000 new jobs by 2017.

Norfolk is also the arts and cultural hub of the region. The Chrysler Museum of Art, Attucks Theatre, Harrison Opera House, Chrysler Hall, Norfolk Botanical Garden, and the Virginia Zoo, are among the many venues that entertain residents and millions of visitors each year.

Norfolk is a military city Naval Sta on Norfolk is the world’s largest naval base and home to:  United States Fleet Forces Command  The Second Fleet  The Allied Command Transforma on (NATO)  United States Joint Forces Command Naval Sta on Norfolk employs:  43,200 ac ve duty personnel  14,600 civilians  Defense spending accounted for $19.5 billion in direct spending in 2014, over 42 percent of the Gross Regional Product

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Norfolk is a port city 

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Norfolk is home to the Port of Virginia, the deepest harbor on the United States East Coast 50‐foot channels, inbound and outbound Six terminals 1,864 acres 19,885 linear feet of berth 30 miles of on‐dock rail Nearly 30 interna onal shipping lines Connec ons to more than 200 countries More than 40 interna onal container, breakbulk, and roll‐on/roll‐off vessels are serviced in an average week

Second Largest City In Virginia Worldwide, people are migra ng to ci es from rural areas. By 2050, about 70 percent of the popula on will be living in ci es. Norfolk’s recent growth mirrors that trend. Understanding the demographic and economic changes shaping the city can help us be er prepare for the evolving needs of our growing popula on. As popula on density and diversity increase, we can capitalize on those advantages to create walkable, dynamic neighborhoods, and business districts which allow us to focus on the most pressing needs while improving the quality of life for residents today and in the future.

Demographic and Economic Sta s cs

Note: not seasonally adjusted rates

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Norfolk is the second largest city in Virginia.

The city’s popula on is increasing and has grown by 3,591 since 2010

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The median age of Norfolk residents is nearly five years younger than in the surrounding six ci es

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Millennials now comprise the greatest share of residents at 33 percent of the total popula on

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Norfolk is the second highest in the region for the number of residents who speak a language other than English at home

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Average residen al home sale prices rose 9.8 percent from 2014 to 2015 through July

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Norfolk has the largest share of families living below the poverty level in the region; however, this dropped nearly 9 percent from 2013 to 2014

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The current unemployment rate has declined from a peak rate of 9.0 percent in 2011 to 6.0 percent as of July 2015

Norfolk’s Recogni ons 

A Top 10 Emerging City for Global Trade (Global Trade  Magazine), 2013

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Named to Rockefeller Founda on 100 Resilient Ci es Program, 2013

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#15 Top 20 Ci es for College Grads to Find Jobs (Nerd Wallet), 2015

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West Freemason named 2013 Great Neighborhood (American Planning Associa on)

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Voice of the People Award for Transforma on in Natural Environment, 2015

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2013 All‐America City (Na onal Civic League)

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#66—100 Best Fleets in North America (100 Best Fleets), 2015

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#13 Millennial Magnet (USA Today), 2014

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Top 5 City for Entrepreneurs (Entrepreneur Magazine), 2015

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Among Best Places to Re re (CNN Money), 2014

#1 in U.S.—Let’s Move Ci es, Towns and Coun es Campaign (Na onal League of Ci es), 2015

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Capitalizing On Corporate Diversity A diversified economy is important to protect against a downturn in any one sector. The region’s reliance on military and federal spending makes this diversity especially important for the city.

While Norfolk is the core of a military region, it is also home to an economy with diverse corporate strength.

The graph on the right shows the city’s employment by sector and highlights this strength. With the exception of government, no one sector comprises more than 15 percent of total employment.

Source: Virginia Employment Commission, Quarterly Census of Employment and Wages, 4th Quarter 2014

Our diverse corporate strength

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Growing Our Tax Base Norfolk: Home to the highest paying jobs in the region 2013 Regional Employment

Norfolk is home to the highest paying, and has the second most jobs in the region. While Norfolk makes up about two percent of the land mass of Hampton Roads, it is home to approximately 19 percent of the jobs.

The unemployment rate has declined by three percentage points since 2011 to fall in line with the na onal average of 5.6 percent.

Source: Bureau of Economic Analysis (2013)

Leveraging private partnerships—Growing our tax base Norfolk con nues inves ng for the future and adding jobs that diversify the local economy. Despite the financial challenges brought on by the great recession, the city con nues to grow its tax base.

Significant redevelopment and private sector investment con nue with exci ng new projects that are currently in progress or have recently opened:

 Slover Memorial Library  The Main  Simon Premier Outlets  Waterside District Since 2008, the city has announced $1.5 billion in new development, business, and pending public / private projects. Norfolk is also becoming a favored loca on for interna onal companies as evidenced by a partnership with the Export Import Bank, the crea on of the Global Ini a ves Fund, and the Export Tech Program.

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Developing Our Economy, Revitalizing Neighborhoods Growing the city’s economy is one of the most important ways to raise local revenue. Norfolk recently embraced a new comprehensive economic and neighborhood development initiative, Norfolk First. This model signals a dramatic shift in how the city promotes comprehensive urban revitalization, fosters job growth, and expands economic opportunity for all residents. The pillars of the Norfolk First initiative are presented in the graphic below. This initiative is based on national best practices and is designed to capitalize on Norfolk’s competitive advantage as the urban center of Hampton Roads. The Norfolk First Initiative will further expand our tax revenue base and strengthen overall quality of life.

Norfolk First: Comprehensive economic development and urban revitaliza on

Priority Development Areas  Priority Target Areas are redevelopment areas that spotlight opportunity sites for large scale development.

 Priority Neighborhood

Priority Neighborhood Commercial Districts      

Berkley/ South Main Street Chelsea Downtown Arts District Five Points Ocean View Avenue Park Place/ 35th Street

Commercial Districts are areas iden fied as choice loca ons for a new breed of retail, ar sanal manufacturing, crea ve services, or unique gathering spaces.

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Priority Target Areas              

Broad Creek Central Business Park Church Street Triangle Downtown East Ocean View Fort Norfolk Hampton Boulevard Li le Creek Military Circle Newtown Rd./ Kempsville Rd. Saint Paul’s Southside Tidewater Drive South Wards Corner

Rebounding Revenue During the great recession, 8.7 million jobs were lost na onwide from January 2008 to February 2010. It wasn’t un l April 2014 that the jobs lost were recovered. While the state has also recovered, the jobs lost in Hampton Roads have not yet been fully restored.

Virginia’s Gross Domes c Product (GDP) has increased slower than in other states. In 2013 GDP growth in Virginia was among the lowest in the na on. This lack of growth is partly due to the slowdown in federal spending as a result of sequestra on and other federal spending cuts. The Hampton Roads economy is specifically sensi ve to federal spending. Norfolk’s reliance on military and federal spending makes diversifying our tax base and economy especially important.

Increasing economic ac vity spurs a growth in local taxes Recently, the city’s economy has shown signs of rebounding from the great recession. We have begun to realize growth in most local taxes. Sales tax, meals tax and admissions tax collec ons are rising as a result of more people buying retail goods, ea ng out, and a ending shows or concerts in Norfolk. The graphs below show the upward trend of these local taxes:

FY 2015 is projected

Norfolk: A city of firsts 

First Marine hospital in America, 1787

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First cruise terminal in Virginia, 2007

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First airplane take‐off from a naval ship , 1910

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U.S.S. Wisconsin—First ba leship open to the Public in Virginia, 2010

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First black police officers in Virginia to be sworn into the police force, 1945

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The Tide—Virginia’s first light rail line, 2011

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First city in the na on to apply for Federal Housing funds under the 1949 Federal Housing Act

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City employee Gloria Peek—first female boxing coach to coach men at the Olympics, 2012

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Children’s Hospital of the King’s Daughters—First free‐ standing pediatric hospital in Virginia, 1961

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First Urban Winery in Virginia, Mermaid Winery, 2014

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Home to the first in‐vitro fer liza on clinic in the U.S.,  1980

Home to the first Kroc Center in Virginia, 2014

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Building A Resilient City Well‐Managed Government is the founda on In 2011, city stakeholders identified six priorities to move the city forward. The priorities identified are:

     

Economic Vitality and Workforce Development Environmental Sustainability Safe, Healthy, and Inclusive Communities Accessibility, Mobility, and Connectivity Lifelong Learning Well‐Managed Government Established, September 2011

Financial Policies (City Council adopted July 2013) In order to become a well‐managed government, City Council approved financial policies to strengthen the city’s long‐term financial sustainability. These policies guide the city’s financial decision‐making and lay the groundwork for improving the city’s financial posi on.

The first tenet of the financial policies was to achieve a structurally balanced budget within five years. A structurally balanced budget is when on‐going expenditures do not exceed on‐going revenues. Structural balance is crucial for the city’s financial health and for long‐term planning.

Because of conservative budgeting practices, we achieved structural balance in FY 2015, four years ahead of schedule. Continuing our good fiscal practices we maintained structural balance in FY 2016.

Structurally balanced budget four years ahead of schedule

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Measuring Our Improvement Shown in the graph to the right, the budget Budget gaps are shrinking gaps we now face are significantly less than in prior years. The FY 2017 ini al es mate of the budget gap was $5.5 million, down from $32 million in FY 2012. This decline is a result of achieving structural balance for two years in a row. In the past, gaps recurred because budgets were not structurally balanced. This means one‐ me revenue was used to address on‐going costs, causing the budget gap to con nue in the following year. For example, use of money only available for one year to Source: Office of Budget and Strategic Planning, 2015 support an on‐going salary increase meant the city had to find funds to support the same increase the next year.

After achieving structural balance the city’s financial policies direct the full funding of reserves. As most households have a savings account, similarly the city sets aside a Risk Management Reserve and an Economic Downturn Reserve. In addition to those funds the city maintains a General Fund Reserves are growing unassigned reserve of five percent of the budget, that also helps mitigate unforeseen emergency or catastrophic needs. Reserve funds enable the city to be financially resilient to shocks and stresses. In uncertain economic times reserve funds can be used to mitigate the need to reduce services or raise taxes. A Source: Office of Budget and Strategic Planning, as of September, 2015 healthy reserve balance is also looked upon favorably by credit rating agencies and investors.

Norfolk’s recent real estate tax increases: The lowest in the region

Norfolk has seen only a very modest increase in real estate tax rate since assessments began to decline.

Since FY 2010, other ci es in the region have implemented substan al real estate tax rate increases. Norfolk’s increase of four cents, of which two cents is dedicated to Norfolk Public Schools for school construc on, technology, and infrastructure, is the lowest in the region.

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Providing A High Level Of Service Despite Fiscal Stress Our ability to raise revenue is limited The Commission on Local Government (CLG) produces a fiscal stress index of Virginia’s coun es and ci es. The index measures a city or county’s overall fiscal well‐being and ability to generate addi onal revenue rela ve to other locali es in Virginia. In the most recent report Norfolk is the 12th most fiscally stressed city in Virginia and the most fiscally stressed city in Hampton Roads. Even though Norfolk is ranked in the high fiscal stress category, we strive to provide a high level of quality service and create more economic opportuni es. Our commitment to providing services that advance the future of the city is evidenced through our 70 community and neighborhood parks, 12 dog parks, 20 community centers, six public pools, 12 libraries, seven entertainment venues, and a mul tude of other municipal services.

Source: Commission on Local Government FY 2013 Report on Compara ve Revenue Capacity, Revenue Effort, and Fiscal Stress of Virginia’s Ci es and Coun es (January 2015).

Norfolk’s tax rate is the lowest among the ci es below that have high fiscal stress Real Estate Tax Rates and Fiscal Stress

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Effec vely Managing Our Finances While the great recession ended in 2009, the city has s ll not seen a full recovery of its financial resources. Real estate tax is the city’s largest locally generated revenue. While real estate assessments overall will increase for the third Three Overall Assessments straight year in FY 2016 (it straight years Annual Change is only the second year for of growth residen al growth), it is important to note, the growth during these three years has been well below the historical average. For example, over the past 20 years, the average annual increase has been five Source: Office of Budget and Strategic Planning percent. In spite of three years of growth, overall assessments remain below the peak reached in FY 2010. Residen al assessed values, which make up the majority of the city’s overall assessments, have only begun to rise a er an unprecedented decline for four straight years. As a result of the decline in assessments, the average resident will pay $230 a year less now than in 2010.

Norfolk has the second highest percentage of tax exempt real estate in the seven ci es Nearly 38 percent of the Norfolk’s real estate is tax exempt. This means that 38 percent of our property is not subject to real estate taxes. As men oned earlier, a city’s fiscal stress is a measure of its ability to raise addi onal local revenue. The high percentage of tax exempt real estate in Norfolk contributes to that stress.

Tax Exempt Real Estate and Fiscal Stress

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Spending Wisely, Spending Less FY 2016 General Fund Budget is less than it was six years ago but the city has increased or maintained service levels to residents Norfolk has been aggressively reducing expenditures and focusing on efficiency initiatives. In fact, the General Fund budget in FY 2016 is smaller than in FY 2010. The budget is smaller, but the city has maintained or increased services to residents.

How does the city spend each dollar?

39 Cents of Every Dollar goes to Norfolk Public Schools

Once the city collects taxes and other revenues, the funds are spent efficiently to provide services for the residents and businesses of the city. The graphic to the left details how each General Fund dollar is spent.

Preliminary FY 2015 General Fund year�end Through mindful spend� ing and conserva ve revenue projec ons, an $8.5 million surplus is es mated for FY 2015

Es mated General Fund surplus is $8.5 million

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Inves ng In Our Employees Employee retirement and healthcare are substantial operating costs for any municipality, including Norfolk. The city has taken great care to manage both programs effectively. In 2014 the city, along with Norfolk Public Schools and the Norfolk Redevelopment and Housing Authority, transitioned to a self‐ administered healthcare model resulting in avoiding over $6.0 million in costs.

The city’s employee re rement system has a very strong funded ra o. The funded ra o is a comparison of the value of the system’s assets vs. liabili es. The be er the funded ra o, the less the city has to pay into it each year. The chart below shows how Norfolk’s re rement system’s funded ra o compares with the funded ra o of the other re rement systems in Virginia. It also shows the fiscal stress level, as determined by CLG’s Fiscal Stress Index (see page 10 for defini on), of each locality. Norfolk also has a be er funded ra o than the Virginia Re rement System for state employees, which is funded at 74.3 percent. Even though Norfolk is in the highest fiscal stress category our commitment to have a well funded re rement system has resulted in a more stable and reliable resource for our employees.

Norfolk’s re rement system: strong funded status Most fiscally stressed among those with inde‐ pendent re rement

(data shown as of most recent actuarial valua on)

Employer of Choice As is evidenced by the status of the city’s re rement system, Norfolk has commi ed to inves ng in its employees. FY 2015 saw the first phase of the city’s A rac ng, Retaining, Mo va ng, and Developing (ARMD) Ini a ve. FY 2016 implements the second phase of the ini a ve. Over the course of the last two fiscal years, the city has: 

Provided at least a two percent pay increase each year

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Ensured that all full‐ me employees are earning at least as much as the federal poverty limit for a family of four

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Provided a supplement to eligible re rees each year

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Adjusted the salary ranges for numerous posi ons earning less than their regional peers

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Ins lling Investor Confidence Norfolk primarily uses debt, in the form of bond financing, to pay for large capital and infrastructure projects. Debt is the total amount of principal owed on all bonds sold to investors, called bondholders.

Governments need to pay close attention to debt. The city has the same obligation to adhere to sound financial management that a home or business does. The repayment of these general capital bonds is paid from the General Fund. For general capital debt, the city adheres to adopted financial policies that promote effec ve financial management. The city has two measures of debt affordability:

 General Fund Debt as a percentage of taxable property may not exceed 3.5 percent  Debt service as a percentage of the General Fund budget cannot exceed 10 percent As illustrated in the table above the city is in compliance with all adopted debt affordability measures, and is expected to be in compliance in FY 2017. It is an cipated that debt service costs will increase in future years as the city manages the funding of several large projects, including school projects, and previously authorized capital projects.

Strong credit ra ngs Credit ra ng agencies rate the ability of the city to repay our debt. Ra ngs are based on financial posi on, current and future debt burden, financial management and the economy. The higher the ra ng the less it costs to borrow money. Norfolk is one notch away from a AAA ra ng.

As an ongoing effort to manage our financing the city has refinanced exis ng debt and saved over $19

million since 2011.

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In 2013 Standard and Poor’s (S&P) upgraded the city’s bond ra ng from AA to AA+. This was the first S&P bond upgrade in 50 years.

Moody’s and Fitch also recently reaffirmed Norfolk’s bond ra ng, no ng the city benefits from conserva ve budge ng and realis c revenue forecas ng.

Pioneering Innova ve Bond Financing Norfolk saves taxpayer dollars by using more innova ve financing techniques than any other city in the Commonwealth Norfolk’s innova ve approach to bond financing leads to:

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Substan ally reduced interest expense Access to a larger taxable investor community Encouraging a sustainable environment Increased debt capacity Be er management of cash flows

Locked in favorable rates for exis ng debt to be refinanced at a later date saving

$1.77 million

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Managing For The Future Five pronged approach to fiscal resilience Norfolk has begun to emerge from the great recession. Real estate assessments have begun to grow, albeit slowly. Local tax revenue is con nuing to recover.

The city’s financial opera ons are sound and benefit from well‐conceived fiscal policies. Norfolk is posi oned to capitalize on its compe ve advantage as the authen c urban experience in Hampton Roads.

Even though we face na onal, state, and regional uncertainty, Norfolk’s innova ve approaches to addressing fiscal challenges have enabled us to manage increasing costs associated with providing quality services.

As we move forward we will con nue to use the same mul ‐faceted strategies used in the past five years: raising revenue, reducing expenditures, becoming more efficient and resilient, growing the economy, and sharing services.

The credit ra ng agencies agree—Norfolk is worth inves ng in

“Timely expenditure reductions and realistic revenue forecasting have resulting in favorable operations and healthy reserve levels”

September, 2015

“Large and diverse tax base with institutional presence”

September, 2014

“Very strong management conditions with strong and well‐embedded inancial management policies and procedures”

September, 2013

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