financial update september 2015

Financial Update

September 2015

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.

The Authen c Urban Experience: Our Compe ve Advantages

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

Norfolk is a port city

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

Norfolk is the second largest city in Virginia. The city’s popula on is increasing and has grown by 3,591 since 2010

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

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

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

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

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

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

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

Second Largest City In Virginia

Norfolk’s Recogni ons

A Top 10 Emerging City for Global Trade (Global Trade

Magazine), 2013

#1 in U.S.—Let’s Move Ci es, Towns and Coun es

Campaign (Na onal League of Ci es), 2015

Named to Rockefeller Founda on 100 Resilient Ci es

Program, 2013

#15 Top 20 Ci es for College Grads to Find Jobs

(Nerd Wallet), 2015

West Freemason named 2013 Great Neighborhood

(American Planning Associa on)

Voice of the People Award for Transforma on in

Natural Environment, 2015

2013 All‐America City (Na onal Civic League) #66—100 Best Fleets in North America (100 Best

Fleets), 2015

#13 Millennial Magnet (USA Today), 2014 Top 5 City for Entrepreneurs (Entrepreneur

Magazine), 2015

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

Note: not seasonally adjusted rates

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.

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.

Our diverse corporate strength

Capitalizing On Corporate Diversity

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

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.

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.

2013 Regional Employment

Source: Bureau of Economic Analysis (2013)

Norfolk: Home to the highest paying jobs in the region

Leveraging private partnerships—Growing our tax base

Growing Our Tax Base

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 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

Priority Development Areas

Priority Target Areas are

redevelopment areas that

spotlight opportunity sites

for large scale development.

Priority Neighborhood

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.

Priority Neighborhood

Commercial Districts

Berkley/ South Main Street

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

Developing Our Economy, Revitalizing Neighborhoods

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.

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:

Increasing economic ac vity spurs a growth in local taxes

FY 2015 is projected

Rebounding Revenue

Norfolk: A city of firsts

First Marine hospital in America, 1787 First cruise terminal in Virginia, 2007

First airplane take‐off from a naval ship , 1910 U.S.S. Wisconsin—First ba leship open to the Public

in Virginia, 2010

First black police officers in Virginia to be sworn into

the police force, 1945

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

First city in the na on to apply for Federal Housing

funds under the 1949 Federal Housing Act

City employee Gloria Peek—first female boxing coach

to coach men at the Olympics, 2012

Children’s Hospital of the King’s Daughters—First free‐

standing pediatric hospital in Virginia, 1961

First Urban Winery in Virginia, Mermaid Winery,

2014

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

1980

Home to the first Kroc Center in Virginia, 2014

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

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.

Well‐Managed Government is the founda on

Financial Policies (City Council adopted July 2013)

Structurally balanced budget

four years ahead of schedule

Building A Resilient City

Established, September 2011

Shown in the graph to the right, the budget

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

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

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

healthy reserve balance is also looked upon

favorably by credit rating agencies and investors.

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.

Budget gaps are shrinking

Reserves are growing

Norfolk’s recent real estate tax increases:

The lowest in the region

Source: Office of Budget and Strategic Planning, as of September, 2015

Measuring Our Improvement

Source: Office of Budget and Strategic Planning, 2015

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.

Our ability to raise revenue is limited

Norfolk’s tax rate is the lowest among the ci es below that have high fiscal stress

Real Estate Tax Rates and Fiscal Stress

Providing A High Level Of Service Despite Fiscal Stress

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).

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

straight year in FY 2016 (it

is only the second year for

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

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.

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.

Norfolk has the second highest percentage of tax exempt real estate in the seven ci es

Overall Assessments Annual Change

Three

straight years

of growth

Tax Exempt Real Estate and Fiscal Stress

Effec vely Managing Our Finances

Source: Office of Budget and Strategic Planning

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.

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.

FY 2016 General Fund Budget is less than it was six years ago but the city

has increased or maintained service levels to residents

How does the city spend each dollar?

Preliminary FY 2015 General Fund year‐end

Es mated General Fund surplus is $8.5 million

Spending Wisely, Spending Less

39 Cents of Every Dollar goes to Norfolk Public Schools

Through mindful spend‐

ing and conserva ve

revenue projec ons, an

$8.5 million surplus is

es mated for FY 2015

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.

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

Ensured that all full‐ me employees are earning at least as much as

the federal poverty limit for a family of four

Provided a supplement to eligible re rees each year

Adjusted the salary ranges for numerous posi ons earning less than

their regional peers

(data shown as of most recent actuarial valua on)

Norfolk’s re rement system: strong funded status

Inves ng In Our Employees

Most fiscally

stressed among

those with inde‐

pendent re rement

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.

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.

Strong credit ra ngs

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.

As an ongoing effort to manage our financing the city

has refinanced exis ng debt and saved over $19

million since 2011.

Ins lling Investor Confidence

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:

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

Pioneering Innova ve Bond Financing

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.

Five pronged approach to fiscal resilience

“Timelyexpenditurereductionsandrealisticrevenueforecastinghaveresultinginfavorableoperationsandhealthyreservelevels”

September, 2015

“Verystrongmanagementconditionswithstrongandwell‐embedded inancialmanagementpoliciesandprocedures”

September, 2013

“Largeanddiversetaxbasewithinstitutionalpresence”

September, 2014

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

Managing For The Future

financial update september 2015

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