RD197 - Annual Report on the Virginia Public School Authority's Financial Statements (Unaudited) for the Year Ending June 30, 2005


Executive Summary:
MANAGEMENT’S DISCUSSION AND ANALYSIS (Unaudited)

This section of the annual financial report of the Virginia Public School Authority (the “Authority”) presents an analysis of the Authority’s financial performance during the fiscal year that ended on June 30, 2005. This information should be considered in conjunction with the information contained in the financial statements, which follow this section.

Authority Activities and Highlights

The Virginia Public School Authority, created by Chapter 11, Title 22.1, Code of Virginia, 1950, as amended, provides financing to localities under the pooled bond program through the sale of its bonds. With the proceeds of its bond issues, the Authority purchases a “pool” of general obligation bonds from localities (the “Local Issuers”). Each Local Issuer uses the proceeds for the purpose of financing capital projects for public schools.

The Authority currently has bonds outstanding under the 1997 Resolution. The 1997 Resolution, adopted on October 23, 1997, currently serves as the primary instrument under which the Authority issues bonds under its pooled bond program. The 1997 Resolution bonds are secured by general obligation local school bonds purchased; the State Aid Intercept Provision; and, a sum sufficient appropriation, first from available Literary Fund monies and then from the Commonwealth’s General Fund. During the fiscal year, the Authority issued $725,065,000 under its pooled bond program.

In addition to its pooled bond program, the Authority also issues special obligation bonds under its stand-alone program. Bonds issued under the stand-alone program are secured solely by the local school bonds purchased from one or more specific localities. The Authority acts as a conduit issuer under the stand-alone program. The Authority also issues obligations to finance technology equipment purchases for local public school systems within the Commonwealth. These obligations are payable from, or otherwise secured by, the assets and income of the Literary Fund and now benefit from a sum sufficient appropriation from the Commonwealth’s General Fund. The Authority issued $55,255,000 under the educational technology equipment note program during the fiscal year, but did not issue any new special obligation bonds.

Overview of the Financial Statements

This discussion and analysis is an introduction to the Authority’s basic financial statements, which are comprised of two components: 1) fund financial statements, and 2) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements. The Authority is not required to present government-wide financial statements since all of its activity is reported in an enterprise fund, which would not change in measurement focus (economic resources) or basis of accounting (accrual) for government-wide statements.

The financial statements of the Authority offer short- and long-term financial information about its activities. The Statement of Net Assets provides information about the nature and amounts of the Authority’s cash, investments, and receivables (assets) and their obligations to creditors (liabilities). All of the current year’s revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Fund Net Assets. This statement measures whether the Authority successfully recovered all its costs through investment earnings, bond proceeds, appropriations from the Commonwealth, and the collection of receivables. The Statement of Cash Flows provides information on the Authority’s cash receipts, cash payments, and net changes in cash resulting from operations, investing, and financial activities.

Financial Analysis of the Authority

The Authority provides a vehicle for financing capital projects for primary and secondary public schools in the Commonwealth’s counties, cities and towns. On local school bonds held by the Authority, localities pay interest 10 basis points (0.10%) above the rates paid by the Authority on corresponding maturities of its bonds. This revenue is deposited to the Authority’s general fund and used to pay the operating costs attributable to its financing programs, including costs of issuance and administration, such as rebate compliance expenses. The Department of the Treasury provides staff support for the Authority. The Authority owns no capital assets.

Virginia Public School Authority's Net Assets (in millions)

2005 Enterprise Fund
Current assets: $6
Noncurrent assets: $2,737
Total Assets: $2,743
Current Liabilities: $325
Noncurrent liabilities: $2,403
Total Liabilities: $2,728
Net assets:
Restricted for debt service: $9
Unrestricted: $6
Total net assets: $15

2004 Enterprise Fund
Current assets: $4
Noncurrent assets: $2,654
Total Assets: $2,658
Current Liabilities: $320
Noncurrent liabilities: $2,313
Total Liabilities: $2,633
Net assets:
Restricted for debt service: $22
Unrestricted: $3
Total net assets: $25

Total assets increased during the year by $85 million, or 3%. This is primarily due to an increase in local school bonds outstanding ($124 million) offset by the distribution of debt service reserve account balances ($33 million) as part of the refunding transactions related to the 1991 Resolution bonds. Total liabilities increased by $95 million, or 4%, during the same period as a result of an increase in outstanding bonds payable ($69 million) and an increase in deferred premiums ($36 million). These increases were offset by decreases in interest payable and amounts due to localities. Accordingly, only a slight decrease of $10 million is reflected in net assets.

Virginia Public School Authority's Changes in Net Assets (in millions)

2005 Enterprise Fund
Revenues:
Operating revenues:
Charges for Services: $124
Non-operating revenues:
Investment earnings: $3
Total revenues: $127
Expenses:
Interest on long-term debt: $121
Other: $20
Total expenses: $141
Transfers: $4
Change in net assets: $(10)
Net assets July 1: $25
Net assets June 30: $15

2004 Enterprise Fund
Revenues:
Operating revenues:
Charges for Services: $127
Non-operating revenues:
Investment earnings: $2
Total revenues: $129
Expenses:
Interest on long-term debt: $118
Other: $7
Total expenses: $125
Transfers: $(7)
Change in net assets: $(3)
Net assets July 1: $28
Net assets June 30: $25

Debt Administration

As a financing entity, the whole business of the Authority is debt administration. The Authority issues bonds, pursuant to its pooled bond programs, to finance capital projects approved by the local governing bodies of counties, cities, and towns of the Commonwealth of Virginia. Such bonds are secured by general obligation bonds of the participating local issuers, which provide payment of principal and interest when due. Obligations issued pursuant to the technology notes programs, in conjunction with the Board of Education, are paid from, and secured by, appropriations made from the Literary Fund. The following table summarizes bond issuance activity during the year under each program:

Summary of Authority Bond Obligations (in millions)

Outstanding at 6/30/04
Pooled Bond Programs: $2,270
Technology Notes Programs: $170
Special Obligation Bonds: $78
Total: $2,518

Issued During Year
Pooled Bond Programs: $725
Technology Notes Programs: $55
Special Obligation Bonds: -
Total: $780

Retired During Year
Pooled Bond Programs: $(628)
Technology Notes Programs: $(57)
Special Obligation Bonds: $(5)
Total: $(690)

Outstanding at 6/30/05*
Pooled Bond Programs: $2,367
Technology Notes Programs: $168
Special Obligation Bonds: $73
Total: $2,608
* Excludes deferral on debt defeasance.

The Authority obtains bond ratings from Moody’s Investors Service (Moody’s), Standard and Poor’s Rating Service (S&P) and Fitch Ratings, Inc. (Fitch). The table below summarizes the ratings on outstanding Authority bonds.

Virginia Public School Authority Bond Ratings

Pooled Bond Programs (*1)
Moody’s: Aa1
S&P: AA+
Fitch: AA+

(*1) 1997 Resolution Bonds

School Educational Technology
Moody’s: Aa1
S&P: AA+
Fitch: AA+

Since the Authority’s bond programs are either backed by state appropriations (School Educational Technology Notes Programs) or carry the credit support of the State Aid Intercept Provision (Pooled Bond Program), the bond ratings are a direct reflection of the Commonwealth’s triple-A rating from each of the three rating agencies.

Future Impact to Financial Position

In November 2005, the Authority plans to issue approximately $199.4 million of School Financing Bonds (1997 Resolution) Series 2005 D to purchase certain general obligation local school bonds to finance capital projects for public schools.