RD198 - Annual Report on the Virginia Public Building Authority's Financial Statements (Unaudited) for the Year Ending June 30, 2005


Executive Summary:
MANAGEMENT’S DISCUSSION AND ANALYSIS (Unaudited) AS OF JUNE 30, 2005

This section of the Virginia Public Building Authority’s (“the Authority”) annual financial report 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.

Authority Activities and Highlights

Upon approval of the General Assembly of the Commonwealth, the Authority is authorized to issue bonds or notes to construct, improve, furnish, maintain, acquire, finance, or refinance certain public facilities for the use of the Commonwealth and its agencies and instrumentalities, and to finance or refinance reimbursements to localities or regional jail authorities for the Commonwealth’s share of the costs of certain jail and juvenile detention projects. The Authority serves exclusively as a financing entity with the sole function of issuing and managing debt. Debt service for all bonds issued by the Authority is secured by appropriations from the Commonwealth. During the past fiscal year, the Authority had several different bond issuances to meet its purposes. The purpose of each bond deal is described below:

The Authority issued $207 million in Public Facilities Revenue Bonds, Series 2004B, to finance construction of certain public facilities.

The Authority issued $39 million and $47 million in Public Facilities Revenue Refunding Bonds, Series 2004C and 2005A, respectively, during the fiscal year ended June 30, 2005. The issuance of the bonds resulted in the prepayment of certain lease obligations secured and payable by the Commonwealth of Virginia.

The Authority also issued $136 million and $106 million in Public Facilities Revenue Refunding Bonds, Series 2004D and 2005B respectively during the fiscal year ended June 30, 2005. The issuance of the refunding bonds resulted in a decrease of future debt service payments of $14,290,783.

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) combined government-wide and fund financial statements, and 2) notes to the financial statements.

Government-wide Financial Statements

The Statement of Net Assets and the Statement of Activities are two basic financial statements that report information about the Authority as a whole. The data is reported using the accrual basis of accounting, and provides insight as to whether or not the Authority’s total financial position has improved as a result of the current year’s activities.

The Statement of Net Assets presents all of the Authority’s assets and liabilities, with the difference between the two reported as “net assets.”

Statement of Net Assets (in millions)

2005
Current assets: $87
Current liabilities: $115
Noncurrent liabilities: $1,067
Total liabilities: $1,182
Net assets: $(1,095)

2004
Current assets: $10
Current liabilities: $58
Noncurrent liabilities: $832
Total liabilities: $890
Net assets: $(880)

The Authority’s net assets decreased by 24% or $215 million in 2005. The decrease is due to the issuance of new bonds during the year. Net assets maintain a deficit balance because the Authority includes the bonds payable liability in its financial statements without including the future appropriation expected from the Commonwealth because future appropriations are not considered available and do not constitute a legally binding commitment.

The Statement of Activities presents information showing how the Authority’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying events giving rise to the change occur, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in these statements for some items that will only result in cash flows in future fiscal periods (e.g. receipt or payments on long-term debt obligations).

Changes in Net Assets (in millions)

2005
Revenues:
Appropriations from the Commonwealth: $100
Other Revenue: $9
Total Revenues: $109
Expenses:
Interest on long-term debt: $67
Disbursements for state and local projects: $257
Total Expenses: $324
Extraordinary Item: -
Change in net assets: $(215)
Net assets July 1: $(880)
Net assets June 30: $(1,095)

2004
Revenues:
Appropriations from the Commonwealth: $115
Other Revenue: $1
Total Revenues: $116
Expenses:
Interest on long-term debt: $53
Disbursements for state and local projects: $53
Total Expenses: $106
Extraordinary Item: $2
Change in net assets: $12
Net assets July 1: $(892)
Net assets June 30: $(880)

The Authority’s revenues decreased by 6% or $7 million compared to last year while expenses increased by 206% or $218 million. The decrease in revenue is largely due to the reduction in debt service requirements for the year, which resulted in decreased appropriations from the Commonwealth. This decrease was offset somewhat by an increase in interest earnings on the proceeds of the revenue bonds issued and the recordation of the proceeds from the sale of an asset to the City of Richmond. The increase in expenses is mostly attributable to an increase in distributions for construction projects and reimbursements made to localities for various regional jail projects. In the current year, $163 million was disbursed for construction and regional jails compared to only $53 million in the prior year. In addition, $92 million in bonds issued to refinance lease agreements between the Commonwealth and various other entities were disbursed during the year. The fluctuations in revenues and expenses are expected due to the nature of the Authority’s operations.

Both statements report Governmental Activities backed by appropriations from the Commonwealth.

Fund Financial Statements

The fund financial statements provide detailed information about the Authority’s major fund. A fund is a fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of funding and spending for a particular purpose.

All of the Authority’s activity is reported in Governmental Funds Financial Statements. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, the governmental funds financial statements focus on near-term inflows and outflows of spendable resources. This approach is known as using the flow of current financial resources measurement focus and the modified accrual basis of accounting. These statements provide a detailed short-term view of the Authority’s finances that assists in determining whether there will be adequate financial resources available to meet the current needs of the Authority.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between the governmental funds and the governmental activities. These reconciliations are presented in the adjustment column in each of the financial statements.

Notes to the Financial Statements

The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and the fund financial statements.

Purpose of the Authority

The primary purpose of the Authority is to provide a vehicle for financing public facilities for the use of the Commonwealth and its agencies and instrumentalities, and to finance reimbursements of the Commonwealth’s share of local or regional jails and juvenile detention facilities costs. The Department of the Treasury provides staff support for the Authority. Consequently, the only operating costs are those attributable to its financing programs, which are paid primarily from bond proceeds.

Debt Administration

As a financing entity, the sole business of the Authority is debt administration. The Authority issues bonds to finance capital projects approved by the General Assembly of the Commonwealth of Virginia. All bonds are secured by amounts to be appropriated by the General Assembly.

The following is a summary of changes in long-term debt of the Authority at June 30, 2005:

Bonds payable at July 1, 2004: $ 869,265,693
Bonds issued: $535,765,000
Bonds defeased: $(246,545,000)
Bonds retired: $(61,025,000)
Amortized discount for fiscal year 2005: $4,547,174
Amortized deferral on debt defeasance for fiscal year 2005: $(12,534,854)
Bonds payable at June 30, 2005: $ 1,089,473,013

The Authority’s outstanding bonds are rated as follows:

Moody’s Investors Service (Moody’s): Aa1
Standard and Poor’s Rating Service (S&P): AA+
Fitch Ratings, Inc. (Fitch): AA+

Since the Authority’s bonds are backed by state appropriations, 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

The Authority anticipates issuing approximately $225 million in bonds this fall. The issues will consist of a standard financing of approximately $175 million to be sold in November 2005, and $50 million in variable rate bonds to be sold in December 2005.