CITY of VIRGINIA BEACH, VIRGINIA $23,500,000 Storm Water Utility Revenue Bonds, Series 2015

SUPPLEMENT TO

OFFICIAL STATEMENT DATED JANUARY 14, 2015

relating to

CITY OF VIRGINIA BEACH, VIRGINIA $23,500,000 Storm Water Utility Revenue Bonds, Series 2015

This Supplement is intended to make certain amendments to the Official Statement of the City of Virginia Beach, Virginia, dated January 14, 2015 (the “Official Statement”) with respect to the above-referenced bonds. Capitalized terms used but not defined herein have the meanings given such terms in the Official Statement.

Amendment to Official Statement

The table on the inside cover of the Official Statement is revised to correct the price identified with respect to the $830,000 in principal amount of the Series 2015 Bonds maturing on November 15, 2024. Specifically, the 118.119 figure given in the Official Statement as the price of such 2024 maturity is incorrect.

The correct price for the 2024 maturity is 118.199, as shown on the substitute inside cover page which is attached hereto as Exhibit A.

All other figures in the table were correct.

Date of this Supplement

The date of this Supplement to the Official Statement is January 22, 2015.

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Exhibit A

CITY OF VIRGINIA BEACH, VIRGINIA $23,500,000 Storm Water Utility Revenue Bonds, Series 2015

Maturity Principal Interest (November 15) Amount Rate Price Yield CUSIP** 2015 $ 605,000 3.000% 102.188 0.250% 927747 CA1 2016 625,000 3.000 104.651 0.400 927747 CB9 2017 645,000 3.000 106.503 0.650 927747 CC7 2018 670,000 5.000 115.068 0.950 927747 CD5 2019 705,000 5.000 117.661 1.200 927747 CE3 2020 735,000 3.000 109.462 1.300 927747 CF0 2021 755,000 2.750 107.511 1.580 927747 CG8 2022 775,000 2.000 102.623 1.640 927747 CH6 2023 795,000 4.000 117.823 1.800 927747 CJ2 2024 830,000 4.000 118.199 1.950 927747 CK9 2025 865,000 4.000 117.226 2.050* 927747 CL7 2026 900,000 4.000 116.262 2.150* 927747 CM5 2027 930,000 3.000 106.559 2.250* 927747 CN3 2028 960,000 3.000 104.762 2.450* 927747 CP8 2029 990,000 3.000 103.877 2.550* 927747 CQ6 2030 1,020,000 3.000 103.000 2.650* 927747 CR4 2031 1,050,000 3.000 102.131 2.750* 927747 CS2 2032 1,080,000 3.000 101.271 2.850* 927747 CT0 2033 1,115,000 3.000 100.420 2.950* 927747 CU7 2034 1,150,000 3.000 99.000 3.068 927747 CV5

$2,405,000 3.000% Term Bonds Due November 15, 2036, priced at 97.644 to yield 3.150%, CUSIP 927747 CW3

$3,895,000 3.125% Term Bonds Due November 15, 2039, priced at 98.000 to yield 3.243%, CUSIP 927747 CX1

* Priced at the stated yield to the November 15, 2024 call date at a price of 100%.

** CUSIP numbers have been assigned by an organization not affiliated with the City and are included solely for the convenience of the holders of the Series 2015 Bonds. The City is not responsible for the selection or uses of these CUSIP numbers nor is any representation made as to their correctness on the Series 2015 Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Series 2015 Bonds as a result of various subsequent actions, including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or similar enhancements by investors that is applicable to all or a portion of the Series 2015 Bonds.

NEW ISSUE Ratings: Fitch: “AAA” BOOK-ENTRY ONLY Moody’s: “Aa2” (See “Ratings” herein) This Official Statement has been prepared by the City of Virginia Beach, Virginia (the “City”), to provide information on the Series 2015 Bonds described below, the security therefor, the City, the projects being financed with the proceeds of the Series 2015 Bonds, and other relevant information. Selected information is presented on this cover page for the convenience of the user. To make an informed decision regarding the Series 2015 Bonds, a prospective investor should read this Official Statement in its entirety. CITY OF VIRGINIA BEACH, VIRGINIA $23,500,000 Storm Water Utility Revenue Bonds, Series 2015 Dated: Date of Delivery Due: November 15, as shown on the inside cover Security THE SERIES 2015 BONDS WILL CONSTITUTE LIMITED OBLIGATIONS OF THE CITY, PAYABLE SOLELY FROM PLEDGED REVENUES (AS DEFINED HEREIN). THE SERIES 2015 BONDS SHALL NOT BE DEEMED TO CONSTITUTE INDEBTEDNESS OF, OR A PLEDGE OF THE FAITH AND CREDIT OF, THE COMMONWEALTH OF VIRGINIA (THE “COMMONWEALTH”) OR OF ANY COUNTY, CITY, TOWN OR OTHER POLITICAL SUBDIVISION OF THE COMMONWEALTH, INCLUDING THE CITY. THE ISSUANCE OF THE SERIES 2015 BONDS DOES NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE COMMONWEALTH OR ANY OTHER POLITICAL SUBDIVISION OF THE COMMONWEALTH, INCLUDING THE CITY, TO LEVY AND COLLECT ANY TAXES WHATSOEVER OR MAKE ANY APPROPRIATION THEREFOR, EXCEPT FROM THE PLEDGED REVENUES, TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE SERIES 2015 BONDS. See “SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS” in Section Two. Tax Exemption Interest on the Series 2015 Bonds (a) is not included in gross income for Federal income tax purposes and (b) is not an item of tax preference for purposes of the Federal alternative minimum income tax imposed on individuals and corporations; however, with respect to corporations (as defined for Federal income tax purposes) subject to the alternative minimum income tax, interest on the Series 2015 Bonds is taken into account in determining adjusted current earnings for purposes of computing such tax. Interest on the Series 2015 Bonds is exempt from income taxation by the Commonwealth. See “TAX EXEMPTION” in Section Four, and Appendix F. Bondholder Consent By purchasing the Series 2015 Bonds, the Bondholder shall be deemed to have consented to amendments to the Agreement of Trust (as defined herein) to provide that that there shall be one Debt Service Reserve Fund for all of the Bonds secured by the Agreement of Trust, rather than a separate debt service reserve account for each separate series of Bonds. See “INTRODUCTION – Bondholder Consent” in Section One. Redemption The Series 2015 Bonds are subject to redemption prior to maturity at the option of the City as more fully set forth herein. See “DESCRIPTION OF THE SERIES 2015 BONDS – Redemption” in Section Two. Purpose The proceeds of the Series 2015 Bonds will be used to finance improvements and expansions to the System (as defined herein). See “AUTHORIZATION AND PURPOSE OF THE SERIES 2015 BONDS – Plan of Finance” in Section Two. Interest Rates/Yields See inside cover. Interest Payment Dates May 15 and November 15, commencing May 15, 2015. Denominations $5,000 and integral multiples thereof. Closing/Delivery Date January 28, 2015. Registration Book-entry only through The Depository Trust Company, New York, New York. See “DESCRIPTION OF THE SERIES 2015 BONDS – Book-Entry System” in Section Two, and Appendix D. Trustee/Registrar U.S. Bank National Association (successor to First Union National Bank), Richmond, Virginia. Bond Counsel Kaufman & Canoles, a Professional Corporation, Norfolk, Virginia. Financial Advisor Public Resources Advisory Group, New York, New York. Official Statement Dated January 14, 2015

CITY OF VIRGINIA BEACH, VIRGINIA $23,500,000 Storm Water Utility Revenue Bonds, Series 2015

Maturity Principal Interest (November 15) Amount Rate Price Yield CUSIP** 2015 $ 605,000 3.000% 102.188 0.250% 927747 CA1 2016 625,000 3.000 104.651 0.400 927747 CB9 2017 645,000 3.000 106.503 0.650 927747 CC7 2018 670,000 5.000 115.068 0.950 927747 CD5 2019 705,000 5.000 117.661 1.200 927747 CE3 2020 735,000 3.000 109.462 1.300 927747 CF0 2021 755,000 2.750 107.511 1.580 927747 CG8 2022 775,000 2.000 102.623 1.640 927747 CH6 2023 795,000 4.000 117.823 1.800 927747 CJ2 2024 830,000 4.000 118.119 1.950 927747 CK9 2025 865,000 4.000 117.226 2.050* 927747 CL7 2026 900,000 4.000 116.262 2.150* 927747 CM5 2027 930,000 3.000 106.559 2.250* 927747 CN3 2028 960,000 3.000 104.762 2.450* 927747 CP8 2029 990,000 3.000 103.877 2.550* 927747 CQ6 2030 1,020,000 3.000 103.000 2.650* 927747 CR4 2031 1,050,000 3.000 102.131 2.750* 927747 CS2 2032 1,080,000 3.000 101.271 2.850* 927747 CT0 2033 1,115,000 3.000 100.420 2.950* 927747 CU7 2034 1,150,000 3.000 99.000 3.068 927747 CV5

$2,405,000 3.000% Term Bonds Due November 15, 2036, priced at 97.644 to yield 3.150%, CUSIP 927747 CW3

$3,895,000 3.125% Term Bonds Due November 15, 2039, priced at 98.000 to yield 3.243%, CUSIP 927747 CX1

* Priced at the stated yield to the November 15, 2024 call date at a price of 100%.

CITY OF VIRGINIA BEACH, VIRGINIA

THE CITY COUNCIL

William D. Sessoms, Jr., Mayor Louis R. Jones, Vice Mayor M. Benjamin Davenport Robert M. Dyer Barbara M. Henley Shannon DS Kane John D. Moss Amelia N. Ross-Hammond John E. Uhrin Rosemary Wilson James L. Wood

______

CERTAIN CITY OFFICIALS

James K. Spore, City Manager Mark D. Stiles, City Attorney Ruth Hodges Fraser, City Clerk Patricia A. Phillips, Director of Finance Phillip A. Davenport, Director of Public Works John T. Atkinson, City Treasurer

______

BOND COUNSEL

Kaufman & Canoles, a Professional Corporation 150 West Main Street, Suite 2100 Norfolk, Virginia 23510

______

FINANCIAL ADVISOR

Public Resources Advisory Group 40 Rector Street, Suite 1600 New York, New York 10006

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The Series 2015 Bonds will be exempt from registration under the Securities Act of 1933. As obligations of a political subdivision of the Commonwealth of Virginia, the Series 2015 Bonds will also be exempt from registration under the securities laws of the Commonwealth of Virginia.

The Official Statement does not constitute an offer to sell or the solicitation of an offer to buy the Series 2015 Bonds in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. No dealer, salesperson or any other person has been authorized to give any information or make any representation, other than those contained herein, in connection with the offering of the Series 2015 Bonds, and if given or made, such information or representation must not be relied upon.

The information set forth herein has been obtained from the City and other sources which are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation by any of such sources as to information provided by any other source. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in affairs of the City or in any other matters described herein since the date hereof or, as in the case of certain information incorporated herein by reference to certain publicly available documents, since the date of such documents.

TABLE OF CONTENTS Page SECTION ONE: INTRODUCTION ...... 1 The Issuer ...... 1 The Series 2015 Bonds ...... 1 Security for the Series 2015 Bonds ...... 1 Bondholder Consent ...... 2 Use of Proceeds ...... 2 Redemption ...... 2 Tax Exemption ...... 2 Bond Counsel ...... 2 Financial Advisor ...... 3 Auditors ...... 3 Ratings ...... 3 Delivery ...... 3 Official Statement ...... 3 Continuing Disclosure ...... 3 Additional Information ...... 3 SECTION TWO: THE SERIES 2015 BONDS ...... 4 AUTHORIZATION AND PURPOSE OF THE SERIES 2015 BONDS ...... 4 Plan of Finance ...... 4 Estimated Sources and Uses ...... 4 DESCRIPTION OF THE SERIES 2015 BONDS ...... 4 General ...... 4 Redemption ...... 5 Manner of Redemption ...... 5 Notice of Redemption...... 5 Book-Entry System ...... 5 SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS ...... 6 General ...... 6 Revenue Covenant ...... 6 Debt Service Reserve Fund ...... 6 Payment Record ...... 7 BONDHOLDERS’ REMEDIES IN THE EVENT OF DEFAULT ...... 7 ADDITIONAL SERIES OF BONDS ...... 7 SECTION THREE: THE STORM WATER UTILITY ...... 8 Authorization and Purpose ...... 8 Service Area ...... 8

(i)

Description of Storm Water Management System ...... 8 Operation and Maintenance ...... 9 Environmental Matters ...... 9 Sea Level Rise ...... 9 Storm Water Utility Fees ...... 9 Administration, Billing, Collection and Liens ...... 11 STORM WATER DEBT INFORMATION ...... 12 Storm Water Debt ...... 12 Direct Pay Subsidy Bonds ...... 14 CALCULATION OF REVENUE COVENANT ...... 14 FINANCIAL OPERATIONS AND CAPITAL IMPROVEMENTS ...... 16 Management’s Discussion of Financial Operations Related to the System ...... 16 Storm Water Utility Capital Improvement Program ...... 16 SECTION FOUR: MISCELLANEOUS ...... 18 SALE AT COMPETITIVE BIDDING ...... 18 LEGAL MATTERS ...... 18 TAX EXEMPTION ...... 18 RATINGS ...... 19 LITIGATION ...... 19 CONTINUING DISCLOSURE ...... 19 APPROVAL OF OFFICIAL STATEMENT ...... 20

Appendix A Certain Information Concerning the City of Virginia Beach, Virginia Appendix B Audited Financial Statements of the City for the Fiscal Year Ended June 30, 2014 Appendix C Audited Financial Statements of the Storm Water Utility Fund for the Fiscal Year Ended June 30, 2014 Appendix D Information Regarding the Depository Trust Company and its Book-Entry System Appendix E Summary of Agreement of Trust Appendix F Form of Bond Counsel Opinion Appendix G Form of Continuing Disclosure Agreement

(ii)

SECTION ONE: INTRODUCTION

The purpose of this Official Statement, including the cover page and appendices hereto, is to furnish information in connection with the sale by the City of Virginia Beach, Virginia (the “City” or “Virginia Beach”), of its $23,500,000 Storm Water Utility Revenue Bonds, Series 2015 (the “Series 2015 Bonds”). Financial and other information contained in this Official Statement has been prepared by the City from its records (except where other sources are noted). This information speaks as of its date and is not intended to indicate future or continuing trends in the financial or economic position of the City. The following introductory material is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Official Statement, including the Appendices hereto, reference to which is hereby made for all purposes.

Unless otherwise defined in this Official Statement, all capitalized terms shall have the meanings as set forth in Appendix E – “Summary of Agreement of Trust – Definitions.”

The Issuer

The issuer of the Series 2015 Bonds is Virginia Beach, which is located in the southeastern portion of the Commonwealth of Virginia (the “Commonwealth”) with an area of 310 square miles. Virginia Beach is the most populous city in the Commonwealth, with a population of 437,994, according to the 2010 U.S. Census, and an estimated population in 2013 of 449,628 according to the Weldon Cooper Center of the University of Virginia. Additional information with respect to the City is set forth in Appendix A hereto. The City’s audited financial statements for the Fiscal Year ended June 30, 2014 are set forth in Appendix B hereto. The audited financial statements of the City’s Storm Water Enterprise Fund for the Fiscal Year ended June 30, 2014 are set forth in Appendix C hereto.

The Series 2015 Bonds

The Series 2015 Bonds consist of $23,500,000 Storm Water Utility Revenue Bonds, Series 2015, dated the date of their issuance and delivery, and maturing on November 15 in the years and in the amounts set forth on the inside cover of this Official Statement. The Series 2015 Bonds will be issued in authorized denominations of $5,000 and multiples thereof and will be held by The Depository Trust Company, New York, New York (“DTC”), or by its nominee as securities depository with respect to the Series 2015 Bonds. See “DESCRIPTION OF THE SERIES 2014 BONDS – Book-Entry System” in Section Two.

Interest on the Series 2015 Bonds will be payable on each May 15 and November 15, beginning May 15, 2015, until the earlier of maturity or redemption, at the rates set forth on the inside cover of this Official Statement. As long as the Series 2015 Bonds are held by the DTC or its nominee, interest will be paid to Cede & Co., as nominee of DTC, in same day funds on each interest payment date.

Security for the Series 2015 Bonds

The Series 2015 Bonds will be limited obligations of the City, payable solely from Pledged Revenues and other funds pledged for their payment pursuant to the terms of an Agreement of Trust dated as of January 1, 2000, between the City and U.S. Bank National Association (as successor to First Union National Bank), as trustee (the “Trustee”), as previously supplemented and as further supplemented by a Third Supplemental Agreement of Trust dated as of January 1, 2015, between the City and the Trustee (the “Third Supplemental Agreement of Trust”) (collectively, the “Agreement of Trust”). Neither the faith and credit of the Commonwealth, nor the faith and credit of any county, city, town or other subdivision of the Commonwealth, including the City, are pledged to the payment of principal of or premium, if any, or interest on the Series 2015 Bonds.

In the Agreement of Trust, the City covenants to fix, charge, collect and revise its fees, rates and other charges for the use of and for the services furnished by the System in each Fiscal Year so as to produce revenues sufficient to pay the cost of operation and maintenance, the cost of necessary replacements and improvements, and the debt service on the Series 2015 Bonds and on any other indebtedness of the City secured by such revenues, and to provide certain reserves therefor.

A more complete description of the security for the Series 2015 Bonds is provided under “SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS” in Section Two.

Bondholder Consent

By purchasing the Series 2015 Bonds described in this Official Statement, the holders of the Series 2015 Bonds are deemed to have consented to amendments to the Agreement of Trust made in the Third Supplemental Agreement of Trust to provide that, rather than providing for separate Series Debt Service Reserve Accounts for each Series of Bonds issued under the Agreement of Trust (the “Bonds”), there shall be one Debt Service Reserve Fund under the Agreement of Trust funded in an amount equal to the Debt Service Reserve Requirement. The Debt Service Reserve Requirement shall be the least of (a) the maximum principal and interest due on the Bonds in the current or any future Fiscal Year, (b) 10% of the original stated principal amount of the Bonds (or 10% of the issue price of the Bonds if required by the Internal Revenue Code of 1986, as amended (the “Code”)) or (c) 125% of the average annual principal and interest due on the Bonds in the current and each future Fiscal Year; provided, however, if measuring (a), (b) and (c) separately for each Outstanding Series of Bonds would require a lower aggregate amount to be on deposit in order for the Debt Service Reserve Fund to remain a “reasonably required reserve or replacement fund” under the Code, then such lower aggregate amount shall be the Debt Service Reserve Requirement.

A further description of the Debt Service Reserve Fund is provided under “SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS – Debt Service Reserve Fund” in Section Two.

Use of Proceeds

Proceeds of the Series 2015 Bonds will be used for the purpose of providing funds to finance improvements and expansions to the System. See “AUTHORIZATION AND PURPOSE OF THE SERIES 2015 BONDS – Plan of Finance” in Section Two for a more complete description of the purpose of the Series 2015 Bonds.

Redemption

The Series 2015 Bonds will be subject to redemption beginning November 15, 2024, in whole or in part at any time, at the option of the City. See “AUTHORIZATION AND PURPOSE OF THE SERIES 2015 BONDS – Redemption” in Section Two for a more complete description of the redemption provisions of the Series 2015 Bonds.

Tax Exemption

Under current law, (1) interest on the Series 2015 Bonds will be exempt from income taxation by the United States of America and (2) interest on the Series 2015 Bonds is exempt from income taxation by the Commonwealth. See “TAX EXEMPTION” in Section Four for a more complete description of the significant elements of the Federal and state income tax status of interest on the Series 2015 Bonds.

Bond Counsel

Kaufman & Canoles, a Professional Corporation, serves as Bond Counsel (“Bond Counsel”) to the City in connection with the issuance of the Series 2015 Bonds. The opinion of Bond Counsel will be dated and given on, and will speak only as of, the date of issuance and delivery of the Series 2015 Bonds.

The scope of engagement of Bond Counsel does not extend to passing upon or assuming responsibility for the accuracy or adequacy of any statements made in this Official Statement other than matters expressly set forth in their opinion, and Bond Counsel makes no representation that they have independently verified the same.

Financial Advisor

Public Resources Advisory Group serves as financial advisor to the City in connection with the issuance of the Series 2015 Bonds. The financial advisor’s fee for services rendered with respect to the sale of the Series 2015 Bonds is not contingent upon the issuance and delivery of the Series 2015 Bonds.

Auditors

The City’s financial statements for the Fiscal Year ended June 30, 2014 are included in Appendix B to this Official Statement and have been audited by the independent public accounting firm of Cherry Bekaert, L.L.P. The financial statements of the City’s Storm Water Utility Fund for the Fiscal Year ended June 30, 2014, included in Appendix C to this Official Statement, have also been audited by such firm. Such financial statements have been included in reliance upon the report of Cherry Bekaert, L.L.P. delivered in connection with such audit.

Ratings

The Series 2015 Bonds have been rated as shown on the cover page hereto by Moody’s Investors Service, 7 World Trade Center, 250 Greenwich Street, New York, New York 10007 (“Moody’s”), and Fitch Ratings, One State Street Plaza, New York, New York 10004 (“Fitch”). See “RATINGS” in Section Four for a more complete description of the ratings.

Delivery

The Series 2015 Bonds are offered for delivery, when, as and if issued, subject to the approval of their validity by Bond Counsel, and to certain other conditions referred to herein. It is expected that the Series 2015 Bonds will be available for delivery, at the expense of the City, through the facilities of The Depository Trust Company, New York, New York, on or about January 28, 2015.

Official Statement

This Official Statement has been approved and authorized by the City for use in connection with the sale of the Series 2015 Bonds. Its purpose is to supply information to prospective buyers of the Series 2015 Bonds. Financial and other information contained in this Official Statement have been prepared by the City from its records, except where other sources are noted. The information is not intended to indicate future or continuing trends in the financial or economic position of the City or the System.

All quotations from and summaries and explanations of laws contained in this Official Statement do not purport to be complete, and reference is made to said laws for full and complete statements of their provisions.

Continuing Disclosure

The City has agreed to execute a continuing disclosure agreement at closing to assist the successful bidder in complying with the provisions of Rule 15c2-12, as amended (the “Rule”), promulgated by the Securities and Exchange Commission (“SEC”) by providing annual System financial and operating information and event notices required by the Rule. See “CONTINUING DISCLOSURE” in Section Four.

Additional Information

Any questions concerning the contents of this Official Statement should be directed to the following: Department of Finance, Municipal Center, Virginia Beach, Virginia, 23456, (757) 385-4681; or the City’s financial advisor, Public Resources Advisory Group, (212) 566-7800.

SECTION TWO: THE SERIES 2015 BONDS

AUTHORIZATION AND PURPOSE OF THE SERIES 2015 BONDS

The Series 2015 Bonds will be issued pursuant to the Constitution and statutes of the Commonwealth, including the Charter of the City (Chapter 147, Acts of Assembly of 1962, as amended) and the Public Finance Act of 1991 (Chapter 26, Title 15.2, Code of Virginia of 1950, as amended) (the “Act”). The Series 2015 Bonds were authorized by ordinances adopted by the City Council without being submitted to the qualified voters of the City. After the issuance of the Series 2015 Bonds, the City will have $20,748,440 in authorized but unissued storm water utility revenue bonds. See “STORM WATER DEBT INFORMATION” in Section Three.

Plan of Finance

The proceeds of the Series 2015 Bonds will be used to finance improvements and expansions to the System, including but not limited to projects to address flood control, water quality and capital maintenance (collectively, the “2015 Project”).

Estimated Sources and Uses

The proceeds of the Series 2015 Bonds, and other available funds of the City, are to be used as follows:

Sources:

Par Amount of Bonds $23,500,000.00 Net Original Issue Premium 1,114,825.30 City Funds 1,353,562.51

Total Sources $25,968,387.81

Uses:

Project Costs $24,385,700.30 Underwriter’s Discount 229,125.00 Debt Service Reserve Deposit (from City Funds) 1,353,562.51

Total Uses $25,968,387.81

DESCRIPTION OF THE SERIES 2015 BONDS

General

The Series 2015 Bonds will be issued in the aggregate principal amount of $23,500,000. The Series 2015 Bonds will be dated the date of their issuance and delivery, and will mature on November 15, as shown on the inside cover page hereof. The Series 2015 Bonds will be registered as to principal and interest in the name of Cede & Co., as nominee for DTC, or otherwise as hereinafter described. Purchases of beneficial ownership interests in the Series 2015 Bonds will be made only in book-entry form and purchasers will not receive physical certificates representing their interests in Series 2015 Bonds so purchased. If the book-entry system is discontinued, bond certificates will be delivered as described in the Agreement of Trust, and the Beneficial Owners (as defined in Appendix D) will become the registered owners. As long as the Series 2015 Bonds are held by DTC or its nominee, interest will be paid to Cede & Co., as nominee of DTC, in same day funds on each interest payment date. Interest on the Series 2015 Bonds will be payable on each May 15 and November 15, beginning May 15, 2015, until maturity. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

Redemption

Optional Redemption. Series 2015 Bonds that mature on or before November 15, 2024, are not subject to optional redemption prior to their stated maturities. Series 2015 Bonds that mature on or after November 15, 2025, will be subject to redemption at the option of the City beginning on November 15, 2024, in whole or in part at any time (in any multiple of $5,000), without premium, upon payment of the principal amount of the Series 2015 Bonds so redeemed plus interest accrued to the redemption date.

Manner of Redemption

If less than all of the Series 2015 Bonds are called for redemption, the Series 2015 Bonds to be redeemed shall be selected by the City’s Director of Finance in such a manner as he or she may determine to be in the best interest of the City.

The portion of any Series 2015 Bond to be redeemed shall be in a minimum principal amount of $5,000 or some multiple thereof. In selecting Series 2015 Bonds for redemption, each Series 2015 Bond shall be considered as representing that number of Series 2015 Bonds which is obtained by dividing the principal amount of such Series 2015 Bond by $5,000. If a portion of a Series 2015 Bond shall be called for redemption, a new Series 2015 Bond in principal amount equal to the unredeemed portion thereof shall be issued to the registered owner upon the surrender thereof.

Partial Redemption within Maturity. If less than all of the Series 2015 Bonds of a particular maturity are called for redemption, the Series 2015 Bonds to be redeemed shall be selected by DTC or any successor securities depository pursuant to its rules and procedures or, if the book-entry system is discontinued, by U.S. Bank National Association, which has been appointed paying agent and bond registrar (the “Registrar”) by lot in such manner as the Registrar in its discretion may determine.

Notice of Redemption

The City will cause notice of the call for redemption, identifying the Series 2015 Bonds or portions thereof to be redeemed, to be sent by the Trustee by facsimile transmission, registered or certified mail or overnight express delivery not less than 30 nor more than 60 days prior to the redemption date, to DTC or its nominee as the registered owner thereof. The City shall not be responsible for mailing notice of redemption to anyone other than DTC or another qualified securities depository or its nominee unless no qualified securities depository is the registered owner of the Series 2015 Bonds. If no qualified securities depository is the registered owner of the Series 2015 Bonds, notice of redemption shall be mailed to the registered owners of the Series 2015 Bonds.

Book-Entry System

DTC will act as securities depository for the Series 2015 Bonds. The Series 2015 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Series 2015 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

So long as Cede & Co. is the registered owner of the Series 2015 Bonds, as nominee of DTC, references in this Official Statement to the Owners of the Series 2015 Bonds shall mean Cede & Co. and shall not mean the Beneficial Owners, and Cede & Co. will be treated as the only holder of Series 2015 Bonds for all purposes under the Agreement of Trust.

Neither City nor the Registrar has any responsibility or obligation to the Direct or Indirect Participants (as defined in Appendix D) or the Beneficial Owners with respect to (a) the accuracy of any records maintained by DTC or any Direct or Indirect Participant; (b) the payment by any Direct or Indirect Participant of any amount due to any Beneficial Owner in respect of the principal of and interest on the Series 2015 Bonds; (c) the delivery or timeliness of delivery by any Direct or Indirect Participant of any notice to any Beneficial Owner which is required or

permitted under the terms of the Agreement of Trust to be given to Series 2015 Bondholders; or (d) any other action taken by DTC, or its nominee, Cede & Co., as Series 2015 Bondholder, including the effectiveness of any action taken pursuant to an Omnibus Proxy.

SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS

General

The Series 2015 Bonds will be issued under and, together with outstanding obligations issued under the Agreement of Trust as Parity Debt, will be equally and ratably secured by the Agreement of Trust. The Series 2015 Bonds will be limited obligations of the City payable (except to the extent payable from the proceeds of the Series 2015 Bonds or the income, if any, derived from the investment thereof) solely from Pledged Revenues.

Under the Agreement of Trust, the City pledges to the Trustee for the payment of the principal of and interest on the Series 2015 Bonds the Pledged Revenues and all amounts held under the Agreement of Trust in the Revenue Fund, the Bond Fund, the Construction Fund and the Debt Service Reserve Fund, subject only to the City’s right to make application of the Pledged Revenues to other purposes, as set forth in the Agreement of Trust.

The Agreement of Trust does not convey or mortgage the System. The City has covenanted not to encumber the System except in the limited circumstances provided in the Agreement of Trust. See “Particular Covenants” in Appendix E.

THE PRINCIPAL OF AND THE PREMIUM, IF ANY, AND THE INTEREST ON THE SERIES 2015 BONDS WILL NOT BE DEEMED TO CONSTITUTE A PLEDGE OF THE FAITH AND CREDIT OF THE COMMONWEALTH OF VIRGINIA OR ANY OTHER POLITICAL SUBDIVISION, INCLUDING THE CITY. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OF VIRGINIA OR ANY CITY, COUNTY, TOWN OR OTHER SUBDIVISION OF THE COMMONWEALTH, INCLUDING THE CITY, ARE PLEDGED TO THE PAYMENT OF PRINCIPAL OF OR PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2015 BONDS.

Revenue Covenant

The Agreement of Trust provides that the City will fix, charge, collect and revise the fees, rates and other charges for the use of and for the services furnished by the System, so that in each Fiscal Year the City will be able to meet the following two independent requirements:

(a) Pledged Revenues will be sufficient to equal the sum of (1) the Operating Expenses shown in the Annual Operating Budget and (2) 115% of Maximum Annual Debt Service. (If any Parity Double Barrel Bonds are outstanding, the coverage calculation shall also take into account 100% of Maximum Annual Additional Parity Debt Service on such obligations.) The City currently does not have any Parity Double Barrel Bonds outstanding.

(b) System Revenues will be sufficient to equal the sum of (1) the Operating Expenses payable from System Revenues shown in the Annual Operating Budget, (2) the amount required to be paid into the Bond Fund, (3) the amount (if any) required to be paid into the Parity Double Barrel Bond Fund, (4) the amount (if any) required to be paid into the Subordinate Debt Fund, (5) the amount of any other indebtedness of the City attributable to the System required to be paid from Pledged Revenues, (6) the amount transferred to the Capital Improvement Account as may be determined by the Director of Public Works and (7) any amount necessary to be paid into the Debt Service Reserve Fund to restore the amount on deposit therein to the amount of the Debt Service Reserve Requirement.

Debt Service Reserve Fund

The Agreement of Trust, as amended by the Third Supplemental Agreement of Trust, will require the City to maintain in the Debt Service Reserve Fund an amount (the “Debt Service Reserve Requirement”) equal to the least of (a) the maximum principal and interest due on the Bonds in the current or any future Fiscal Year, (b) 10% of

the original stated principal amount of the Bonds (or 10% of the issue price of the Bonds if required by the Code) or (c) 125% of the average annual principal and interest due on the Bonds in the current and each future Fiscal Year; provided, however, if measuring (a), (b) and (c) separately for each Outstanding Series of Bonds would require a lower aggregate amount to be on deposit in order for the Debt Service Reserve Fund to remain a “reasonably required reserve or replacement fund” under the Code, then such lower aggregate amount shall be the Debt Service Reserve Requirement. See “Debt Service Reserve Fund” in Appendix E.

The amount required to be deposited in the Debt Service Reserve Fund as a result of the issuance of the Series 2015 Bonds will be funded from City funds.

Payment Record

The City has never defaulted in the payment of either principal of or interest on any indebtedness.

BONDHOLDERS’ REMEDIES IN THE EVENT OF DEFAULT

In the case of an Event of Default under the Agreement of Trust (see “Events of Default and Remedies on Default” in Appendix E), the Trustee may, and if requested by the registered owners of not less than 25% in aggregate principal amount of Bonds, including the Series 2015 Bonds and any additional Series of Bonds then outstanding, upon indemnification by the Bondholders as provided in the Agreement of Trust shall, proceed to protect and enforce its rights and the rights of the registered owners of the Series 2015 Bonds by instituting a mandamus or other suit, action or proceeding at law or in equity, including an action for specific performance of any agreement contained in the Agreement of Trust. The mandamus remedy, however, may be impracticable and difficult to enforce. Furthermore, the right to enforce payment of the Series 2015 Bonds may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws and equitable principles, which may limit the specific enforcement of certain remedies. Further, there shall be no rights of acceleration with respect to any Bonds, including the Series 2015 Bonds.

Chapter 9 of the United States Bankruptcy Code (the “Bankruptcy Code”) permits a municipality such as the City, if insolvent or otherwise unable to pay its debts as they become due, to file a voluntary petition for the adjustment of debts provided that such municipality is “specifically authorized, in its capacity as a municipality or by name, to be a debtor....” Bankruptcy Code, § 109(c)(2). Current Virginia statutes do not expressly authorize the City or municipalities generally to file for bankruptcy under Chapter 9, although it is unclear if the lack of express authorization under state law would be a successful defense to a claim that federal bankruptcy law preempts any Commonwealth of Virginia limitation on the exercise by the City of rights under the Bankruptcy Code. Chapter 9 does not authorize the filing of involuntary petitions against municipalities such as the City.

Bankruptcy proceedings by the City could have adverse effects on registered owners of the Bonds, including, (a) delay in the enforcement of their remedies, (b) subordination of their claims to claims of those supplying goods and services to the City after the initiation of bankruptcy proceedings and to the administrative expenses of bankruptcy proceedings, and (c) imposition without their consent of a reorganization plan reducing or delaying payment of the Bonds. The Bankruptcy Code contains provisions intended to ensure that, in any reorganization plan not accepted by at least a majority of a class of creditors such as the registered owners of the Bonds, such creditors will have the benefit of their original claims or the “indubitable equivalent” thereof, although such plan may not provide for payment of the Bonds in full. The effect of these and other provisions of the Bankruptcy Code cannot be predicted and may be significantly affected by judicial interpretations.

ADDITIONAL SERIES OF BONDS

As set forth in the Agreement of Trust, the City may issue, subject to certain restrictions, one or more Series of Bonds or Parity Debt, equally and ratably secured with the Bonds, including the Series 2015 Bonds, (a) to pay the cost of acquiring, constructing, improving, extending, expanding or equipping the System, (b) to pay the cost of planning or investigating the feasibility of acquiring, constructing, improving, extending, expanding or equipping the System, (c) to refund any Series of Bonds or other City obligations secured by or payable from Pledged Revenues or (d) any combination thereof. In addition, the City may at any time issue one or more series of bonds having a lien on revenues of the System that are subordinate to the lien securing the Bonds, including the

Series 2015 Bonds, so long as the City remains in compliance with the Rate Covenant under the Agreement of Trust. See “Issuance of Bonds” in Appendix E.

SECTION THREE: THE STORM WATER UTILITY

Authorization and Purpose

The City created the storm water utility pursuant to Ordinance No. 2195 enacted by the City Council on December 1, 1992, and Sections 32.5-1 through 32.5-7 of the Code of the City of Virginia Beach, Virginia (the “City Code”), with an implementation date of July 1, 1993. The storm water utility charges fees to owners of all developed property in the City to provide for a balanced operating and capital improvement budget for maintenance of the storm water management system. Income from the fees shall not exceed actual costs incurred in providing the services and facilities described in Section 32.5-3 of the City Code. The amount of the fees charged is defined in Section 32.5-2(b) of the City Code, and rate changes require approval by City Council.

Service Area

The service area covered by the storm water utility includes the entire incorporated limits of the City.

Description of Storm Water Management System

The City generally lies within two watersheds. The northern highly developed half of the City lies within the Chesapeake Bay Watershed and the southern half of the City lies within the Back Bay/North Landing River Watershed. The storm water management system that serves Virginia Beach consists of a combination of pipes, canals, ponds and lake systems. The secondary (collector system) drainage system is made up of pipe systems (primarily in the northern half of the City) and open ditch systems (primarily in the rural southern part of the City). The secondary system conveys storm water to the primary drainage system, which is made up of major ditches, canals/ponds and lakes. To date, the storm water management system has over 5,000 outfalls to waters of the United States.

The ten largest customers of the storm water management system during Fiscal Year 2014 are listed below.

CITY OF VIRGINIA BEACH, VIRGINIA TEN LARGEST STORM WATER UTILITY ACCOUNTS FOR BILLING PERIOD ENDING JUNE 30, 2014

Customer Fees Billed Sentara Healthcare $106,576 Pembroke Square 79,598 Eagle Holdings, LLC 77,806 Virginia Wesleyan College 76,295 Inland Diversified Real Estate 75,943 Sentara Virginia Beach Hospital 70,400 Stihl, Inc. 62,766 GEICO 56,600 Wordsworth Village at West Neck 56,062 Barber Self-Storage LLC 54,096

Source: City Department of Finance

Operation and Maintenance

The Department of Public Works – Storm Water Maintenance Bureau is responsible for the maintenance and repair of the storm water management system. Its annual budget of approximately $39,360,000 per year is used to fund pipe cleaning, cave in repairs, roadside and off road ditch cleaning, pump station operation and maintenance, lake dredging, spill response and street sweeping. Its inventory of storm water features includes approximately 1,200 miles of pipe, 450 miles of roadside ditches, 180 miles of off road ditches, 16 storm water pump stations, 1,200 lake systems and 2,500 curb miles of arterial and major collectors.

In addition to the physical maintenance requirements, the storm water utility funds Public Works maintenance activities so that the City may respond to the federally mandated National Pollutant Discharge Elimination System Municipal Separate Storm Sewer System (“NPDES-MS4”) permitting program. At this time, the City is in full compliance with the NPDES-MS4 permitting requirements.

Environmental Matters

The Department of Public Works is the overall manager of the City’s multi-department storm water management system, which is a requirement of the NPDES-MS4 permit. No federal or state regulatory body has ever notified the City that the existing storm water management program is not in compliance with the applicable environmental regulations. While the Hampton Roads Planning District Commission (“HRPDC”) had issued preliminary cost estimates for compliance with the EPA-mandated measures to control pollution in the Chesapeake Bay (Total Daily Maximum Load – “TMDL”), the cost to comply appears to be significantly less than the original forecasts. Virginia Beach has submitted to the Virginia Department of Environmental Quality (“DEQ”), as was required during the TMDL Watershed Improvement Plan, Phase II, a list of strategies it will employ to meet its compliance requirements. The list includes nine strategies, and at the present time sufficient funding has been allocated within the existing revenues to meaningfully address each of the strategies as is required by the NPDES- MS4 permit. Current spending levels associated with activities in support of these strategies, some of which accomplish other requirements, approach $5 million per year. A renewal of the City’s NPDES-MS4 permit is overdue, held-up by DEQ, the issuing agency. The model NPDES-MS4 permit that is proposed to be issued to Hampton Roads localities will likely increase compliance costs. There are several issues with the new permits that are of concern for Hampton Roads localities that are being addressed through an HRPDC committee consisting of members from each jurisdiction. Success in negotiating these concerns with DEQ will affect the cost of compliance. The direct increase in cost related to new compliance requirements under the negotiated and final NPDES-MS4 permit for Virginia Beach, over and above the $5 million that is already programmed and/or anticipated for Chesapeake Bay TMDL compliance, is not expected to exceed $3 million per year.

Sea Level Rise

The Hampton Roads area has been experiencing relative sea level rise since tide levels have been recorded. As a coastal community, Virginia Beach is proactive in addressing sea level rise. The oceanfront has been protected from rising seas and coastal storm events through two major civil works projects, at the Resort Area and at Sandbridge Beach. With projections for sea level rise acceleration, the City Council has directed that a comprehensive sea level rise and recurrent flooding analysis be performed. A national consultancy with expertise in flood protection and hazard analysis has been engaged to identify the risks, to screen and evaluate adaptation strategies, and to develop an implementation plan. That work began in the fall of 2014 and is expected to be complete by 2018. The City has a long history of partnering with the federal government through the U.S. Army Corps of Engineers for flood control civil works projects and programs, and intends to participate in any new federal programs to specifically address sea level rise.

Storm Water Utility Fees

The basis for determining storm water fees is the Equivalent Residential Unit (“ERU”). Each ERU is equivalent to 2,269 square feet of impervious surface area (as defined below) as determined by averaging the impervious surface area of developed residential properties during the development of the storm water utility. Fees

are billed in arrears either bi-monthly or semi-annually. For purposes of determining fees, several billing classes have been established as follows.

• Developed residential property means a developed lot or parcel containing at least one (1) but no more than four (4) residences or dwelling units. Such property shall include houses, duplexes, triplexes, quadruplexes, townhouses and mobile homes. For fee purposes, each residential dwelling unit is assessed a fee equal to one ERU.

• Developed multifamily residential property means developed property containing more than four (4) residences or dwelling units. Such property shall include apartments and condominiums. The monthly utility fee for developed multifamily residential property shall be the ERU rate multiplied by the numerical factor obtained by dividing the total impervious surface area of a developed multifamily residential property by one (1) ERU (2,269 square feet). The numbered factor will be rounded to the nearest tenth (0.1) of an ERU.

• Developed nonresidential property means developed property which does not serve a primary purpose of providing permanent dwelling units. Such property shall include, but not be limited to, commercial properties, industrial properties, parking lots, recreational and cultural facilities, hotels, offices and churches. For fee purposes, the total impervious surface area on each of these properties is divided by the impervious surface area of one ERU (2,269 square feet) to determine the number of ERU’s that will be assessed to the property. The number of ERU’s billed is rounded to the nearest tenth (0.1) of an ERU.

For multifamily residential and nonresidential properties, credits of up to 50% of the total ERU assessment can be provided if on-site drainage features which are owned and maintained by the property owner are in place.

“Impervious surface area” means a surface which is compacted or covered with material that is highly resistant to infiltration by water, including, but not limited to, most conventionally surfaced streets, roofs, sidewalks, parking lots, and other similar structures.

The following table shows historical storm water utility rates and associated effective dates.

STORM WATER UTILITY RATE HISTORY

Effective Date Rate per day per ERU July 1, 2014 $ 0.433 July 1, 2013 0.416 July 1, 2012 0.366 July 1, 2011 0.316 July 1, 2010 0.241 July 1, 2009 0.221 July 1, 2008 0.201 July 1, 2007 0.181 July 1, 2006 0.171 July 1, 2005 0.161

City Council has established the rate of storm water utility fees at $0.433 per day per ERU, effective July 1, 2014. The following tables show billing distribution by type of property, and collections history.

STORM WATER UTILITY BILLING DISTRIBUTION BY TYPE OF PROPERTY AS OF JUNE 30, 2014

Type of Property % of ERU Residential 50.2 Multifamily 11.7 Non-residential 38.1

STORM WATER UTILITY FEE COLLECTIONS AS OF JUNE 30

Fiscal Year Assessed fees Collected fees % Collected* 2014 $36,709,700 $36,537,711 99.531 2013 32,006,788 31,852,199 99.517 2012 27,632,407 27,541,919 99.673 2011 20,883,989 20,833,505 99.758 2010 19,285,723 19,251,212 99.821 ______* The City expects that 2015 collections percentage will be consistent with prior years.

Administration, Billing, Collection and Liens

The Department of Public Utilities has the responsibility for rendering bills to owners of each lot or parcel subject to the utility fee; provided, however, where a tenant or occupant is the person to whom water or sewer service, or both, is billed, the utility fee may be charged to such tenant or occupant. This is the result of the implementation of a combined services billing application that was implemented in January 2005 between the Departments of Public Works and Public Utilities for the billing of storm water fees and utilities charges. In any case in which a tenant or occupant fails to pay utility fees, the delinquent utility fees shall be collected from the owner of the property. All properties, except undeveloped property, shall be rendered bills or statements for storm water services. Bills are sent bi-monthly in arrears. A small percentage of accounts (less than 5% of total accounts billed) are stand-alone storm water accounts and continue to be billed semi-annually in arrears on December 31st (for the six months from July 1 to December 31) and June 30th (for the six months of January 1 to June 30). Bills are due 30 days from the date of the bills, and are considered delinquent if not paid within 33 days after the bill date. On day 45, the unpaid account is eligible for water service suspension through the Department of Public Utilities. The actual cut off process may take up to four days to complete depending upon work volume, weather, staffing and other factors. Partial or selective payments are not permitted within the payment posting application, and the storm water fee is the first charge to be paid in the hierarchy of payments within the billing system. Although the City Code allows the City to impose interest of 10% per year on delinquent storm water accounts, such interest charge is not applied, except with respect to a small number of long-standing delinquencies that have been referred to the City Treasurer for collection. The City Code does not allow for “penalty” charges on delinquent accounts. Pursuant to Section 32.5-5(d) of the City Code (and in accordance with Section 15.2-2114D of the Virginia Code), all payments and interest due may be recovered by action at law or suit in equity, and unpaid fees and interest accrued shall constitute a lien against the property, ranking on a parity with liens for unpaid taxes, including real estate taxes. Consequently, most delinquent storm water fees are paid when a property changes owners.

STORM WATER DEBT INFORMATION

As of the issuance date of the Series 2015 Bonds, the City will have authorized but unissued storm water revenue bonds in the amount of $20,748,440, as shown below.

Authorized and Unissued Authorized and Unissued (Before Issuing (After Issuing Year Authorized Series 2015 Bonds) Series 2015 Bonds Series 2015 Bonds)

2006 $ 448,440 $ 448,440 $ - 2008 6,000,000 6,000,000 - 2011 16,300,000 16,300,000 - 2013 12,500,000 751,560 11,748,440 2014 9,000,000 - 9,000,000 Totals $ 44,248,440 $ 23,500,000 $ 20,748,440

Source: City Department of Finance

Storm Water Debt

Pursuant to Article VII, Section 10(a)(3) of the Virginia Constitution, the City has issued storm water revenue bonds which are secured solely by the net revenues of the City’s storm water management system. As of December 31, 2014, $23,380,000 in aggregate principal amount of these bonds was outstanding.

It is the City’s current policy to service all debt issued for storm water management purposes through revenues derived from the storm water management system.

The following table shows the amount of storm water management system debt that will be outstanding as of the issuance date of the Series 2015 Bonds.

STORM WATER ENTERPRISE FUND OUTSTANDING DEBT BY ISSUE AS OF THE ISSUANCE DATE OF THE SERIES 2015 BONDS

Revenue Bonds:

Series 2015 Storm Water Revenue Bonds $ 23,500,000 Series 2010A Storm Water Revenue Bonds 17,860,000 Series 2010B Storm Water Revenue Refunding Bonds 5,520,000

Total Storm Water Debt Outstanding: $ 46,880,000

The following table presents the City’s storm water management system debt service requirements that will be effective as of the issuance date of the Series 2015 Bonds.

CITY OF VIRGINIA BEACH STORM WATER ENTERPRISE FUND DEBT SERVICE REQUIREMENTS AS OF DECEMBER 31, 2014

Year Ending Storm Water Plus: Storm Water June Utility Revenue Bonds Utility Revenue Bonds 30th Series 2010A&B(1) Series 2015(1) Total Debt Service(1) PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL 2015 $ - $ 351,602.44 $ - 226,373.73 $ - $ 577,976.17 $ 577,976.17 2016 1,055,000.00 692,654.88 605,000.00 752,556.26 1,660,000.00 1,445,211.14 3,105,211.14 2017 1,075,000.00 672,433.00 625,000.00 734,106.26 1,700,000.00 1,406,539.26 3,106,539.26 2018 1,095,000.00 652,147.50 645,000.00 715,056.26 1,740,000.00 1,367,203.76 3,107,203.76 2019 1,125,000.00 629,290.13 670,000.00 688,631.26 1,795,000.00 1,317,921.39 3,112,921.39 2020 1,150,000.00 603,113.41 705,000.00 654,256.26 1,855,000.00 1,257,369.67 3,112,369.67 2021 1,180,000.00 572,740.44 735,000.00 625,606.26 1,915,000.00 1,198,346.70 3,113,346.70 2022 1,225,000.00 536,119.34 755,000.00 604,200.01 1,980,000.00 1,140,319.35 3,120,319.35 2023 1,280,000.00 494,607.62 775,000.00 586,068.76 2,055,000.00 1,080,676.38 3,135,676.38 2024 1,340,000.00 453,448.88 795,000.00 562,418.76 2,135,000.00 1,015,867.64 3,150,867.64 2025 1,400,000.00 412,013.50 830,000.00 529,918.76 2,230,000.00 941,932.26 3,171,932.26 2026 800,000.00 378,186.24 865,000.00 496,018.76 1,665,000.00 874,205.00 2,539,205.00 2027 845,000.00 351,960.36 900,000.00 460,718.76 1,745,000.00 812,679.12 2,557,679.12 2028 885,000.00 323,285.60 930,000.00 428,768.76 1,815,000.00 752,054.36 2,567,054.36 2029 930,000.00 293,201.97 960,000.00 400,418.76 1,890,000.00 693,620.73 2,583,620.73 2030 980,000.00 261,543.72 990,000.00 371,168.76 1,970,000.00 632,712.48 2,602,712.48 2031 1,030,000.00 228,227.97 1,020,000.00 341,018.76 2,050,000.00 569,246.73 2,619,246.73 2032 1,080,000.00 193,254.72 1,050,000.00 309,968.76 2,130,000.00 503,223.48 2,633,223.48 2033 1,135,000.00 155,065.60 1,080,000.00 278,018.76 2,215,000.00 433,084.36 2,648,084.36 2034 1,195,000.00 113,416.86 1,115,000.00 245,093.76 2,310,000.00 358,510.62 2,668,510.62 2035 1,255,000.00 69,623.12 1,150,000.00 211,118.76 2,405,000.00 280,741.88 2,685,741.88 2036 1,320,000.00 23,595.00 1,185,000.00 176,093.76 2,505,000.00 199,688.76 2,704,688.76 2037 - - 1,220,000.00 140,018.76 1,220,000.00 140,018.76 1,360,018.76 2038 - - 1,260,000.00 102,031.26 1,260,000.00 102,031.26 1,362,031.26 2039 - - 1,295,000.00 62,109.38 1,295,000.00 62,109.38 1,357,109.38 2040 - - 1,340,000.00 20,937.50 1,340,000.00 20,937.50 1,360,937.50

$ 23,380,000.00 $ 8,461,532.30 $ 23,500,000.00 $ 10,722,695.84 $ 46,880,000.00 $ 19,184,228.14 $ 66,064,228.14

Source: City Department of Finance. (1) Revenue bonds issued pursuant to Article VII, Section 10(a)(3) of the Constitution of Virginia (secured solely by revenues of the City’s storm water management system). Interest on the portion of the Series 2010A Bonds issued as Build America Bonds is shown net of the United State Treasury subsidy payment to be received for those bonds. See “STORM WATER DEBT INFORMATION – Direct Pay Subsidy Bonds,” below, in Section Three.

The following table shows the principal retirement schedule for the storm water management system debt that will be outstanding as of the issuance date of the Series 2015 Bonds.

RAPIDITY OF PRINCIPAL RETIREMENT ALL STORM WATER BONDS AS OF THE ISSUANCE DATE OF THE SERIES 2015 BONDS

Maturing Amount Percentage Within Maturing Retired 5 years $ 8,750,000 18.66% 10 years 19,065,000 40.67 15 years 28,150,000 60.05 20 years 39,260,000 83.75 25 years 46,880,000 100.00

Direct Pay Subsidy Bonds

$17,295,000 in currently outstanding principal amount of the Series 2010A Bonds were issued as Build America Bonds (the “BABs”). Interest on the BABs is subject to a direct pay subsidy (payable directly to the City) from the United States Treasury equal to 35% of the semi-annual interest payments made by the City on the BABs (the “Subsidy Payments”). As a result of the implementation of the sequestration provisions of the Budget Control Act of 2011, the 35% subsidy has been reduced by 7.2% for each interest payment made between October 1, 2013 and September 30, 2014, and by 7.3% for each interest payment made during the federal government’s fiscal year beginning October 1, 2014. The City has not pledged the Subsidy Payments to holders of the BABs and the semi- annual interest payments to holders of the BABs will not be reduced as a result of any reduction in the Subsidy Payments to the City. The City’s budget has sufficient funds to pay debt service on the BABs notwithstanding the reduction of the Subsidy Payments.

CALCULATION OF REVENUE COVENANT

The following table sets forth the calculation of the two independent requirements of the Revenue Covenant, a summary of which is set forth in the section “SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS” in Section Two. The Revenue Requirement A table, in the Budget 2015 column, reflects Maximum Annual Debt Service to be in effect as of the issuance date of the Series 2015 Bonds. The Revenue Requirement B table, in the Budget 2015 column, takes into account the Fiscal Year 2015 interest payment to be due on the Series 2015 Bonds. The information in the table below shows actual results for Fiscal Years 2011, 2012, 2013 and 2014, prepared on a cash basis, and budgeted amounts for Fiscal Year 2015. Set forth in Appendix C are the audited financial statements of the City’s Storm Water Enterprise Fund for the Fiscal Year ended June 30, 2014.

[Table appears on following page]

Revenue Requirement A

Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2011 (Actual) 2012 (Actual) 2013 (Actual) 2014 (Actual) 2015 (Budget) Pledged Revenues: System Revenues (including interest income) $ 21,234,088 $ 27,892,419 $ 32,954,179 $ 37,150,524 $ 39,002,647 Non-Operating Revenues deposited into the Revenue Fund (from the Commonwealth)* 2,656,916 - - - - Total Revenues $ 23,891,004 $ 27,892,419 $ 32,954,179 $ 37,150,524 $ 39,002,647

Total Expenses: $ 11,234,614 $ 13,311,162 $ 14,317,957 $ 15,366,723 $ 16,105,138

Revenues Available for Debt Service: $ 12,656,390 $ 14,581,257 $ 18,636,222 $ 21,783,801 $ 22,897,509

Maximum Principal and Interest Requirement: Series 2010A Bonds $ 1,343,595 $ 1,343,595 $ 1,343,595 $ 1,343,595 $ 1,343,595 Series 2010B Bonds 645,475 645,475 645,475 645,475 645,475 Series 2015 Bonds (Interest Payment) - - - - 226,374 Total of Maximum Debt Service: $ 1,989,070 $ 1,989,070 $ 1,989,070 $ 1,989,070 $ 2,215,444

Debt Service Coverage Ratio: 6.4 7.3 9.4 11.0 10.3 ______Source: City Department of Finance

* The City has no legal obligation to deposit revenues from the Commonwealth into the Revenue Fund.

Revenue Requirement B

Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2011 (Actual) 2012 (Actual) 2013 (Actual) 2014 (Actual) 2015 (Budget)

System Revenues (including interest income): $ 21,234,088 $ 27,892,419 $ 32,954,179 $ 37,150,524 $ 39,002,647

Less Required Transfers:

Operating Expenses $ 10,479,442 $ 12,045,293 $ 12,456,779 $ 13,576,682 $ 12,770,738 Capital Outlay 755,172 1,265,869 1,861,178 1,790,041 3,334,400 Senior Debt: Maximum Principal and Interest Requirement: Series 2010A Bonds: 1,343,595 1,343,595 1,343,595 1,343,595 1,343,595 Series 2010B Bonds: 645,475 645,475 645,475 645,475 645,475 Series 2015 Bonds (Interest Payment) - - - - 226,374

Subordinate Debt Fund (Prior Bonds) 489,014 469,360 322,975 226,457 - Capital Improvement Account (Cash) 5,947,338 10,836,635 14,122,870 13,962,480 9,514,582

Total Transfers: $ 19,660,036 $ 26,606,227 $ 30,752,872 $ 31,544,730 $ 27,835,164

Surplus revenues available after transfers: $ 1,574,052 $ 1,286,192 $ 2,201,307 $ 5,605,794 $ 11,167,483

Reconciliation of Expenses to CAFR:

Total Operating Expenses (per CAFR) $ 13,226,435 $ 15,550,163 $ 16,709,597 $ 19,477,620 Less: Depreciation (1,991,821) (2,239,001) (2,391,640) (4,110,897) Total Expenses (Revenue Requirement): $ 11,234,614 $ 13,311,162 $ 14,317,957 $ 15,366,723 ______Source: City Department of Finance

FINANCIAL OPERATIONS AND CAPITAL IMPROVEMENTS

Management’s Discussion of Financial Operations Related to the System

The Agreement of Trust contains specific debt service coverage requirements that must be met by the Storm Water Utility Fund each Fiscal Year. Pursuant to the Agreement of Trust, the debt service coverage ratio calculated using Pledged Revenues must be greater than 1.15 times maximum annual debt service. Based on the debt service coverage ratios for each of the last four Fiscal Years and the current Fiscal Year 2015 budget year, Revenue Requirement A is met for each year. Revenue Requirement B of the Agreement of Trust requires the System Revenues to at least equal the sum of the required deposits, which are detailed in the Agreement of Trust. Based on the analysis of surplus revenue, for each of the last four Fiscal Years and the current Fiscal Year 2015 budget year, Revenue Requirement B of the Agreement of Trust is met for each year. See “SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2015 BONDS – Revenue Covenant” in Section Two and “CALCULATION OF REVENUE COVENANT” in Section Three.

The City budgets conservatively and actual results for the Storm Water Utility Fund have historically come in under budget each year.

The Storm Water Utility Fund maintains adequate liquidity, as shown in the table below for the past four Fiscal Years and the Fiscal Year 2015 budget year.

Storm Water Utility Fund Working Capital

Actual Actual Actual Actual Budget Year FY-11 FY-12 FY-13 FY-14 FY-15

Total Current Assets $11,719,325* $14,288,011* $16,925,012 $21,786,593 $21,786,593 Total Current Liabilities 2,351,886 2,315,992 4,251,146 4,290,741 4,290,741

Working Capital $ 9,367,439 $11,972,019 $12,673,866 $17,495,852 $17,495,852**

Operating Expenses $11,234,614 $13,311,162 $14,317,957 $15,366,723 $16,105,138

Working Capital as a Percentage of Operating Expenses 83.38% 89.94% 88.52% 113.85% 108.64% ______* Note: Restated to reflect current assets after transfer to the capital program to be comparable to years FY-13 forward. ** Based on assets/liability position of the Storm Water Utility Fund at the end of Fiscal Year 2014.

Storm Water Utility Capital Improvement Program

The storm water utility system funds the Storm Water Utility Capital Improvement Plan (the “CIP”), a six- year program that includes projects that address flood control, water quality and capital maintenance. The City has accumulated $346.1 million in capital assets for the Storm Water Utility Fund, which were financed with cash and bond proceeds. The current CIP includes 27 storm water projects with an approximate total cost of $180.6 million.

The current CIP includes appropriations of $104.3 million through Fiscal Year 2015, of which $44.2 million will be Storm Water Utility Revenue bonds, which equates to 42.4% debt financing. At this time, it is projected that, for the remaining five-year period of the capital plan Fiscal Year 2016 through Fiscal Year 2020, the Storm Water Utility Fund can cash finance $49.3 million of proposed CIP projects. However, each year, the proposed projects are evaluated against community needs as well as funding sources, including debt and cash, and the need to raise storm water fees. The table below describes the funding sources for the storm water utilities projects.

CIP FINANCING SUMMARY

Appropriations Future Funding Total Programmed Through (Fiscal Years Funds Fiscal Year 2015 2016-2020)

Federal and State Contribution $ 1,686,189 $ 1,686,189 $ - Private Contribution 172,127 172,127 - Storm Water Utility Fund 107,483,677 58,203,541 49,280,136 Storm Water Utility Revenue Bonds 71,248,440 44,248,440* 27,000,000 Total $180,590,433 $104,310,297 $76,280,136 ______* Authorized but unissued storm water revenue bonds (before issuing the Series 2015 Bonds).

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SECTION FOUR: MISCELLANEOUS

SALE AT COMPETITIVE BIDDING

The Series 2015 Bonds were offered for sale at competitive bidding at 11:30 a.m. Eastern Time, Wednesday, January 14, 2015, and were awarded to UBS Financial Services, Inc. (the “Underwriter”) on the terms as to principal amounts, interest rates, prices and yields set forth on the inside front cover. The Underwriter has informed the City that it anticipates a total underwriting compensation of $229,125.00 (0.975% of the principal amount of the Bonds). The Underwriter may change the public offering yields from time to time.

LEGAL MATTERS

Certain legal matters relating to the authorization and validity of the Series 2015 Bonds will be subject to the approving opinion of Kaufman & Canoles, a Professional Corporation, Bond Counsel, which will be furnished at the expense of the City upon delivery of the Series 2015 Bonds, in substantially the form set forth as Appendix F (the “Bond Opinion”). The Bond Opinion will be limited to matters relating to the authorization and validity of the Series 2015 Bonds and to the tax status of interest thereon as described in the section “TAX EXEMPTION.” Bond Counsel has not been engaged to investigate the financial resources of the City or its ability to provide for payment of the Series 2015 Bonds, and the Bond Opinion will make no statement as to such matters or as to the accuracy or completeness of this Official Statement or any other information that may have been relied on by anyone in making the decision to purchase Bonds.

TAX EXEMPTION

Opinion of Bond Counsel. In the opinion of Bond Counsel, under current law, interest, including accrued original issue discount (“OID”), on the Series 2015 Bonds (a) is not included in gross income for Federal income tax purposes, and (b) is not an item of tax preference for purposes of the Federal alternative minimum income tax imposed on individuals and corporations; however, with respect to corporations (as defined for Federal income tax purposes) subject to the alternative minimum income tax, interest on the Series 2015 Bonds is taken into account in determining adjusted current earnings for purposes of computing such tax. Interest on the Series 2015 Bonds is exempt from income taxation by the Commonwealth of Virginia. Except as discussed below regarding OID, no other opinion is expressed by Bond Counsel regarding the tax consequences of the ownership of or the receipt or accrual of interest on the Series 2015 Bonds.

Bond Counsel’s opinion will be given in reliance upon certifications by representatives of the City as to certain facts relevant to both the opinion and requirements of the Code, and is subject to the condition that there is compliance subsequent to the issuance of the Series 2015 Bonds with all requirements of the Code that must be satisfied in order for interest thereon to remain excludable from gross income for Federal income tax purposes. The City has covenanted to comply with the current provisions of the Code regarding, among other matters, the use, expenditure and investment of the proceeds of the Series 2015 Bonds and the timely payment to the United States of any arbitrage rebate amounts with respect to the Series 2015 Bonds. Failure by the City to comply with such covenants, among other things, could cause interest, including accrued OID, on the Series 2015 Bonds to be included in gross income for Federal income tax purposes retroactively to their date of issue.

Original Issue Discount. The initial offering prices of each maturity of the Series 2015 Bonds maturing in the years 2034, 2036 and 2039 (the “OID Bonds”), will be less than their stated principal amount. In the opinion of Bond Counsel, under current law, the difference between the stated principal amount and the initial offering price of each maturity of OID Bonds to the public (excluding bond houses and brokers) at which a substantial amount of such maturity of such Series 2015 Bonds is sold will constitute OID. The offering prices set forth on the inside cover of this Official Statement for the OID Bonds are expected to be the initial offering prices to the public at which a substantial amount of each maturity of such Series 2015 Bonds (at least 10%) are sold.

Under the Code, for purposes of determining the holder’s adjusted basis in an OID Bond, OID treated as having accrued while the holder holds the Series 2015 Bond will be added to the holder’s basis. OID will accrue on a constant yield-to-maturity method. The adjusted basis will be used to determine taxable gain or loss upon the sale or other disposition (including redemption or payment at maturity) of an OID Bond.

Prospective purchasers of the OID Bonds should consult their own tax advisors with respect to the calculation of accrued OID and the state and local tax consequences of owning or disposing of OID Bonds.

Original Issue Premium. Series 2015 Bonds purchased, whether upon issuance or otherwise, for an amount (excluding any amount attributable to accrued interest) in excess of their principal amount will be treated for Federal income tax purposes as having amortizable bond premium. A holder’s basis in such a Series 2015 Bond must be reduced by the amount of premium which accrues while such Bond is held by the holder. No deduction for such amount will be allowed, but it generally will offset interest on the Series 2015 Bonds while so held. Purchasers of such Series 2015 Bonds should consult their own tax advisors as to the calculation, accrual and treatment of amortizable bond premium and the state and local tax consequences of holding such Series 2015 Bonds.

Other Tax Exemption. In addition to the matters addressed above, prospective purchasers of the Series 2015 Bonds should be aware that the ownership of tax-exempt obligations may result in collateral Federal income tax consequences to certain taxpayers, including without limitation financial institutions, property and casualty insurance companies, S corporations, foreign corporations subject to the branch profits tax, recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers of the Series 2015 Bonds should consult their tax advisors as to the applicability and impact of such consequences. Prospective purchasers of the Series 2015 Bonds also should consult their own tax advisors as to the status of interest on the Series 2015 Bonds under the tax laws of any state other than Virginia.

RATINGS

Fitch Ratings has assigned a rating of “AAA” to the Series 2015 Bonds. Moody’s Investors Service has assigned a rating of “Aa2” to the Series 2015 Bonds. The City requested that the Series 2015 Bonds be rated and furnished certain information to Fitch and Moody’s, including certain information that may not be included in this Official Statement.

Each rating reflects only the view of such organization and any desired explanation of the significance of any ratings should be obtained from Fitch at One State Street Plaza, New York, New York 10004, and from Moody’s at 7 World Trade Center, 250 Greenwich Street, New York, New York 10007. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. The rating is not a recommendation to buy, sell or hold the Series 2015 Bonds and should be evaluated independently. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Series 2015 Bonds.

LITIGATION

According to the City Attorney, there is no litigation of any kind now pending or, to the best of his information, knowledge and belief, threatened against the City to restrain or enjoin the issuance or delivery of the Series 2015 Bonds or the collection and application of Pledged Revenues under the Agreement of Trust, or in any manner questioning the proceedings and authority under which the Series 2015 Bonds are issued, the validity of the Series 2015 Bonds, or the ability of the City to own and operate the System.

The City and its employees have been named from time to time as defendants in various litigation matters filed by parties alleging personal injuries, property damages and other causes of action which are being vigorously defended by the City. In the opinion of the City Attorney, none of the pending litigation, if decided adversely to the City, would materially affect the City’s financial position.

CONTINUING DISCLOSURE

To permit compliance by the purchasers of the Series 2015 Bonds with the continuing disclosure requirements of the Rule, the City will execute a Continuing Disclosure Agreement (the “Disclosure Agreement”) at

closing, pursuant to which the City will agree to provide certain annual System financial and operating information and event notices required by the Rule. Such information will be filed through the Electronic Municipal Market Access System (“EMMA”) maintained by the Municipal Securities Rulemaking Board and may be accessed through the Internet at emma.mrsb.org. As described in Appendix G, the Disclosure Agreement requires the City to provide only limited information at specific times, and the information provided may not be all the information necessary to value the Series 2015 Bonds at any particular time. The City may from time to time disclose certain information and data in addition to that required by the Disclosure Agreement. If the City chooses to provide any additional information, the City will have no obligation to continue to update such information or to include it in any future disclosure filing unless the failure to do so would violate applicable law. The City has not failed in the last five years to comply in all material respects with any previous continuing disclosure undertakings under the Rule.

Failure by the City to comply with the Disclosure Agreement is not an event of default under the Series 2015 Bonds or the Agreement of Trust. Under current law, the sole remedy for a default under the Disclosure Agreement is to bring an action for specific performance of the City’s covenants thereunder, and no assurance can be provided as to the outcome of any such proceeding.

APPROVAL OF OFFICIAL STATEMENT

Any statements in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended as such and not as representations of fact. No representation is made that any of the statements will be realized. Neither this Official Statement nor any statement which may have been made verbally or in writing is to be construed as a contract with the holders of the Series 2015 Bonds.

The attached Appendices are an integral part of this Official Statement and must be read together with the balance of this Official Statement.

* * *

The execution of this Official Statement has been duly authorized by the City Council. This Official Statement is in a form deemed final as of its date within the meaning of the Rule.

CITY OF VIRGINIA BEACH, VIRGINIA

By: /s/ James K. Spore City Manager

APPENDIX A

CERTAIN INFORMATION CONCERNING THE CITY OF VIRGINIA BEACH, VIRGINIA

TABLE OF CONTENTS

INTRODUCTION ...... 1 CITY GOVERNMENT ...... 1 Form of Government ...... 1 School Board ...... 2 Elected Officials ...... 2 Certain City Council Appointees and Administrative Staff Members ...... 3 Appointed Officials ...... 4 GOVERNMENTAL SERVICES AND FACILITIES ...... 5 General Overview of Governmental Organization and Selected Functions ...... 6 Functional Departments...... 7 ECONOMIC AND DEMOGRAPHIC FACTORS ...... 13 Population ...... 13 Income ...... 14 Business and Industry ...... 20 Retail Sales ...... 24 Tourism and Conventions ...... 24 Military ...... 26 Medical Facilities ...... 27 Agribusiness ...... 27 Education ...... 28 Higher Education ...... 29 FINANCIAL INFORMATION ...... 30 Commitments and Contingencies ...... 30 Retirement and Pension Plans ...... 31 Other Postemployment Benefits ...... 33 Employee Relations and Collective Bargaining ...... 34 Southeastern Public Service Authority ...... 35

INTRODUCTION

The present City of Virginia Beach, Virginia was formed on January 1, 1963, by the merger of Princess Anne County and the former smaller City of Virginia Beach. This merger created one of the largest cities in the Commonwealth of Virginia (the “Commonwealth”) with an area of 310 square miles and 38 miles of shore-line on the Atlantic Ocean and the Chesapeake Bay. The City covers the entire eastern border of Virginia south of the Delmarva Peninsula and includes all of the area from the Chesapeake Bay to the North Carolina border.

The City has the largest population of any city in Virginia with a population of 449,628 according to the 2013 estimate of the Weldon Cooper Center for Public Service. As a city on the eastern seaboard, Virginia Beach has always been known as a resort community. The strength of the City’s economy, however, lies in its diversification. Construction/real estate, light industry, “high-tech” services, wholesale and retail sales, agriculture, four major military bases, and resort and convention trade are the major aspects of the economy. The City encourages and supports this diversification.

Virginia Beach is an independent, full-service city with sole local governmental taxing power within its boundaries. It derives its governing authority from its City Charter granted by the General Assembly of the Commonwealth. The governing body of the City is the City Council, which formulates policies for the administration of the City. The current City Charter provides for a Council-Manager form of government.

There is no overlapping debt or taxing powers with other political subdivisions. The water and sewage and storm water systems are operated on a self-supporting basis.

The Executive Offices are located at the Municipal Center, Virginia Beach, Virginia 23456, telephone number (757) 385-4242. The telephone number for the Finance Department is (757) 385-4681.

CITY GOVERNMENT

Form of Government

The City operates under the Council-Manager form of government as established by its City Charter. There is an 11-member City Council vested with local legislative powers. Each member of the City Council is elected on an “at large” basis; however, seven seats must be filled by individuals who reside in the seven residence districts of the City. The City Charter was amended in 1995 to provide that the City’s seven boroughs would be replaced by these approximately equally populated residence districts. There is no district residency requirement for the remaining four seats. The Mayor is elected by the voters and occupies one of these four seats. The City Council elects a Vice-Mayor from among its members. All members of the City Council are elected for four-year terms.

The City Manager is the administrative head of the municipal government and carries out the policies of the City Council. The City Manager is appointed by the City Council and serves at the pleasure of the City Council.

The City Council also appoints members to certain boards, commissions, and authorities as it deems necessary to the operation of the City.

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School Board

The School Board is made up of 11 members. Seven seats must be filled on the School Board by individuals who reside in the seven respective residence districts of the City but each of the eleven elected School Board members are elected by the voters of the City at large. The School Board members serve four-year terms. The School Board exercises all of the powers conferred and performs all of the duties imposed upon them by general law.

Elected Officials

William D. Sessoms, Jr., Mayor

President and CEO of Towne Financial Services Group from 2011-2014. President of TowneBank, Virginia Beach from 2005-2010. Elected to City Council in 1988, serving as Vice Mayor from 1992 to 2002. Re-elected to City Council as Mayor in 2008, re-elected in 2012. In 2012, he was recognized as elected official of the year by the Association of Defense Communities. Graduate of First Colonial High School and Virginia Commonwealth University.

Louis R. Jones, Vice Mayor

Owner and operator of Hollomon-Brown Funeral Homes, Inc. Elected to City Council in 1982 and served as Mayor from 1982 to 1984. Re-elected to City Council in 1990, 1994, 1998, 2002, 2006, 2010 and 2014. Has served as Vice Mayor since 2002. Bachelor of Science degree in business administration from the College of William and Mary, Norfolk Division (now Old Dominion University).

M. Benjamin Davenport, Councilman

Broker, Davenport Management Co. Started full time in the family business in June 2010. Elected to City Council in 2014. Possesses Virginia Class ‘A’ Contractors License and Real Estate Broker’s License.

Robert M. Dyer, Councilman

Administrative Dean and Associate Professor, School of Government at Regent University. Elected to City Council in 2004; re-elected in 2008 and 2012. Bachelor of Science degree in physical therapy from Saint Louis University, Master of Public Administration degree from Fairleigh Dickinson University and a Ph.D. in organizational leadership from Regent University.

Barbara M. Henley, Councilwoman

Partner, Henley Farms, LP. Elected to the City Council 1978-1990, during which time she served as Vice Mayor from 1982 to 1984. Re-elected to the City Council 1994-2002 and 2006-2014. Bachelor of Science degree in elementary education from Old Dominion University and a Masters in Urban Studies from Old Dominion University.

Shannon DS Kane, Councilwoman

President and founder of EWR Management Group in Virginia Beach. Appointed to City Council in 2014 by members of Council to fill on an interim basis a portion of the term of a Council member who resigned. Reelected in a special election held in November 2014. Bachelor’s degree in communications and public relations from James Madison University.

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John D. Moss, Councilman

Serves as the Director for Submarine Program Requirements and Warfare Development for the Commander Submarine Force Atlantic. Elected to City Council in a special election in November 2011; reelected in 2014. Served two prior terms on City Council, as the Kempsville Borough Representative (1986-1990) and as an At Large member (1992-1995). Graduate of Princess Anne High School, Virginia Tech, Old Dominion, and Naval War College, as well as the Senior Federal Fellows Program, John F. Kennedy School of Government, Harvard University.

Amelia N. Ross-Hammond, Councilwoman

Professor and director of service-learning and civic engagement at Norfolk State University. Elected to City Council in 2013. She holds a doctorate in educational leadership, curriculum and instructions from the University of Denver, a masters of music education from the College of New Jersey and a bachelor’s degree from Ithaca College.

John E. Uhrin, Councilman

Since 1991, Director of Operations for Burlage Management, currently overseeing the operation of six hotels. Elected to City Council in 2006; re-elected in 2010 and 2014. John graduated from Kellam High School. He attained his bachelor’s degree in business administration with a concentration in marketing and finance from Old Dominion University.

Rosemary Wilson, Councilwoman

Realtor with Prudential Towne Realty and former Virginia Beach school teacher as well as School Board member. Rosemary was recognized in 2012 by Lawyer’s Weekly, as one of the Most Influential Woman in Virginia. Elected to City Council in 2000; re-elected in 2004, 2008, and 2012. Bachelor of Science in education from Old Dominion University.

James L. Wood, Councilman

Vice President of J D & W, Inc., a commercial general contracting firm. Elected to City Council in 2002; re-elected in 2006, 2010 and 2014. Graduate of Princess Anne High School. Bachelor of Science “with special attainments in commerce” from Washington and Lee University.

Certain City Council Appointees and Administrative Staff Members

The City Manager is responsible for planning, organizing, directing, and coordinating all activities of the City. The City Manager is also responsible for appointing and discharging all City employees and officers, though responsibilities may be delegated to subordinates. A major responsibility of the City Manager is the preparation of the annual City Operating Budget and Capital Improvement Program.

The City Attorney has management, charge, and control of all legal business of the City. The City Attorney is chief legal advisor to the City Council, the City Manager, and all City departments and agencies. It is the duty of the City Attorney to advise the City Council concerning the legality of actions by the City and to represent the City in all matters affecting its interest.

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It is the responsibility of the Real Estate Assessor’s Office annually to appraise all real property in the City. In addition, this office administers the Land Use Assessment Program for qualifying farm and forest lands and processes the Tax Relief for the Elderly and Disabled Program for qualifying senior citizens and disabled persons.

The City Clerk’s Office is responsible for recording and maintaining all legislative documents and actions of the City Council; preparing and monitoring the legislative budgets; and compiling annual financial disclosures for City Council and members of City Boards and Commissions. The City Clerk’s Office also serves as liaison for all Sister City activities.

Appointed Officials

James K. Spore, City Manager

City Manager since November 25, 1991. Previously served as City Manager of Garland, Texas (1985 to 1991), and Burnsville, Minnesota (1981 to 1985). Also served as the Director of Community Development for the City of Lakewood, Colorado (1976 to 1981), and the City of Elgin, Illinois (1970 to 1976). Master of Public Administration degree, University of Colorado, Boulder; and Bachelor and Master of Urban Planning degrees, University of Illinois, Urbana.

Mark D. Stiles, City Attorney

Appointed City Attorney effective March 1, 2009. Served in City Attorney’s Office since 1999 in roles including Deputy City Attorney for Litigation, Senior Litigation Attorney and Associate City Attorney. Employed as associate with the law firm of Willcox & Savage, P.C. from 1989 until 1999. Bachelor of Arts from West Virginia University (1986) and Juris Doctor from Washington & Lee University (1989).

Ruth Hodges Fraser, City Clerk

City Clerk since January 1, 1979. Master Municipal Clerk, Bachelor of Arts in Administration from Potomac State College of West Virginia University.

David L. Hansen, Deputy City Manager

Deputy City Manager since April 3, 2006. Responsible for the Finance Department among other City departments. Previously Chief Financial Officer and Resource Manager for the U.S. Army’s Training and Doctrine Command at Fort Monroe. Bachelor of Science in business administration and accounting from the University of Central Florida. Master of Business Administration and Contracting from the Florida Institute of Technology. Master of Science in strategic studies and logistics from the Industrial College of the Armed Forces.

Patricia A. Phillips, Director of Finance

Director of Finance since April 16, 1992. Previously served as Director of the Office of Research and Strategic Analysis from 1975 to 1992. Also served as a public accountant for Coopers and Lybrand from 1970 through 1975. Bachelor of Science degree in business administration, Magna Cum Laude, Old Dominion University. Master of Business Administration, Old Dominion University. Certified Public Accountant since 1972.

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GOVERNMENTAL SERVICES AND FACILITIES

The City provides general governmental services for its citizens including police and fire protection, emergency medical services, collection and disposal of refuse, water and sewer services, parks and recreation, libraries/culture, and maintenance of streets and highways. Other services provided by the City, which services are partially funded by the Commonwealth, include public education in grades kindergarten through twelfth, and certain technical and special education, mental health assistance, health and social services, agricultural services, and judicial activities.

The City’s main municipal complex includes eight general administrative buildings, a school administration building, a public safety building, a city jail and a judicial complex. In close proximity are a City garage complex, a highway maintenance facility, a public utilities operational maintenance facility, a waste management facility and a farmer’s produce market. There are four police precincts, one Law Enforcement Training Academy, 19 fire stations, one fire/emergency medical services training center, one central library together with eight area libraries and two satellite library facilities, 236 developed city parks, and 87 public educational facilities located throughout the City.

Some of the other major facilities provided by the City include a convention center, the Virginia Aquarium and Marine Science Center, seven recreational centers, a tennis complex, five municipal golf courses, a 6,000 seat multipurpose sports stadium, a performing arts center and a 20,000 capacity amphitheater, which books approximately 40 entertainment events per year.

The City provides a comprehensive range of public services characteristic of its position as the most populous city in the Commonwealth.

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CITY OF VIRGINIA BEACH – ORGANIZATIONAL CHART

General Overview of Governmental Organization and Selected Functions

The City government structure has evolved to respond to the challenges of increased demand for quality service, infrastructure needs, potential reductions in state and federal funding and a slowdown in population and revenue growth. In 1991, a Management Leadership Team (“MLT”) was established to assist the City Manager with identifying and resolving organizational issues. The MLT continues to evolve to meet the changing needs of the community and the organization. The MLT includes the City Manager and three Deputy City Managers. The MLT oversees the integration and alignment of the organization toward City Council’s vision and annual goals.

In 1995, the City created Strategic Issue Teams to focus on City Council’s vision and direction. Six business areas were identified: Economic Vitality, Safe Community, Quality Physical Environment, Quality Education for Lifelong Learning, Cultural and Recreational Opportunities, and Family and Youth Opportunities. A seventh area was identified by City Council in 2002 and named Quality Organization. These Strategic Issue Teams focus on the government organization as a quality-driven service provider delivering cost-effective services.

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As a result of the planning by the Strategic Issue Teams, “Community for a Lifetime: A Strategy to Achieve City Council’s Vision for the Future” was published in August 1998 and outlined the organization’s long-range goals. In April 1999, the City was recognized for its efforts by receiving the Medallion Award from the 1998 U.S. Senate Productivity and Quality Award in the public sector category. For the next ten years the organization implemented the strategies, focused on three year priorities, and incorporated City Council’s annual goals. In 2008 a new Strategic Plan was published. In 2011, the Strategic Issue Teams were challenged to begin a new planning process and City Council was presented with a New Strategic Plan to achieve their Vision in January 2012.

Functional Departments

The Department of Agriculture provides educational and resource services in agriculture, home economics, money management, 4-H, and community resource development. The department has three major divisions. The Virginia Beach Cooperative Extension Office offers educational programs and technical information on agriculture, horticulture, and money management. The Agriculture Reserve Program (ARP) is a land preservation program. The goal of the ARP is to promote and enhance agriculture as an important local industry that is part of a diverse local economy by purchasing development rights over a resource base of farmland. The Farmer’s Market provides a venue for the sale of goods and products of local farmers and craftsmen and for the provision of rural heritage activities.

The Office of the City Auditor. On December 11, 2007, City Council adopted an ordinance to recognize the Office of the City Auditor as a Council-appointed Office. This reorganization creates independence in the overseeing of the audit of financial information. The Council-appointed auditor has all the duties of the former position and reports directly to City Council under the new organizational structure. Among the auditor’s duties is to conduct financial and performance audits of City departments, offices, boards, activities, agencies, programs and systems. These audits focus on efficiencies and the adequacy of internal controls, and all audits are conducted in accordance with Government Auditing Standards. The City Auditor also operates a fraud, waste and abuse hotline and oversees and coordinates investigations of suspected fraudulent activity. A Council-appointed Audit Committee consisting of two Council members, a citizen Certified Public Accountant, and two other citizen members with a background in finance, accounting, and/or auditing review the City Auditor’s audit schedule and audit reports after issuance. Audit reports are forwarded to City Council and made available for public inspection on the City Auditor’s office home page on www.vbgov.com.

The function of the Department of Communications and Information Technology is the processing and electronic storage of information used in the daily business of the City. The department collects, organizes and disseminates information to all City departments, City agencies, and the public school system. It also provides consulting services in related areas to municipal users to assist them in formulating goals, objectives and long-range plans. The department manages School and City video production services and facilities and provides information to the community on municipal government and the public school system through the City’s Municipal Cable Television Station, Channels 46, 47 and 48. The department’s services center around seven main operational areas: applications support, system support, telecommunications, multimedia services, geo-spatial information services, technology services, and business center.

The Convention & Visitors Bureau coordinates the advertising and promotion of tourism and convention activities and is responsible for bringing leisure travelers, meetings, conferences, sports events, group tours and conventions to Virginia Beach. The department operates three year-round Visitor Information Centers and two seasonal kiosks in the resort area, and the award-winning Virginia Beach Convention Center. Approximately 5.9 million overnight visitors stayed in Virginia Beach in calendar year 2013, and an additional 6.9 million day visitors were also hosted by the city. Total 2013 visitor

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spending figures from the U.S. Travel Association were at a record high level with a spending volume of $1.31 billion. Visitor activity generated $108 million in City and State revenues in 2013.

The Office of Cultural Affairs was created to reflect the importance of the role of arts and culture in making a well-rounded and vital community for a lifetime. The creation of this office demonstrates the rising significance of our cultural facilities in the City’s structure. The role of the Office of Cultural Affairs consists of the following: develop the vision and direction for cultural arts in Virginia Beach, direct the Virginia Beach Arts and Humanities Commission, coordinate the City’s Public Art Program, assist the newly formed 501(c)3 non-profit organization, Public Art Virginia Beach Foundation, provide contract management for the Sandler Center for the Performing Arts; provide administrative leadership to the Sandler Center for the Performing Arts 501(c)3 Foundation, and the Sandler Center Foundation’s Endowment fundraising campaign.

The Economic Development Department promotes and encourages the economic growth and diversity of the City. The department works with the City of Virginia Beach Development Authority to attract business and industry to the City and to develop sites for new or expanding businesses in the City’s Business/Industrial Parks. Recent accolades include: One of America’s “Best Cities for Global Trade,” Global Trade Magazine, 2014, One of America’s “50 Best Cities to Live,” 24/7 Wall Street, 2014, A “Millenial Boomtown,” Forbes, 2014, A Top 10 Beach Town for Retirees, CBS News, 2014, 5th Best Run City in America, 24/7 Wall Street, 2014, 3rd out of 52 Best Cheap Cities for Raising a Family, Cheapism.com., 2014, One of the Big Cities Leading a U.S. Manufacturing Revival -Forbes, November 2013, One of the Ten Best Cities for Early Retirement -Kiplinger, November 2013, One of America’s 10 Hardest-Working Cities Forbes, August 2013, Virginia Beach Ranked as the Fittest City in America Facebook’s Fittest Cities, 2013, 2nd Most Business-Friendly City in America CNNMoney.com Report, June 2013, Virginia Beach named the 2nd Most Small-Business Friendly City Governing Magazine April th th 2013, 6 Happiest City in Which to Work, Forbes Magazine, 25 Most Literate City, Central Connecticut State University, 2013, One of America’s 50 Best Cities, Bloomberg Businessweek, 2012, 7th Best Walking City in America, Prevention Magazine 2012, 2nd Best City in America to Raise a Family, 24/7 Wall St., 2012. In FY2013-2014, companies in Virginia’s most populous City leveraged more than $111,000,000 in capital investments and created or retained 2,140 Virginia Beach jobs. These companies also occupied 718,000 square feet of next and existing commercial space. Last year 50 new business relocation and expansion projects were announced, including four from companies headquartered outside the U.S.

The Department of Emergency Communications and Citizen Services (ECCS) is comprised of VB9-1-1 and VB3-1-1. VB9-1-1 (Emergency Communications) is a centralized public-safety answering point (PSAP) for citizens to access public safety services. VB9-1-1 also provides communications services for Police, Fire, Emergency Medical Services (EMS), Animal Control and other departments Citywide. In Fiscal Year 2014, VB9-1-1 received 504,872 incoming calls for public safety service. VB3- 1-1 (Citizen Services) provides city information services via multiple communication channels such as telephone, online assistance, email, fax, print, radio dispatching and emergency notifications. Also, VB3- 1-1 assists walk-in customers and various city departments such as Real Estate Assessor, Code Enforcement, and after hours Public Utilities and Public Works, with their information/service requests. In Fiscal Year 2014 VB3-1-1 processed 146,054 inquiries.

The Department of Emergency Medical Services (EMS) coordinates the pre-hospital emergency care provided by the 10 volunteer Rescue Squads, operating out of 18 stations. In Fiscal Year 2014, the department answered 41,438 calls for service which included providing a safe and efficient response to the scene, advanced treatment of patients and prompt transport to the hospital. The department operates multiple specialized resources, which include: mass casualty response, tactical (SWAT) medics, vehicle extrication services, a marine rescue team, lifeguard services and a collaborative Air Medical Ambulance

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(Police/EMS helicopter). In addition, the department provides initial, ongoing, recertification and/or other medical training for volunteer rescue, career EMS, fire department, police department, and/or emergency communications personnel. In Fiscal Year 2014 the Department of EMS consisted of approximately 1,243 volunteer rescue squad members and 46 uniformed career personnel.

The Department of Finance oversees the financial affairs of the City and ensures the financial integrity of City operations. Departmental services include: payment of all City bills; maintenance of accounting records; payment of all City employees and administration of employee benefits; provision of insurance and operation of the self-insurance program; maintenance of the City’s fixed assets inventory; procurement of all equipment, materials and services for all city agencies; and coordination and administration of the City’s long-term debt program.

The City’s Fire Department, which is responsible for both fire prevention and fire suppression, handled approximately 40,500 fire and rescue incidents in Fiscal Year 2014. The City’s firefighters respond to fire, medical and other emergency events from the City’s 19 fire and rescue stations. In addition, volunteer personnel with proper training from the City’s fire training center provide manpower contributions to a variety of department customer service areas. There are 1,160 volunteers active with our Citizen Emergency Response Team (CERT) and 57 volunteers who serve as firefighters, support technicians and administrative personnel.

The Office of the General Registrar, pursuant to provisions in the Code of Virginia, is responsible for providing an accessible and fair means by which City residents can register to vote in general and special elections and primaries. The number of registered voters was 291,042 as of February 1, 2014.

The Department of Housing and Neighborhood Preservation provides a variety of housing and neighborhood improvement services, including enforcement of the building maintenance code and property maintenance codes, provision of financial assistance to home owners for housing rehabilitation, and provision of financial assistance to eligible renters. In addition, an on-line “Pattern Book” that provides design guidelines and various types of information to assist homeowners who are planning rehabilitation, is now available on the city’s website.

The Department of Human Resources is responsible for developing and managing the City’s human resource programs to ensure quality, efficiency and diversity. The department manages recruitment and retention, applicant testing, equal employment opportunity, FMLA/ADA, volunteer referrals, employee communications, policy creation and interpretation, employee recognition, leave programs, dispute resolution, performance management, workforce planning, and official personnel record documentation. The department assists in member development in the areas of leadership, personal and professional growth, organizational awareness, job skills, career counseling and coaching, employee safety, and occupational health services. Staff support is provided to the Human Rights Commission, the Investigation Review Panel and the Personnel Board.

The Department of Human Services was created by merging the Department of Mental Health/Mental Retardation/Substance Abuse Services, the Department of Social Services, Pendleton Child Service Center, and the Juvenile Detention Center. The department continues to carry out the missions of the former departments including: providing Mental Health, Substance Abuse and Developmental services to children, adults, and the elderly, in order to improve quality of life and ensure community safety. Additionally, the department provides a range of child welfare services including child protective services, foster care, and employment services. The department is responsible for providing secure detention services for children before the juvenile and domestic relations court, and the department provides prevention orientation services to young children identified by the school system as being in need of early intervention services. The department is also responsible for Community

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Corrections/Pretrial Services which provides probation services and pretrial monitoring for adults who have been charged or convicted of misdemeanors or non-violent felonies.

The Juvenile Probation Office provides support services to the Juvenile and Domestic Relations District Court. The office provides probation supervision, intake services, and parole services for juveniles. It provides court support by processing petitions and preparing social background investigations.

The Department of Management Services develops and oversees the City Operating Budget and Six-Year Capital Improvement Program. The department provides assistance and direction to other City departments for any budget amendments for issues that arise during the year. The department also provides multi-year forecasting of revenues and expenditures, provides fiscal impact analysis, coordinates grant review, monitors performance measurement data, evaluates City programs and services, and assists departments in management issues, as assigned.

The Media and Communications Group provides communication services to city officials, executive leadership and departments to inform and improve communications with citizens, promote civic engagement, manage issues and achieve strategic outcomes.

The Department of Museums and Historic Resources operates the Virginia Aquarium & Marine Science Center, the Francis Land House, the Adam Thoroughgood House, the Lynnhaven House and the Princess Anne County Training School/Union Kempsville High School located in the Renaissance Academy. The department coordinates projects and initiatives for the preservation of the City’s historic resources and administers the Virginia Beach Historical Register. The Virginia Aquarium & Marine Science Center first opened in 1986 and was expanded to three times its original size in 1996. The expanded building encompasses 120,000 square feet. The Aquarium takes visitors on a journey of water through Virginia’s marine environment by way of interactive exhibits and 800,000 gallons of aquariums that feature sharks, river otters, harbor seals and sea turtles. The Aquarium also offers a larger-than-life experience in its 3D Giant Screen Theater. The Theater was recently renovated with a $1.2 million upgrade that includes a new digital projection system, and the largest screen in Virginia. A $28 million renovation of the Aquarium’s 20-year old original exhibit gallery was completed in late 2009, and features extensive additions to the exhibits, which represent Virginia’s environment at various periods of time. The renovation includes a forty-foot, 100,000 gallon walk- through aquarium with spotted eagle rays and other colorful tropical fishes, an arid coastal desert, a volcanic region with Komodo dragons, and a misty peat swamp featuring Tomistoma crocodiles. The Aquarium had attendance of 600,000 and generated revenue of $9 million in Fiscal Year 2014. In May of 2014, the Aquarium opened the largest Ropes/Zipline course in North America. With this opening, the Aquarium anticipates an increase of 70,000 visitors per year. The Virginia Beach historic house museums promote Virginia Beach’s historic resources with the community and ensure the preservation and education of our rich heritage. Specifically, the purpose of the Francis Land House is to collect, preserve and present historically accurate material reflecting life in eighteenth century Princess Anne County. The House is open year- round for tours and educational programming. The Adam Thoroughgood House provides year-round tours and programs related to Adam Thoroughgood, a founding father of Virginia Beach, and early life in colonial Virginia. Through public tours and programs, the Lynnhaven House presents life on a rural farm in 18th century Princess Anne County. During tours, visitors learn about the Thelaball family who lived in the house during the 1700’s. The Princess Anne County Training School/Union Kempsville museum provides the community with the legacy of a segregated African American school history, and educates the visitors on the sacrifice, and the importance of education for African American students from 1934 until the school’s closing in 1969. In Fiscal Year 2013, the historic house museums had attendance of 14,000 and earned $39,313 in revenue. The department also provides oversight, as well as an

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operational allotment and maintenance funding, for two other city-owned properties: the Old Coast Guard Station, and the deWitt Cottage, which houses the Atlantic Wildfowl Heritage Museum.

The Organization Development Office enhances and supports organizational performance and individual development to improve the effectiveness and sustainability of a Quality Organization. The Office supports the organization, departments, and individual teams in strategic planning, leadership development, and assessing the culture of the organization. A key focus of the Office is change leadership, increasing the capacity of the organization to more effectively manage change. This includes such things as developing strategies and processes for the successful implementation of change initiatives by enhancing learning, communication, decision-making and alignment.

The Department of Parks and Recreation’s mission is to deliver parks, recreation programs and public spaces that reflect the priorities of our community; support tiered levels of service that recognize the diverse needs of the community; and focus on sustainability of core programs, services and facilities through efficient business practices. In Fiscal Year 2014 the Parks and Recreation Special Revenue Fund, which include parks, outdoor programs, recreation center operations and out-of-school programs, generated $14,877,707 in fees and charges. The Business Systems Division is responsible for managing the department’s financial resources and technology, and coordinating the development of the operating budget and the department’s human resources functions. The Planning, Design and Development Division updates the Virginia Beach Outdoors Plan and Bikeways and Trails Plan; manages the implementation of the plans and the construction and replacement of Parks and Recreation facilities through the department’s Capital Improvement Program. The Programming and Operations Division is responsible for the following areas: providing recreation and leisure services to adults, senior citizens and youths; providing citizens with disabilities the opportunity to receive the benefits of recreation and leisure in the least restrictive environment; operating all parks and park facilities; operating two multi-purpose athletic complexes; operating two motorized boat launches; operating seven recreation centers located throughout the City, one of which, Bow Creek, is being modernized and will open in February, 2015; managing 48 Open Space preservation areas, and operating Out-of-School Time programs. There are 236 developed City parks, 179 of these are classified as neighborhood parks, 13 are classified as community parks, 6 are classified as metro parks, 2 are classified as signature parks, 3 are classified as linear parks, 5 are classified as natural area parks, and 28 are classified as special use park facilities, 6 of which are under management agreements. The Landscape Management Division provides landscape services for: all public infrastructures, including roadways and public buildings; the Municipal Center; the resort area; Town Center; and all public open spaces, parks and school sites.

The Department of Planning and Community Development provides policy assistance and operational support in the areas of transportation, land use planning, zoning and environmental resource protection. The department also provides plan review, inspection and code enforcement ensuring the quality of the built environment. Three divisions of Planning; Comprehensive Planning, Transportation Planning and the Environment and Sustainability Office (ESO), are responsible for maintaining long- range plans which provide guidance for the physical development of the City. Comprehensive Planning supports the Historic Review Board and the ESO supports the Chesapeake Bay Board and the Wetlands Board. The Current Planning Division provides staff support to the Planning Commission, the City Council on Planning items and the Board of Zoning Appeals. Current Planning also administers the City’s Zoning Ordinance. The Department’s Development Services Center reviews subdivision plans, site plans and land management plans, issues moving and hauling permits and provides surety administration. The Permits and Inspections Division ensures compliance with building code standards by inspecting all building, electrical, mechanical and plumbing construction in the City.

The Police Department is composed of five major units: Administration, Professional Standards, Support, Operations, and Investigative Divisions. The department operates through four precincts located

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throughout the City. Virginia Beach’s Part I Crime rate for 2013 was 26.7 crimes per 1,000 residents, which is a decrease from the 2012 crime rate of 28.1 crimes per 1,000 residents. The Part I Crime rate includes violent and property crimes. The property crime rate was 25.0 per 1,000 residents. The violent crime rate was 1.7 crimes per 1,000 residents. According to the FBI’s Crime in the United States 2012, the City’s violent crime rate is the lowest among participating U.S. cities with a population of 350,000 to 900,000. The City continues to be one of the safest communities of its size in the country.

The Department Public Health exists to promote and protect the health of the community. Community is defined as all the citizens, including tourists, and the environment. The department serves as the “safety net” in providing health services to the people who do not have access to care in the private sector such as the uninsured/underinsured and homeless individuals. The department provides clinics and services as follows: communicable disease (surveillance, investigation of individual cases and community outbreaks); Sexually Transmitted Infections (HIV/AIDS, syphilis, gonorrhea, Chlamydia, herpes, VA AIDS Drug Assistance Program [ADAP]); Tuberculosis (case management, Chest Clinic, directly observed treatment [DOT] and preventive therapy [DOPT]); dental care for children (ages 3-17 years); Women, Infants and Children (WIC) Supplemental Food Program; Infant, Child & Adolescent Health Clinic (routine preventive health care and limited non-urgent sick care, immunizations (childhood and adult); pregnancy testing, pregnancy referral, and maternity care, family planning, home visiting, parent support, Healthy Start Program, Environmental Health (essential food protection: permitting and inspections of restaurants, dairy plants, day care facilities, schools and hospitals; essential sewage and water services: on-site sewage disposal systems and wells, ground water quality, recreational beach water monitoring; general environmental: rabies, public swimming pools, hair dressing, tanning, and nail salons, body art establishments); community-based services: health education and injury prevention; vital statistics: death and birth certificates.

The Department of Public Libraries manages eight area libraries, a 95,000 square foot Central Library and 125,000 Joint-Use Library. It operates a mobile early literacy outreach center (bookmobile), provides library services (support) for visually and physically impaired citizens and maintains a public law library. The department has concluded work on a $26 million capital investment program. The Great Neck Area Library was renovated and reopened in May 2003. The Princess Anne and Oceanfront Area Libraries were opened in October 2003 and October 2004, respectively. The Windsor Woods Area Library reopened in January 2006 following extensive interior renovations, and a new Bayside Area Library opened in November 2005. Renovation of the Central Library was completed in 2005. Interior renovations for the Kempsville Area Library were completed in September 2009. The department worked with Tidewater Community College Virginia Beach Campus on a Joint Use Library project that is located on the TCC- Virginia Beach campus. This 125,000 square foot facility serves the faculty and students of TCC and the entire Virginia Beach community and is jointly operated by the College and the department. The Joint Use Library construction project was funded with approximately $42.3 million from the Commonwealth of Virginia and approximately $11.0 million from the City of Virginia Beach. The Joint Use Library officially opened to the public on August 17, 2013. The total current square footage of the library system (including the portion of the Joint Use Library that is paid for and utilized by the City) is approximately 230,418.

The Department of Public Utilities provides water and sanitary sewer services to City residents. As of June 30, 2014, the department had installed and continues to maintain more than 3,142 miles of water and sanitary sewer lines as well as operating and maintaining 407 sanitary sewer pumping stations, nine water pumping stations (including Lake Gaston), 11 water storage facilities with 24.5 million gallons of water capacity, and 8,257 fire hydrants. The department coordinates the engineering and administration of the development of raw water supplies for the City and oversees the City’s water conservation programs.

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The Department of Public Works oversees the design and construction of new City structures and transportation systems, maintains a large portion of the City’s infrastructure (e.g., roadways, bridges, storm water systems, beaches, traffic control devices, City-owned buildings and City-owned motorized equipment), and provides for collection, recycling and disposal of solid waste. The administration of the storm water management utility is also included as a responsibility of the department.

The Office of Volunteer Resources coordinates the use of over 20,000 volunteers throughout City Departments.

ECONOMIC AND DEMOGRAPHIC FACTORS

Population

Based on the April 2010 census conducted by the U.S. Census Bureau, the population of the City of Virginia Beach was 437,994. This census confirmed Virginia Beach as the most populous city in the Commonwealth and the 34th largest city in the United States. In 2013, the Weldon Cooper Center for Public Service estimated the City’s population at 449,628. The following table presents population figures for selected years.

POPULATION AND RATE OF CHANGE VIRGINIA BEACH AND THE UNITED STATES SELECTED YEARS

Year Virginia Beach Rate of Change United States Rate of Change

1960 85,200 N/A 179,323,175 N/A 1970 172,106 102.00% 203,302,031 13.37% 1980 262,199 52.35 226,542,199 11.43 1990 393,089 49.92 248,709,873 9.79 2000 425,257 8.18 281,424,602 13.15 2010 437,994 3.00 308,745,538 9.71 2013 449,628 2.66 316,128,839 2.39

Source: U.S. Census Bureau (1960-2010); Virginia Beach as of 7/1//2013, Weldon Cooper Center for Public Service

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FIVE MOST POPULOUS CITIES IN VIRGINIA

City 2012 Population 2013 Population

Virginia Beach 447,489 449,628 Norfolk 245,803 246,392 Chesapeake 228,210 232,977 Richmond 208,834 211,172 Newport News 183,331 183,412

Source: Weldon Cooper Center for Public Service

Income

Presented below are tables on median household income, distribution of household income, per capita income, total personal income and median household effective buying income. Median household income is defined as the income of the household in the middle of all household incomes when sorted from lowest to highest. Per capita income is total personal income divided by the area’s residential population. Total personal income is a measurement of the area’s total income from all sources. Effective buying income is a measurement of disposable income or after-tax income.

MEDIAN HOUSEHOLD INCOME

Virginia Commonwealth United Year Beach of Virginia States

2006 61,333 56,277 48,451

2007 61,462 59,562 50,740

2008 65,776 61,233 52,029

2009 59,298 59,330 50,221

2010 64,212 60,674 50,046

2011 64,614 61,882 50,502

2012 61,626 61,741 51,371

2013 62,855 62,666 52,250 ______Source: Census Bureau’s 2006-2013 American Community Survey 1-year estimates

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DISTRIBUTION OF HOUSEHOLD INCOME 2013

Virginia Beach Virginia United States $100,000+ 26.7% 29.8% 22.6% $75,000 - $99,999 14.4% 12.5% 11.9% $50,000 - $74,999 21.9% 17.7% 17.9% $25,000 - $49,999 23.8% 21.3% 23.9% Under $24,999 13.2% 18.6% 23.7% ______Source: Census Bureau’s 2013 American Community Survey 1-year estimate

PER CAPITA INCOME

1980 1990 2000 2010 2013 Virginia Beach $10,836 $21,724 32,008 46,429 50,662 Norfolk 9,165 16,914 24,942 36,061 39,009 Chesapeake 9,630 19,019 28,226 42,011 44,562 Newport News 9,137 17,283 23,313 34,625 37,862 Commonwealth of Virginia 10,107 20,831 32,453 44,836 48,838 United States 10,091 19,584 30,587 40,144 44,765

Source: U.S. Department of Commerce, Bureau of Economic Analysis. Most recent information available as of November 2014.

The City’s 2013 per capita income ranks 12th among 105 Virginia localities for which the Bureau of Economic Analysis computes income. Virginia Beach’s 2013 per capita income is 113.17% of the United States’ per capita income.

TOTAL PERSONAL INCOME (In Millions)

1980 1990 2000 2010 2013

Virginia Beach $ 2,869 $8,169 $ 13,665 $20,386 $22,721 Commonwealth of Virginia $54,257 $126,278 $230,606 $359,782 $403,425

Virginia Beach as a percent of State 5.3% 6.5% 5.9% 5.7% 5.6%

Source: U.S. Department of Commerce, Bureau of Economic Analysis. Most recent information available as of November 2014.

The following tables show median household effective buying income for the City, the Virginia Beach Metropolitan Statistical Area (“MSA”), the Commonwealth and the United States for the last ten calendar years, followed by comparative tables showing Virginia Beach as a percentage of the various regions.

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MEDIAN HOUSEHOLD DISPOSABLE INCOME Virginia Beach Commonwealth January 1 Virginia Beach MSA of Virginia United States

2005 43,736 39,702 42,991 39,324 2006 45,410 41,618 44,680 40,529 2007 47,317 41,706 46,028 41,255 2008 49,559 44,804 47,678 41,792 2009 50,435 45,487 49,389 45,138 2010 50,884 46,385 49,722 43,926 2011 54,292 49,293 52,254 45,113 2012 54,029 48,905 52,120 44,907 2013 52,133 46,798 50,719 41,840 2014 52,124 46,845 51,364 42,529

Virginia Beach Virginia Beach MSA Commonwealth January 1 As a Percent of U.S. As a Percent of U.S. As a Percent of U.S.

2004 112.14% 100.77% 109.89% 2005 111.22 100.96 109.33 2006 112.04 102.67 110.24 2007 114.69 101.09 111.57 2008 118.58 107.21 114.08 2009 111.74 100.77 109.42 2010 115.84 105.60 113.19 2011 120.35 109.27 115.83 2012 120.31 108.90 116.06 2013 124.60 111.85 121.22 2014 122.56 110.15 120.77

Virginia Beach Virginia Beach January 1 as a Percent of MSA as a Percent of Commonwealth

2004 111.28% 102.05% 2005 110.16 101.73 2006 109.11 101.63 2007 113.45 102.80 2008 110.61 103.95 2009 110.88 102.12 2010 109.70 102.34 2011 110.14 103.90 2012 110.48 103.66 2013 111.40 102.79 2014 111.27 101.48

Source: Sales & Marketing Management (2004 – 2005); Demographics USA (2006-2008); Demographics Now (2009); Decision Data Resources (2010-2012); Esri (2013-2014)

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Housing and Construction

The information in the following tables is presented to illustrate various housing characteristics for the City. As of January 1, 2014, the total dwelling units in the City were 174,772 excluding military housing. Single-family units represented 55.9 percent of this total. Selected data regarding the distribution of all dwelling units is as follows:

DWELLING UNITS BY TYPE* % of 2014 2013 Units 2014 Units Units by Type Single Family 97,456 97,720 55.9% Multi-family Complex 32,644 33,346 19.1 Townhouse 19,692 19,695 11.3 Low Rise Condominium 19,393 19,741 11.3 Duplex 1,477 1,428 .8 High Rise Condo/Co-op 2,842 2,842 1.6 Total 173,504 174,772 100.0%

______Source: City Real Estate Assessor. *Does not include Military Combined Units.

For calendar year 2013, the City issued a total of 32,404 permits valued at $691 million. For calendar year 2014 through November 30, the City had issued a total of 29,979 permits valued at $566,753,703. The following table presents a further, historical breakdown of selected building permits by type.

NUMBER OF SELECTED BUILDING PERMITS ISSUED AND VALUE (1)(3)

Calendar Other Building Total Estimated Year Residential(2) Commercial Industrial Permits Value

2004 2,543 1,267 10 19,328 $635,848,544 2005 1,903 1,001 4 20,708 705,262,350 2006 1,382 1,414 3 20,007 817,683,741 2007 989 1,495 6 16,218 671,839,566 2008 789 1,101 1 14,152 432,118,047 2009 614 888 0 12,633 400,894,075 2010 622 880 2 13,554 362,141,721 2011 3,640 1,422 0 2,859 491,131,408 2012 3,606 1,435 0 2,619 359,631,526 2013 3,772 1,457 0 3,000 470,070,678 2014(4) 3,638 1,190 0 2,599 374,377,616

Source: City Department of Planning and Community Development, Division of Permits and Inspections (1) Represents building permits only. Does not include trade permits, e.g. electrical, plumbing, gas, mechanical and other types of permits. (2) One residential building permit does not necessarily equal one residential unit; in many instances one permit is for multiple residential units. (3) In 2011, a new permit reporting system was implemented which allowed a more efficient way of managing the number of permits issued per project: (1) instead of issuing multiple types of building permits per project, one building permit is issued per location; and (2) permit modifications no longer require the issuance of a new permit. Years 2011 forward the number of permits is not comparable to prior years. (3) Through November 30, 2014.

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The following table presents annual new construction as reported by the City Assessor. The total value of new construction in the City for 2013 was $336,129,500, which has already been surpassed by the first three quarters of 2014 at $367,063,600.

NEW CONSTRUCTION: NUMBER OF UNITS AND ESTIMATED VALUE (1) Residential Construction Commercial Construction(2) Calendar Number of Residential Estimated Number of Estimated Total Estimated Year Units Addition Value Permits Value Value

2003 2,456 2,614 $396,157,100 186 $92,494,544 $488,651,644 2004 1,732 3,020 371,913,666 164 128,395,480 500,309,146 2005 1,905 2,625 452,700,606 149 176,806,665 629,561,271 2006 1,905 3,016 537,922,864 256 151,479,530 689,402,394 2007 1,430 2,640 539,420,291 177 193,469,906 732,890,197 2008 1,647 1,834 433,016,855 210 220,787,369 653,804,224 2009 911 1,810 272,966,398 156 93,865,100 366,831,498 2010 1,267 1,489 234,054,592 108 68,811,100 302,865,692 2011 588 1,370 176,935,212 54 48,769,000 225,704,212 2012 1,105 1,183 227,649,900 61 111,027,600 338,677,500 2013 1,365 1,065 250,878,100 75 85,251,400 336,129,500 2014* 1,246 1,152 249,428,400 57 117,635,200 367,063,600 ______Source: Office of Real Estate Assessor – Annual Report (1) Building/structures only (excludes land) (2) Represents general commercial, hotel, industrial and office, including additions. *Through September 30, 2014

Employment

Employers in the City, excluding military, provided jobs for 165,660 persons through the first quarter of calendar year 2014. The following table presents the number of establishments, employment, and quarterly gross wages for the first quarter of calendar year 2014.

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CITY OF VIRGINIA BEACH NUMBER OF ESTABLISHMENTS, EMPLOYMENT AND QUARTERLY GROSS WAGES QUARTER ENDED MARCH 31, 2014 (NON-MILITARY)

Average Average Weekly Emp. Wages Number of For Quarterly Per Industry Group Establishments Quarter Gross Wages Employee

Private Services 6,132 79,042 $720,067,952 $701 Wholesale and Retail Trade 1,779 26,454 200,714,911 584 Construction 1,167 8,933 95,353,741 821 Financial, Insurance and Real Estate 1,247 11,798 194,749,407 1270 Manufacturing 226 5,489 69,835,256 979 Transportation and Warehousing 186 1,803 18,152,846 774 Information 128 3,050 33,116,808 835 Agriculture, Forestry, Fishing and Mining 25 70 411,143 452 Total Private* 10,890 136,639 $1,332,402,064 $750

Public

State Government 29 2,095 $16,099,188 $ 591 Local Government 50 20,641 204,596,080 762 Federal Government 46 6,285 103,475,681 1,266 Total Public 125 29,021 $324,170,949 $859

TOTAL 11,015 165,660 $1,656,573,013 $769

Source: Virginia Employment Commission, Economic Information Services Division, Quarterly Census of Employment and Wages Report (QCEW). Based upon most current and available information. * Immaterial amounts have been suppressed in certain industry sub-categories, which are included in the total amounts.

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The following table is a breakdown of employment by sector in the City.

EMPLOYMENT BY SECTOR AS A PERCENTAGE OF TOTAL QUARTER ENDED MARCH 31, 2014

Services 47.7% Wholesale and Retail Trade 16.0 Government* 17.5 Construction 5.4 Financial, Insurance and Real Estate 7.1 Manufacturing 3.3 Transportation, Communications and Utilities 1.1 Information 1.8 Agriculture, Forestry, Fishing and Mining 0.1 Total 100.0%

Source: Virginia Employment Commission, Economic Information Services Division. *Excludes active duty military personnel stationed at bases located in the City.

As illustrated in the table below, the unemployment rate for the City has, for the most part, been consistently lower than the rates for the Hampton Roads MSA, the Commonwealth and the United States.

ANNUAL AVERAGE UNEMPLOYMENT RATES

2007 2008 2009 2010 2011 2012 2013 2014(2) Virginia Beach 2.7% 3.7% 5.9% 6.4% 6.0% 5.6% 5.3% 5.1% Virginia Beach MSA (1) 3.2 4.2 6.8 7.4 7.0 6.6 6.0 5.6 Commonwealth 3.0 4.0 6.7 6.9 6.2 5.9 5.5 5.2 United States 4.6 5.8 9.3 9.6 8.9 8.1 7.4 5.7

Source: U.S. Department of Labor, Bureau of Labor Statistics, and Virginia Employment Commission (1) MSA includes the Virginia Cities of Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg, and the Virginia Counties of Gloucester, Isle of Wight, James City, Mathews and York. Also includes Currituck County, and Gates County, North Carolina. (2) Reported for the month of Sept. 2014 (preliminary, not seasonally adjusted).

Business and Industry

The City has five major concentrations of office, industrial and commercial property: Airport Industrial Park, Greenwich/Witchduck Corridor, Central Business District/Pembroke area, Oceana West Corporate Park/Lynnhaven Corridor, and Corporate Landing Business Park.

Airport Industrial Park. The park encompasses 250 acres with four million square feet of light industrial and office space. National and international manufacturing, warehousing and distribution operations are located here.

Greenwich/Witchduck Corridor. The Greenwich/Witchduck corridor currently contains 907,212 square feet of low and mid-rise suburban office space in business parks, including Interstate Corporate Center, Corporate Woods and Commerce Park that house corporate headquarters and business operations

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of many types. The Corridor currently contains 639,773 square feet of light industrial space and facilities housing regional warehousing and distribution operations.

Central Business District/Pembroke Area. The CBD encompasses 500 acres and 2.3 million square feet of low and high-rise office space in business parks including Town Center, Pembroke Office Park, Corporate Center and Convergence Center.

The Town Center of Virginia Beach is a new urban “Main Street” style development located within the core of the City’s Central Business District. The core area of the project spans 33 acres and, when completed, will include 850,000 square feet of Class A office space, 750,000 square feet of upscale retail, fine dining, a business class hotel, a luxury hotel with high-rise condominiums, a performing arts center, a central park, and apartments. The entire area is serviced by free structured parking. The corporate citizens in the area include numerous financial, information processing, law and professional service firms. Phases I, II, and III, as described below, are complete. Phase IV is on hold. Phase V is under construction.

Phase I included the construction of a 21-story, 254,000 square-foot Class “A” office tower, two- story and five-story self-contained office/retail buildings, totaling approximately 93,000 square feet, a 176–room, business-class Hilton Garden Inn Hotel, a two story Towne Bank, and a 1,284-space parking garage.

Phase II included the construction of four additional blocks of property containing 341 residential luxury apartments in the Cosmopolitan building, 232,500 square feet of retail and office space, and two parking garages with a total of 1,430 parking spaces.

The Phase III Development Agreement between the Virginia Beach Development Authority and the Town Center Associates, LLC was approved in September 2005, and a modification to the agreement was approved in June 2006. Phase III includes a 37-story, 236–room Westin Hotel and 119 luxury condominiums which opened in December 2007, 36,500 square feet of retail space, a structured parking garage with 735 public parking spaces and 212 private parking spaces, the 84,000 square-foot, 1,200 seat Sandler Center for the Performing Arts which opened in November 2007 and a 5-story 90,000 square-foot building consisting of Class A office and retail space. The Westin Virginia Beach Town Center Hotel and Residences is the tallest building in the Commonwealth at 500 feet to the tip of its architectural spire.

Phase V of Town Center began construction in January 2013, and will include a 212,998 square foot office tower, 290 apartments, 26,600 square feet of retail, and approximately 900+ parking spaces in a structured garage. Clark Nexsen has signed on as the anchor tenant for the new office tower. Phase V was completed in July 2014.

Spinoff projects due to the success of the Town Center include Pembroke Mall expansion and redevelopment, a major site development to the west of the Town Center, the Citiview mixed project on Bonney Road, and Convergence Center III and IV.

Oceana West Corporate Park/Lynnhaven Corridor. The park encompasses 1,100 acres and currently contains 1.76 million square feet of low and mid-rise suburban office space and 5.5 million square feet of light industrial space. 195 acres are presently available for development. Corporate citizens in Oceana West and adjacent business parks, including Reflections, Sabre, Lynnhaven Industrial Area, Oceana East and Taylor Farms Industrial Park, comprise a wide variety of domestic and foreign firms, including corporate headquarters and manufacturing, warehousing and distribution operations.

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Corporate Landing Business Park. The park encompasses over 325 acres and is owned and operated by the City of Virginia Beach Development Authority. 125 acres are presently available for headquarters, professional services, research and development, office buildings, retail and two conference centers. Corporate citizens include world headquarters, regional offices, and high-tech manufacturing. This master-planned, multi-faceted park contains 38 acres of lakes, jogging trails, green space and recreational opportunities. 639,773 square feet of mid-rise suburban office is currently developed.

Norfolk Southern Right-of-Way and Light Rail. The City has purchased a 10.6 mile corridor of rail line and a related easement that runs along Interstate 264 from Newtown to Birdneck Road for $40 million ($15 million City, $20 million State grant and $5 million from Hampton Roads Transit (HRT). The purpose of the acquisition was to preserve the rail corridor for future transportation. HRT is conducting the Virginia Beach Transit Extension study (VBTES) and the Draft Environmental Impact Statement (DEIS) to examine the best transit options available for the corridor. The study looks at four alignment alternatives to extend one of two forms of fixed guideway transit: light rail or bus rapid transit. Also, the City Council may choose not to proceed with the project. The VBTES and DEIS are scheduled to be completed in late 2014, with the public comment period in fall 2014. City Council will select the Locally Preferred Alternative after the DEIS public hearing, which is anticipated by January 2015. The City has received three private proposals to extend light rail into Virginia Beach. These proposals are currently being evaluated. The City Council may choose: 1) not to accept any of the proposals; 2) request additional information for evaluation; or 3) choose one of the offers to enter into the detailed evaluation and negotiation phase.

Throughout Virginia Beach there are many additional smaller nodes of office and commercial activity including Little Neck, Oceanfront, Birdneck/Laskin Road, First Colonial and Kempsville.

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CITY OF VIRGINIA BEACH MAJOR PRIVATE EMPLOYERS AS OF MARCH 31, 2014

Employer Industry 1000 and over employees Sentara Healthcare Hospitals Stihl Machinery Manufacturing Anthem Insurance Carriers and Related Activities Wal Mart General Merchandise Stores Food Lion Food and Beverage Stores Farm Fresh Food and Beverage Stores Christian Broadcasting Network Broadcasting (except Internet)

500 to 999 employees Professional Hospitality Administrative and Support Services GEICO, Government Employees Insurance Insurance Carriers and Related Activities Liberty Tax Service Professional, Scientific, and Technical Services Kroger Food and Beverage Stores Caliper Support Svcs Administrative and Support Services Hall Automotive LLC Motor Vehicle and Parts Dealers Regent University Educational Services Catholic Diocese of Richmond Educational Services Red Lobster & The Olive Garden Food Services and Drinking Places Morrison Crothall Support Administrative and Support Services Target Corp General Merchandise Stores McDonald’s Food Services and Drinking Places Westminster Canterbury Nursing and Residential Care Facilities Medical Transport LLC Ambulatory Health Care Services Checkered Flag Motor Vehicle and Parts Dealers Wendy’s Food Services and Drinking Places Cendant Car Rental Group Inc Rental and Leasing Services

250 to 499 employees Lifenet Ambulatory Health Care Services Building Material and Garden Equipment and Supplies The Home Depot Dealers Harris Teeter Supermarket Food and Beverage Stores New American Mortgage LLC Credit Intermediation and Related Activities U.P.S. Couriers and Messengers Amsec Professional, Scientific, and Technical Services Religious, Grantmaking, Civic, Professional, and Similar Norfolk Cent YMCA Organizations Charles Barker Toyota VW Inc Motor Vehicle and Parts Dealers Aor Management Co of Virginia Inc Ambulatory Health Care Services N.C.O. Financial Systems Administrative and Support Services Electronic Systems Inc Merchant Wholesalers, Durable Goods Atlantic Shores Nursing and Residential Care Facilities Architectural Graphics Inc Miscellaneous Manufacturing Crestline Hotels & Resorts Accommodation OS Restaurant Services, Inc. Food Services and Drinking Places Towne Bank Credit Intermediation and Related Activities SAIC Gemini, Inc. Professional, Scientific, and Technical Services Remedy Staffing Administrative and Support Services

Source: Virginia Employment Commission.

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Retail Sales

The table presented below is a summary of the City’s taxable retail sales; it does not include sales which are exempt from tax. Specifically exempt from the sales tax under Sections 58.1-600 et seq. of the Virginia Retail Sales and Use Tax Act are sales of alcoholic beverages in government stores, sales of certain motor vehicles, trailers and semitrailers, mobile homes, and travel trailers, and sales of certain motor vehicle fuels. Also, the figures do not include the significant amount of non-taxable sales on military bases in the City. As shown in the table, annual taxable retail sales have increased by 23.8% from 2003 through calendar year 2013.

TAXABLE RETAIL SALES

Calendar Year Taxable Retail Sales

2003 $4,090,073,466 2004 4,437,864,910 2005 4,183,908,609 2006(1) 4,726,601,202 2007 4,937,885,412 2008 4,841,022,728 2009 4,638,871,814 2010 4,690,141,162 2011 4,738,333,394 2012 4,933,930,604 2013 5,064,938,738 2014(2) 2,425,900,536

Source: Virginia Department of Taxation (1) In 2006 the Virginia Department of Taxation changed its methodology for calculating taxable retail sales. Years prior to 2006 were not adjusted. (2) Reported thru June 30, 2014

Tourism and Conventions

In calendar year 2013, Virginia Beach tourism and convention industry results continued to improve from the declines in the national economy during the previous few years. According to Longwoods International research, Virginia Beach entertained 5.9 million overnight visitors in 2013, about the same volume as in 2012. Day visitors totaled 6.9 million in 2012, a small increase over the 2012 figure of 6.8 million, also according to Longwoods.

Total 2013 visitor spending as reported by the U.S. Travel Association was a record high $1.31 billion, exceeding 2012’s spending volume of $1.284 billion. Visitor activity generated $108 million in City and State tax revenues in 2013, up from $102 million in 2012. In 2013 the tourism and convention industry supported 12,257 jobs in the City to serve the many visitors during the peak summer season and year-round.

Hotel performance moderated during 2013 following the record 2012. Citywide annual hotel occupancy for 2013 decreased to 54.3% from 57.6% in 2012, according to Smith Travel Research data. In the more important key indicators of hotel revenue per available room (RevPAR) and total revenue for the year, the Virginia Beach hotel industry performance was down slightly, again according to Smith Travel: Annual RevPAR was down 1.7% in 2013, from $65.76 in 2012 to $64.64, and total hotel revenue

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decreased from $271,227,911 in 2012 to $269,735,059, a drop of 0.6%. Both Annual RevPAR and total hotel revenue declined slightly from record highs in 2012.

Revenue for all lodging in the city, which includes hotels, vacation home rentals and campgrounds, totaled $300 million for 2013, a 0.6% decline from 2012, according to official city tax receipts.

Customer loyalty remained high in summer 2013 with repeat visitation of approximately 74%, a figure which has remained essentially unchanged since summer 2009. Canadian markets continued strong for the City as Canadian visitation has fluctuated between 7% and 12% in recent years.

The recent adoption of a substantial transportation funding measure by the State is expected to bring about increased roadway capacity and ease regional congestion. Because of Virginia Beach’s status as a drivable destination, the vehicular connectivity improvement is expected to enhance the City’s desirability for vacationers.

The Convention Marketing and Sports Marketing Divisions’ Fiscal Year 2014 remained strong with a total of 212 future bookings extending through 2020. These bookings represent a total of more than 167,000 room nights with an economic impact of approximately $93.4 million in direct spending. More than 50% of the room nights booked are for clients using space at the Convention Center.

The City completed the construction of the Virginia Beach Convention Center in January 2007. The $206 million, 516,000-square-foot facility includes a 150,000-square-foot Exhibition Hall, 31,000- square-foot ballroom, 29,000 square feet of meeting space and 2,209 parking spaces. This is two and a half times the size of the former convention center. The convention center is located on the same site as the City’s former facility and is intended to create a focal point for future development in the resort. Since opening, the center has hosted an average of 350 events per year and welcomes more than a half million visitors and citizens annually.

One of the most significant measures of any convention center is the number of room nights it generates in area hotels. Since the center was fully completed, an average of over 119,000 room nights citywide has been occupied annually, far exceeding projections.

In April 2010 the Virginia Beach Convention Center became the first convention center in the country to achieve LEED® Gold certification for Existing Buildings, saving over $410,000 in the prior two years through conservation and energy efficiency. This achievement also signifies the facility as the Commonwealth of Virginia’s largest building (over 515,000 square feet ) to achieve the LEED® Gold certified project for Existing Buildings. The LEED (Leadership in Energy and Environmental Design) Green Building Rating System is the nationally accepted benchmark for the design, construction, and operation of high performance green buildings, which was developed by the U.S. Green Building Council (USGBC). The Center serves as an icon and leader in Virginia Beach’s sustainable efforts.

Virginia Beach has more than 11,800 hotel rooms with about 8,100 rooms located in the Resort Area. There are several key tourism-related projects intended to forward the momentum of the industry that are in various stages of discussion and review. These include a major Convention Headquarters Hotel and arena adjacent to the convention center, an Entertainment Complex at the eastern end of the 19th Street Corridor, the Laskin Gateway Mixed-Use Project, and the Rudee Loop Development at the southern end of the Oceanfront.

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Tourism and convention activity generate tax revenue for the City, particularly in the form of a hotel room and meal tax, as illustrated in the table below. As shown in the table, since Fiscal Year 2004, hotel room and meal tax receipts have increased by an average of approximately 3.8% per year.

HOTEL ROOM AND MEAL TAX AND RESTAURANT TAX RECEIPTS FISCAL YEARS 2004 THROUGH 2014

Fiscal Year Hotel Meal Total Tax Receipts 2004 $19,103,583 $38,144,787 $57,248,370 2005 19,175,967 41,565,553 60,741,520 2006 20,982,033 45,025,727 66,007,760 2007 22,616,459 46,743,465 69,359,924 2008 23,623,107 48,069,618 71,692,725 2009 22,955,423 48,304,462 71,259,885 2010 22,801,413 48,442,376 71,243,789 2011 24,169,996 50,594,181 74,764,177 2012 25,003,788 53,254,313 78,258,101 2013 26,049,027 55,122,465 81,171,492 2014 26,643,369 56,872,794 83,516,163 ______Source: City Department of Finance.

Military

The military bases in Virginia Beach have an annual payroll of $2.5 billion for 34,480 armed services and civilian workers in 2014.

Oceana Naval Air Station and Oceana Naval Air Station Dam Neck Annex. Oceana Naval Air Station (“NAS Oceana”) is the United States Navy’s East Coast “Master Jet Base.” NAS Oceana is home to some 337 aircraft with 19 squadrons of F/A-18 Hornets and Super Hornets fighter/attack aircraft and one C-40A (Navy 737 variant) squadron. NAS Oceana/Dam Neck Annex, with a $1.6 billion economic impact, has 10,500 active duty personnel and 4,500 civilian employees with $1.2 billion in direct salaries totaling $1.3 billion with goods and services annually.

NAS Oceana Dam Neck Annex’s primary mission is to provide training in the operation and employment of combat direction and control systems. Dam Neck Annex provides the highest quality, most up-to-date training in aviation maintenance, administration and management, survival, evasion, resistance and escape training and conventional weapons training.

The federal Base Realignment and Closure (“BRAC”) Commission was formed pursuant to Public Law 101-510 to conduct an independent review of the recommendations and analysis of the Secretary of Defense and provide the President of the United States with its recommendations on the timely closure and realignment of military installations in the United States. Although the 2005 decision of the BRAC Commission recommending realignment of NAS Oceana by relocating the Master Jet Base to Cecil Field in Jacksonville, Florida is moot, the City of Virginia Beach remains committed to the Air Installations Compatible Use Zones (AICUZ) program it implemented in an effort to keep Virginia Beach as the home of the Navy’s East Coast Master Jet Base. The AICUZ program includes a multi-pronged state/local partnership effort including land use laws, the acquisition of non-conforming uses, and incentivizing compatible uses.

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Joint Expeditionary Base Little Creek–Fort Story. On October 1, 2009 two military bases in Virginia Beach operated by different branches of the military - the Navy’s Little Creek Naval Amphibious Base and the Army’s Fort Story - merged to become a single entity, with a unified command and a new name. The newly merged base is the biggest military employer in Virginia Beach, with 14,638 active duty personnel and 4,841 civilian employees with an estimated payroll of $1.3 billion a year. It is the primary East Coast base supporting overseas contingency operations. The former Little Creek Naval Amphibious Base, is the Navy’s east coast major operating base for the expeditionary forces of the U.S. Atlantic Fleet. The former Fort Story was established as a coast artillery post in 1917. It is home to the 11th Transportation Battalion and provides an invaluable joint training venue utilized by Navy, Marine Corps and Army. There are a combined 130 resident commands on Joint Expeditionary Base. (Source: Public Affairs Officers at each Military Base.)

The Federal Budget, specifically the impacts of sequestration mandated in Budget Control Act of 2011, impacted the Department of Defense (DOD) spending in the Hampton Roads region and created uncertainty in the regional economy. Subsequently, Congress and the executive branch reduced the impact of sequestration on defense spending by allowing flexibility in spending so cuts could be prioritized. Also helpful, Congress passed the Bipartisan Budget Act of 2013, which provides $63 billion in sequestration relief in FY-14 and FY-15, half of which applies to defense spending. This act also provides an additional $85 billion to the DOD for its overseas contingency operation and funding for a 1% military and federal civilian workers salary increase in FY-14. The result of these actions is likely to result in increased defense expenditures in 2014 in Hampton Roads. (Source: ODU Annual 2014 Economic Forecast.)

Medical Facilities

Medical facilities in the City have expanded over the last few years. One of the premier hospitals in the region, Sentara Virginia Beach General, underwent major renovations to improve services to its patients. The 276-bed acute-care facility features trauma services 24/7, stroke center, cancer center, and many other health care services. It is the region’s only Level III Trauma Center and home to the Sentara Heart Center. Sentara Princess Anne Hospital is a 160-bed acute care hospital, and employs 968 people. It serves Southern Virginia Beach as well as neighboring Chesapeake and northeastern North Carolina communities. “Sentara Princess Anne Hospital, in partnership with Bon Secours Virginia, brings experienced physicians, award winning patient safety initiatives, advanced technology and a patient- centered approach to care for patients. Combined with more than 100 physicians and services offered on the multiple campus medical office buildings, Sentara Princess Anne Hospital is a comprehensive healthcare destination for the community.” In addition, there are 21 urgent care centers for medical assistance throughout the City. Approximately 1,165 licensed doctors utilize the medical facilities in the City and approximately 544 dentists practice in the City. (Sources: Reference USA database Virginia Board of Medicine. http://www.sentara.com.)

Agribusiness

In 2013, the economic impact of agricultural community was estimated at $120 million made up of a diverse AG business sector including production agriculture (corn, soybeans, wheat), fruits & vegetables (over 24 different locally grown products), equine, livestock and agritourism. 44 square miles of the City’s 248 square miles of land consist of farmland and forestland. This land base supports over 200 farms and farm related businesses that contribute to the environment, quality of life, and economy of the city and the region. Virginia Beach farms generate an estimated average $37b million in output annually. The farm sector was also responsible for attracting over 280,000 agritourism visitors from inside and outside the city. The Agriculture Reserve Program (ARP) has preserved over 9,223 acres of farmland through October 31, 2014. The City has a year around farmers market that serves the community with local goods and products as well as offering community events such as Friday Night Hoe

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Downs, Ag Themed Festivities and Ag Educational venues such as Farm Days, Harvest Fair and Eat Healthy. Agriculture continues to grow and is expected to be a sustainable long term viable economic engine for the City of Virginia Beach.

Education

Available within the City is a wide variety of educational facilities and programs, including public elementary, junior and senior high schools, private and parochial schools, and eight higher educational facilities. In terms of public enrollment, the City’s public school system is the largest city school system in the Commonwealth.

PUBLIC EDUCATION FACILITIES/PROGRAMS June 30, 2014

55 Elementary Schools 13 Middle Schools 11 Senior High Schools 1 Technical and Career Education Center

1 Old Donation Center for the Gifted and Talented* 1 Adult Learning Center

1 Kemps Landing Magnet School* 1 International Baccalaureate Magnet Center (1) 1 Ocean Lakes High School Math/Science Center (2) 1 Advanced Technology Center 1 Juvenile Detention Center 1 Renaissance Academy

Source: Business Services Office, Virginia Beach City Public Schools * Merged into one facility (1) Located in Princess Anne High School. (2) Located in Ocean Lakes High School.

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Public Schools. The City’s public school March 31 average daily membership totaled 68,569 for the 2013-14 school year, a slight decrease of 0.07 percent over the previous year. Summarized below are the March 31 average daily membership and annual percentage change for the school year 2003-2004 to school year 2013-2014.

PUBLIC SCHOOLS STUDENT POPULATION SCHOOL YEARS 2003-2004 TO 2013-2014 School Year Number of Students Percent Change

2003-04 75,151 (0.38) 2004-05 74,091 (1.41) 2005-06 72,953 (1.54) 2006-07 71,452 (2.06) 2007-08 70,473 (1.37) 2008-09 69,335 (1.61) 2009-10 69,225 (0.16) 2010-11 69,219 (0.01) 2011-12 68,977 (0.35) 2012-13 68,614 (0.53) 2013-14 68,569 (0.07)

Source: Business Services Office, Virginia Beach City Public Schools.

Private and Parochial Schools. According to The Virginia Council for Private Education, there are 14 accredited private and parochial schools in the City of Virginia Beach. Approximately 4,220 students are enrolled in these schools. (Sources: http://nces.ed.gov/globallocator/; www.vais.org; http://www.vcpe.org/; school web sites.)

Higher Education

Virginia Beach’s higher educational resources include the Virginia Beach Higher Education Center, Virginia Wesleyan College, Tidewater Community College, the Advanced Technology Center, and Regent University. Virginia Beach is also home to branch campuses of Bryant & Stratton College, Centura College, ECPI University, George Washington University, Hampton University, Saint Leo University, South University, Strayer University, Troy University, Southern Illinois University, University of Virginia, Virginia Polytechnic Institute and State University, World College, and The Art Institute of Atlanta. Town Center area is the location for four of these branch campuses: The Art Institute of Virginia Beach, Hampton University’s The College of Virginia Beach, University of Phoenix, and Strayer University, all offering adult education.

Tidewater Community College (TCC), with an annual enrollment of nearly 46,000 students over four main campuses, is a division of the Virginia Community College System, and offers over 150 degree and certificate programs. The Virginia Beach campus has an enrollment of approximately 24,249 students. TCC offers general, occupational-technical and university parallel-college transfer education, and is Hampton Road’s largest provider of higher education and workforce development services. TCC is a resource for business and industry to gain technical employees, as well as expertise for training and retraining programs for current employees. The 125,000- square- foot Joint-Use Library, built by TCC and the City of Virginia Beach, opened in August, 2013. It is located on the corner of Rosemont Road and Faculty Drive. A new 89,000 square-foot Student Center opened in January 2014. It includes a Welcome

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& Information Center, Barnes and Noble bookstore, a fitness center, a gym, a study lounge and more for students, staff and guests. (Source: www.tcc.edu.)

Virginia Wesleyan College is a four-year liberal arts private college located on the Virginia Beach/Norfolk boundary line. It was chartered in 1961 and is related to the United Methodist Church. It has an enrollment of approximately 1,300 students. There are approximately 34 majors in the undergraduate program including Criminal Justice, Liberal Arts Management, Languages and Computer Science. (Source: http://www.vwc.edu/about-us/.)

Regent University, founded in 1978, has an enrollment of approximately 5,953. Regent consisted of seven graduate schools and one undergraduate school. Regent offers 50 graduate and undergraduate degrees with graduate schools of Business & Leadership, Education, Government, Law, Public Policy, Divinity, Psychology and Counseling, the College of Communications & Arts. (Source: http://www.regent.edu/about_us/.)

The Virginia Beach Higher Education Center is one of three Old Dominion University Regional Higher Education Centers (RHECs). The Virginia Beach Higher Education Center opened in 1999 through a partnership of the City of Virginia Beach, Old Dominion University and Norfolk State University. This partnership continues today among the City of Virginia Beach, Old Dominion University, Norfolk State University and Tidewater Community College. The Center also hosts the following organizations or programs: Institute for Learning in Retirement (ILR) and the Virginia Tidewater Consortium for Higher Education. Students can pursue undergraduate degrees in Communication, Criminal Justice, Engineering Technology, Health Sciences, Nursing, Psychology, Teacher Preparation, Work and Professional Studies, and more. Graduate degrees include Ph.D.’s in English and Community College Leadership, and Master’s Degrees in Nursing, Public Health, Business Administration, Education, Accounting and Engineering Management, and more. Certification and licensure programs are also available. The Center also hosts The Institute for Learning in Retirement (ILR) and The Virginia Tidewater Consortium for Higher Education. (Source: http://www.odu.edu/vabeach/info.)

The Advanced Technology Center (ATC) is a special Commonwealth of Virginia state/city partnership of Tidewater Community College, Virginia Beach Public Schools, and the City of Virginia Beach. The state provided $10 million and contributed the land. The City of Virginia Beach provided $12.5 million in funding. ATC provides technical training for high school and college students pursuing positions in fields such as Telecommunications, Information Technology, Engineering Technology, Computer Science, and Computer Aided Drafting and Design. ATC also partners with the Virginia Beach Department of Economic Development and provides industry-certified training in areas including Marine Services and Water Transportation, Radio and Television, and more. ATC offers space for existing and new businesses to enhance their employee’s skills, and has a state-of-the-art theater for conferences, meetings, and training sessions. (Source: http://www.vbatc.com/a-about.html.)

FINANCIAL INFORMATION

Commitments and Contingencies

The City participates in a number of federal and state grants, entitlements, and shared revenues programs. These programs are subject to program compliance audits by the applicable federal or state agency or its representatives. Furthermore, the U.S. Congress passed legislation called the “Single Audit Act Amendment of 1996” which required most governmental recipients of federal assistance to have an annual independent organization-wide financial and compliance audit. The results thereof are incorporated in the audited financial statements for the City for the Fiscal Year ended June 30, 2014,

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included as Appendix B to this Official Statement. The amounts, if any, of expenditures which may be disallowed by these audits cannot be determined at this time although the City expects such amounts, if any, to be immaterial.

Retirement and Pension Plans

Plan Description. The City has elected to participate in the Virginia Retirement System (“VRS”), and substantially all of the full-time salaried general government and school employees are covered by a retirement plan, group term life insurance, and disability and death benefits upon employment. The City is a separate cost-sharing pool within VRS, and makes contributions based on biennial rates set by VRS’s actuarial calculations of the annual required contributions.

The VRS Basic Benefit is a lifetime monthly benefit based on a retirement multiplier as a percentage of the member’s average final compensation multiplied by the member’s total service credit. For members hired before July 1, 2010, the monthly benefit is based on 1.7% (1.85% for hazardous duty employees) of the member’s 36 consecutive months of highest compensation. For non-hazardous duty members hired or rehired on or after July 1, 2010 and members who were not vested on January 1, 2013, the monthly benefit is based on 1.65% of the member’s 60 consecutive months of highest compensation.

Effective January 1, 2014, all new employees without prior VRS service are required to enroll in the VRS Hybrid Plan except for sworn personnel, a combination of defined benefit and defined contribution plans. The Hybrid Plan, introduced to address future affordability, lowered the retirement multiplier and increased the number of months used to calculate the average final compensation.

Funding Policy. Plan members are required by Title 51.1 of the Code of Virginia (1950), as amended, to contribute 5.00% of their creditable compensation toward their retirement, which up until July 1, 2012 was paid by the City as permitted by VRS. In another step taken by VRS to insure future affordability, as of July 1, 2012, new employees were required to pay the 5% member contribution. In addition, for existing employees, employers were required to begin making the employee pay the 5% member contribution. This is being phased in over a period of 5 years and the City is providing salary increases equal to the amount of the increase in the employee paid member contribution in each of the five years as required by VRS.

In addition, the City and School Board are required to contribute the remaining amounts necessary to fund its participation in the VRS using the actuarial basis specified by the Code of Virginia as determined by VRS’s actuaries and approved by the VRS Board of Trustees. The City and the School Board have never failed to make the contribution required by VRS. The City’s actuarially determined contribution rate for FY-14 is 20.68% (15.68% employer and 5% employee) of annual covered payroll. The contribution rate for FY-15 and FY-16 will be 21.35% of annual covered payroll. For FY-14, the City and employees’ contribution was $60.5 million. The School Board (non-teacher employees) contribution for the fiscal year ended 2014 was $5.6 million or 14.11% of annual covered payroll. For additional information on VRS please see Note 12 in the City’s audited financial statements for the period ending June 30, 2014 attached as Appendix B to this Official Statement. The table below provides VRS actuarial determined information for the City and School Board pension plans for the last five fiscal years.

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City Employees

(a) (b) (b-a) (a/b) (c)

Actuarial Unfunded Actuarial Accrued (Overfunded) UAAL as a Actuarial Value of Liability Accrued Liability Funded Covered Percentage of Valuation Date Assets (AAL) (UAAL) Ratio Payroll Covered Payroll

June 30, 2010 $ 1,114,172,642 $ 1,523,438,859 $ 409,266,217 73.14% $ 280,058,066 146.14% June 30, 2011 $ 1,139,545,339 $ 1,579,038,961 $ 439,493,622 72.17% $ 275,816,830 159.34% June 30, 2012 $ 1,137,764,995 $ 1,659,201,183 $ 521,436,188 68.57% $ 283,727,245 183.78% June 30, 2013 $ 1,178,523,280 $ 1,676,863,639 $ 498,340,359 70.28% $ 284,964,878 174.88% June 30, 2014 $ 1,301,875,453 $ 1,726,261,456 $ 424,386,003 75.42% $ 291,563,485 145.56%

Virginia Beach School Non-Teacher Employees

(a) (b) (b-a) (a/b) (c)

June 30, 2010 $ 153,783,371 $ 182,222,930 $ 28,439,559 84.39% $ 41,493,390 68.54% June 30, 2011 $ 155,756,190 $ 187,196,469 $ 31,440,279 83.20% $ 40,672,520 77.30% June 30, 2012 $ 153,700,081 $ 192,573,584 $ 38,873,503 79.81% $ 40,059,396 97.04% June 30, 2013 $ 158,045,061 $ 191,185,052 $ 33,139,991 82.67% $ 40,464,375 81.90% June 30, 2014 $ 172,999,987 $ 198,236,212 $ 25,236,225 87.27% $ 40,427,033 62.42%

Source: Virginia Retirement System (VRS) Actuarial Valuation Reports.

The School Board 2014 contribution to the VRS statewide teacher pool was $62,857,681. This amount represented 16.66% of annual covered payroll for 2014. The contribution for 2013 was $63,194,423, which was 16.66% of annual covered payroll. The contribution for 2012 was $42,884,174, which was 11.33%, of annual covered payroll.

GASB 68, Accounting and Financial Reporting for Pensions, that will be effective for the period starting July 1, 2014 (the beginning of the City’s FY-15), requires the Unfunded Actuarial Accrued Liability (UAAL) to be reported on the face of the financial statements as a liability for the entity. In accordance with GASB 68, in addition to the City and Schools Non-teacher employees, the City and other Virginia local governments will need to disclose the local share of the statewide teacher unfunded pension liability. This has not previously been included in the City’s financial reporting since Virginia Beach teachers are included in the VRS statewide teacher pooled pension system. In preparation for the implementation of GASB 68, VRS has preliminarily determined the City’s allocation of the statewide teacher unfunded pension liability for FY-14 based on the percent of the City’s teachers payroll to the total statewide payroll, as shown in the table below. When consideration is given to the City and School Non-teacher employees and School Teachers, had GASB 68 been implemented in FY-14, the City’s total UAAL would have been $1.26 billion.

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Virginia Beach School Teachers

(a) (b) (b-a) (a/b) (c)

June 30, 2013 $ 1,381,923,696 $ 2,110,725,792 $ 728,802,096 60.20% $ 381,520,230 191.03%

Source: estimated by Virginia Retirement System (VRS).

Other Postemployment Benefits

Plan Description. The City and School Board Other Postemployment Benefit Plans are each a single-employer, defined benefit plan, administered by the City and School Board in accordance with State and City statutes. Section 15.2-1500 of the Virginia State Code provides that every locality shall provide for the governmental functions of the locality, including employment of the officers and other employees. In connection with this employment, the City has established certain plans to provide postemployment benefits other than pensions as defined in Section 15.2-1545 of the Virginia Code to retirees and their spouses and eligible dependents. Employees who retire with at least 25 years of service with the City and School Board as well those who retire on a work-related disability compensable under the Workers’ Compensation Act before age 65 are eligible for access to health insurance coverage. This benefit is payable until the retiree becomes eligible for Medicare

In accordance with Article 8, Chapter 15, Subtitled II of Title 15.2 of the Virginia Code, the City and School Board have elected to establish a trust for the purpose of accumulating and investing assets to fund Other Postemployment Benefits. The City and School Board in accordance with this election have joined the Virginia Pooled OPEB Trust Fund which invests funds contributed by each participating employer. It does not administer the retiree health benefits of each participating employer. Deposits to this trust are irrevocable and are held solely for the payment of OPEB benefits for the City and School Board.

Funding Policy. Contribution requirements of the City, School Board and plan members are established and may be amended by the respective legislative bodies. The required contributions were actuarially determined and are based upon projected pay as you go financing requirements with an additional amount to prefund benefits. For the period ending June 30, 2014 the City and School Board contributed, $7,101,900 and $5,700,900 respectively. Plan members from each organization contributed $90.73 per month for retiree-only point of services coverage. Retirees who elect HMO coverage will contribute less. City and School Board retirees with coverage for their spouses will contribute $448.39 per month to age 65. Retirees who participate in the Wellness for Life program will receive reduced retiree rates. Employees who retire with at least 25 years of service with the City and School Board as well as those who retire on a work-related disability compensable under the Workers’ Compensation Act before age 65 are eligible for access to health insurance coverage. This benefit is payable until the retiree becomes eligible for Medicare. The City and School Board has determined that all current employees and retirees shall contribute to the cost of their health care coverage and no level of benefit shall be provided free of charge. The retiree contribution rate shall be based on the experience of the plan, the City’s and School Board’s annual contribution amount and the remaining premium cost. For additional information

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please see Note 13 in the City’s audited financial statements for the period ending June 30, 2014 attached as Appendix B to this Official Statement.

Annual OPEB Cost. For 2014, the City and School Board’s annual OPEB cost of $7,101,900 was equal to its required contribution. The City placed in its OPEB Trust a total of $1,043,800. The balance of the City’s annual OPEB cost was paid during the year for health insurance subsidies for current retirees. The School Board’s OPEB cost for 2014 totaled $6,041,800 and exceeded its annual required contribution of $5,700,900 by $340,900. This overage was withdrawn from the School Boards Trust Account and returned to the School Board. The City and School Board’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2014, 2013 and 2012 are presented below:

City

Fiscal Year Annual OPEB Percentage of Annual Net OPEB Ended Cos t OPEB Cos t Contributed Obligation 6/30/2014 $ 7,101,900 100% $ - 6/30/2013 $ 8,871,000 100% $ - 6/30/2012 $ 8,714,600 100% $ -

School Board

Fiscal Year Annual OPEB Percentage of Annual Net OPEB Ended Cost OPEB Cost Contributed Obligation 6/30/2014 $ 5,700,900 100% $ - 6/30/2013 $ 7,858,100 100% $ - 6/30/2012 $ 7,721,500 100% $ -

Funded Status and Funding Progress. The funded status of the plan as of January 1, 2014, was as follows:

City School Board Actuarial accrued liability (AAL) $ 83,582,300 $ 65,951,300 Actuarial value of plan assets 29,363,100 23,164,800 Unfunded actuarial accrued liability (UAAL) $ 54,219,200 $ 42,786,500 Funded ratio (actuarial value of plan assets/AAL) 35.13% 35.12% Covered payroll (active plan members) $ 290,297,000 $ 421,065,100 UAAL as a percentage of covered payroll 18.68% 10.16%

Employee Relations and Collective Bargaining

There were 6,925 full-time City employees and approximately 10,191 School Board employees as of June 30, 2014. Some employees are members of unions or trade or professional associations. The City, however, does not, and cannot under Virginia law, bargain collectively with any of its employees. The Virginia General Assembly has rejected several recent legislative proposals to authorize public employees to engage in collective bargaining. Public employees of Virginia or of any county, city, or town in Virginia do not have a legal right to strike. Any such employee who engages in any organized strike or willfully refuses to perform his/her duties shall, according to Virginia law, be deemed to have terminated his/her employment. Re-employment of any such employee requires court approval.

A-34

Southeastern Public Service Authority

The Southeastern Public Service Authority (SPSA) has been the regional waste disposal system since 1985, and includes a waste-to-energy component that sells electricity to American Electric Power. In early 2009, SPSA had developed budgetary challenges as a result of several issues, including the loss of commercial waste revenues. The Chief Administrative Officers of the member communities developed a financial assistance plan to ensure the financial soundness of SPSA (“Financial Assistance Plan”). This multi-faceted strategy involved raising the municipal tipping fee from the then current $104/ton to $170/ton, the refinancing of some of SPSA’s outstanding debt with a guarantee from five of the communities, a guarantee of a line of credit by two communities, and a deferral of reimbursement amounts by the City of Virginia Beach.

The City pays the same per ton tipping fee as other SPSA member localities, but then is entitled to receive a refund equal to the difference between the blended average tipping fee paid and a “cap amount” set forth in the Ash and Process Residue Agreement. As part of the Financial Assistance Plan, the City Council agreed to continue deferring receipt of these payments for a time subject to SPSA’s agreement to pay them in the future. All of the governing bodies of each of the other SPSA localities formally agreed to the Financial Assistance Plan. SPSA repaid on April 29, 2010 the amount of $18.1 million originally deferred.

SPSA evaluated proposals to sell its waste to energy plant and executed an agreement with Wheelabrator on April 29, 2010. Virginia Resource Authority, SPSA’s largest debtor, approved the transaction with the condition that each member jurisdiction provide a general obligation guaranty of a pro-rata portion of SPSA’s outstanding debt owed to VRA. After the distribution of the Wheelabrator proceeds, the balance owed by SPSA to VRA is $30.2 million as of June 30, 2014, and Virginia Beach’s pro-rata guaranty is currently at $9.2 million. SPSA is expected to have sufficient cash flows to meet all debt service requirements. Over the past three years that Wheelabrator has owned and operated the energy plant, Wheelabrator has invested over $60 million in capital improvements to the facility. SPSA continues to have sufficient cash flow for its operations. The tipping fee rate paid by member localities is currently $125 per ton, with Virginia Beach still having a capped rate of approximately $65 per ton.

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APPENDIX B

AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2014

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ReportofIndependentAuditor

The Honorable Members of the City Council City of Virginia Beach, Virginia

Report on Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the individual and aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Virginia Beach, Virginia, (the “City”) as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements as listed in the table of contents. Management’sResponsibilityfortheFinancialStatements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’sResponsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the Virginia Beach Community Development Corporation, which represent 4.92%, 3.03% and 0.73%, respectively, of the assets, net position and revenues of the aggregate discretely presented component units. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinions, insofar as they relate to the amounts included for the Virginia Beach Community Development Corporation, is based solely on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the Specifications for Audits of Counties, Cities and Towns, issued by the Auditor of Public Accounts of the Commonwealth of Virginia. Those standards and specifications require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

B-1

Opinions In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the individual and aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City as of June 30, 2014, and the respective changes in financial position, and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. EmphasisofMatter Fund Reclassification As described in Note 10 to the financial statements, effective July 1, 2013, the City has reclassified the beginning balance of the General Fund to reflect the closure of its Print Shop Internal Service Fund. Our opinions are not modified with respect to this matter. OtherMatters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis and required supplementary information as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. OtherReportingRequiredbyGovernmentAuditingStandards In accordance with Government Auditing Standards, we have also issued our report dated November 21, 2014, on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance.

Virginia Beach, Virginia November 21, 2014

B-2 MANAGEMENT’S

DISCUSSION AND ANALYSIS

B-3 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS

The City of Virginia Beach has put together this section to provide readers with a narrative overview and analysis of the financial activities of the City for the fiscal year ended June 30, 2014. Readers are encour- aged to consider the information presented here in conjunction with the transmittal letter at the front of this report and the City’s financial statements which follow this section.

FINANCIAL HIGHLIGHTS

The City’s total net position improved in the current year. At the end of the fiscal year, the City’s assets and deferred outflows of resources exceeded liabilities and deferred inflows of resources by $3.7 billion. This amount represents an increase of $90.5 million, or 2.5%, over prior year’s ending balance. A large part of the net position is invested in capital assets or is restricted for capital projects and future debt service. The unrestricted net position totals $197.5 million (Tables 1 and 2).

Net position for governmental activities increased $41.8 million. During the year, the $1.3 billion generated in taxes and other revenues for governmental programs exceeded expenses by $59.4 million (before transfers). This is an improvement over the prior year, when revenues exceeded expenses by $49.6 million before transfers.

In the City’s business-type activities, net position increased by $48.7 million compared to prior year’s increase of $38.9 million.

The City’s governmental funds reported combined ending fund balances of $542.7 million, a slight increase (1.3%) compared to prior year. The total fund balance consists of 9.2% nonspendable and restricted amounts, 62.3% of committed (mainly for projects in the capital improvement program), and 28.5% remaining amounts available for spending at the government’s discretion (either assigned for specific purposes or unassigned).

Governmental funds show decreases in property taxes of $7.8 million primarily due to a lower real estate tax rate from $0.95 to $0.93 per $100 of assessed valuation. Performance of other local revenue sources such as other local taxes; fines and forfeitures; permits, privilege fees, and regulatory licenses; and revenues from use of money and property increased slightly in comparison to prior year. Increased charges for services of $24.2 million were due in part from higher waste management fees. Receipts from the Commonwealth increased by $2.3 million and federal government receipts decreased by $5.3 million.

The general fund reported a decrease in fund balance of $17.0 million. General fund revenues and other financing sources were lower than budget by $13.1 million, while expenditures and other financing uses were lower than budget by $45.7 million. Total general fund transfers to other funds include $42.5 million to the debt service fund, $42.9 million for the capital improvement program, $5.1 million for the Parks and Recreation special revenue fund, and $16.6 million for the Sheriff’s Department special revenue fund.

The City maintained its Triple-A bond rating from Moody’s Investor Services, Standard & Poor’s, and Fitch Ratings. During this fiscal year, new debt issued by the City included $85.1 million in General Obligation Public Improvement bonds, $45.0 million in Public Facility Revenue bonds, and $44.8 million in Water and Sewer System Revenue Bonds.

B-4 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

OVERVIEW OF THE FINANCIAL STATEMENTS

This Comprehensive Annual Financial Report consists of four sections: introductory, financial, statistical, and single audit. The financial section is illustrated in the following Figure 1. This section of the report has three components: Management’s Discussion and Analysis (this section), the basic financial statements, and required supplementary information.

Figure 1: Components of the Financial Section The basic financial statements include two types of statements, government-wide and fund financial statements, that present different views of the City.

MANAGEMENT BASIC REQUIRED DISCUSSION AND FINANCIAL SUPPLEMENTARY ANALYSIS STATEMENTS INFORMATION

GOVERNMENT- FUND NOTES TO THE WIDE FINANCIAL FINANCIAL FINANCIAL STATEMENTS STATEMENTS STATEMENTS

Up until 2002, the primary focus of local government financial statements has been summarized fund-type information on a current financial resource basis. This approach has been modified and now the statements presented focus on the City as a whole (government-wide) as well as the major individual funds. The government-wide financial statements provide both long-term and short-term information about the City's overall financial status. The fund financial statements focus on the individual parts of the City government, reporting the operations of the City in more detail than the government-wide statements. Both perspectives (government-wide and individual fund) allow the reader to address relevant questions, broaden the basis for comparison (year-to-year or government to government), and enhance the City's accountability.

Government-Wide Financial Statements

The government-wide financial statements report information about the City as a whole, using accounting methods similar to those used by private-sector companies. The statement of net position components are reported using the full accrual basis of accounting. The statement of activities accounts for all of the current year's revenues and expenses, regardless of when cash is received or paid.

The two government-wide statements report the City's net position and how it has changed. Net Position, the difference between the City’s assets plus deferred outflows of resources and liabilities plus deferred inflows of resources, is one way to measure the financial health, or position, of the City.

Over time, increases or decreases in the City's net position are an indicator of whether its financial health is improving or deteriorating. To assess the overall health of the City, one needs to consider other nonfinancial factors such as changes in the City's property tax base and condition of the City's infrastructure.

B-5 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

The government-wide financial statements of the City are divided into three categories:

Governmental Activities - Most of the City's basic services are included here, such as police, fire and other public safety services, parks and recreation, public works, and general administration. Property and sales taxes, charges for services, and state and federal grants finance most of these activities.

Business-type activities - The City's water and sewer, storm water, economic development, and parking operations are reported here. Fees are charged to customers to help cover the costs of providing these services.

Component units - The City includes three other entities in its report - the City of Virginia Beach School Board, the Development Authority and the Community Development Corporation (CDC). Although legally separate, these "component units" are important because the City is financially accountable for them, providing operating and capital funding. The Development Authority is presented as a blended component unit and included in the City’s reporting entity. The School Board and CDC are presented as discretely component units and reported in separate columns of the entity-wide statements.

Fund Financial Statements

The fund financial statements provide detailed information about the City's most significant funds and will be more fa- miliar to traditional readers of government financial statements. The focus is now on major funds rather than fund types.

A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City uses fund accounting to ensure and demonstrate compliance with finance- related legal requirements, such as general statutes or the City’s budget ordinance. The City’s funds are divided into the following categories:

Governmental funds - Most of the City’s basic services are included in governmental funds, which focus on (1) how cash and other financial assets can readily be converted to cash flow in and out and (2) the balances are year- end that are available for spending. Consequently, the governmental funds statements provide a short-term view that helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. Because this information does not encompass the additional long-term focus of the government -wide statements, additional information is provided at the bottom of the governmental funds statements that explain the relationship (or differences) between them. Governmental funds include the general fund, debt service fund, capital projects fund, and special revenue funds (such as Parks and Recreation and Tourism Investment Program).

Proprietary funds - Services for which the City charges customers a fee are generally reported in proprietary funds. These funds, like the government-wide statements, provide both long-term and short-term financial information. The City's enterprise funds (one type of proprietary fund) are the same as its business-type activities, but the fund financial statements provide more detail and additional information, such as cash flows. The City utilizes enterprise funds to account for its storm water, water and sewer, economic development, and parking operations. The Devel- opment Authority is presented as a blended component unit and its proprietary fund is included in the City’s reporting entity as a major enterprise fund. The City uses internal service funds (the other type of proprietary fund) to report activities that provide supplies and services for the City's other programs and activities. The City’s internal service funds are used for providing city garage and fuel services, risk management, printing, landscaping and information technology services.

Fiduciary funds – Used to account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations and other governmental units. The City is responsible for ensuring that the assets reported in these funds are used for their intended purposes. The fiduciary funds are agency funds (Special Welfare and Es- cheat Property), the Pension Trust Fund and the Postemployment Benefits Trust Fund. The agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. These fiduciary activities are excluded from the City's government-wide financial statements because the City cannot use these assets to finance its operations.

B-6 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL ANALYSIS OF THE CITY AS WHOLE

Net Position

The statement of net position serves as a useful indicator of a government’s financial position. In the case of the City, assets and deferred outflows of resources exceeded liabilities and deferred inflows of resources by $3.7 billion at the close of the fiscal year (Table 1). The City's combined net position (the City's bottom line) increased by $90.5 million over prior year’s ending balance of $3.6 billion. Net position from governmental activities increased by $41.8 million. Business-type activities resulted in an increase in net position of $48.7 million.

The largest component of the City’s net position ($3.0 billion or 80.6%) is the investment in capital assets (e.g., land, buildings, machinery, and equipment), net of any outstanding related debt used to acquire those assets. The City uses these capital assets to provide services to citizens; therefore, these assets are not available for future spending. Although the City’s investment in capital assets is reported net of related debt, it should be noted that the resources needed to re- pay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Net investment in capital assets for business-type activities represents, in the most part, the assets of the water, sewer, and storm water utilities.

The City's unrestricted net position, which is used to finance day-to-day operations, totaled $197.5 million, a decrease of 12.8% from $226.5 million in prior year. Included in unrestricted net position for governmental activities are fund balances of the general fund and most special revenue funds that have been committed or assigned at the fund level. Capi- tal assets total $4.3 billion, net of accumulated depreciation, and include roads, bridges, parks, water and sewer facilities, land, other long-lived assets, and projects in the construction in progress program. Under the “tenancy in common” with the School Board, the City has included $329.6 million of net book value of School Board property equal to the total outstanding principal balance of the “on behalf” debt at June 30, 2014. Capital assets increases resulted from additions to construction in progress for roadway projects, modernization of the Bow Creek recreation center, and the acquisition of several parcels of land purchased as part of the six-year program to protect the Oceana Naval Air Station from encroaching development (BRAC).

Ta bl e 1 Statement of Net Position (in Millions) Governmental Business-Type Total Primary Activities Activities Government 2014 2013 2014 2013 2014 2013

Current and Other Assets $ 656.7 $ 660.2 301.1$ 219.2$ $ 957.8 $ 879.4 Capital Assets 3,287.0 3,198.2 1,041.4 1,018.1 4,328.4 4,216.3 Total Assets 3,943.7 3,858.4 1,342.5 1,237.3 5,286.2 5,095.7

Deferred Outflows of Resources 0.2 0.5 1.1 1.2 1.3 1.7

Long-Term Debt Outstanding 1,153.0 1,109.5 329.5 276.3 1,482.5 1,385.8 Other Liabilities 69.0 70.0 18.6 15.7 87.6 85.7 Total Liabilities 1,222.0 1,179.5 348.1 292.0 1,570.1 1,471.5

Deferred Inflows of Resources 7.7 7.0 0.6 0.3 8.3 7.3 Net Position Net Investment in Capital Assets 2,273.8 2,428.3 716.1 790.1 2,989.9 3,218.4 Restricted 272.1 40.8 249.6 132.9 521.7 173.7 Unrestricted 168.3 203.3 29.2 23.2 197.5 226.5 Total Net Position $ 2,714.2 $ 2,672.4 994.9$ 946.2$ $ 3,709.1 $ 3,618.6

B-7 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

Changes in Net Position

The City’s net position increased by $90.5 million during the current year as compared to the $73.2 million increase in prior year. The following table summarizes the changes in net position:

Ta bl e 2 Changes in Net Position (in Millions)

Governmental Business-Type To t a l Activities Activities Primary Government 2014 2013 2014 2013 2014 2013 Revenues: Program Revenues: Charges for Services $ 122.9 106.0$ $ 162.2 $ 153.6 $ 285.1 259.6$ Operating Grants & Contributions 163.7 166.1 - - - 163.7 166.1 Capital Grants & Contributions 69.8 37.5 7.5 1.9 77.3 39.4 General Revenues: Property Taxes 544.0 552.0 - - - 544.0 552.0 Other Taxes 270.0 274.8 - - - 270.0 274.8 Other 79.4 74.2 0.6 0.7 80.0 74.9 Total Revenues 1,249.8 1,210.6 170.3 156.2 1,420.1 1,366.8

Ex pe n s e s : Legislative 1.2 1.3 - - 1.2 1.3 Executive 2.5 2.6 - - 2.5 2.6 Law 3.9 3.7 - - 3.9 3.7 Finance 18.5 18.0 - - 18.5 18.0 Human Resources 10.5 9.9 - - 10.5 9.9 Judicial 56.2 53.4 - - 56.2 53.4 Health 3.1 2.9 - - 3.1 2.9 Police 98.9 94.3 - - 98.9 94.3 Human Services 110.3 108.9 - - 110.3 108.9 Public Works 201.6 197.2 - - 201.6 197.2 Parks & Recreation 46.9 44.5 - - 46.9 44.5 Library 17.8 16.1 - - 17.8 16.1 Planning 9.8 9.4 - - 9.8 9.4 Agriculture 0.9 0.9 - - 0.9 0.9 Economic Development 1.5 0.9 - - 1.5 0.9 Convention & Visitor Bureau 22.0 24.3 - - 22.0 24.3 Communication & Information Technology 35.3 28.5 - - 35.3 28.5 Emergency Communication & Citizen 8.9 8.6 - - 8.9 8.6 Boards and Commissions 28.2 28.2 - - 28.2 28.2 Fire 52.6 49.3 - - 52.6 49.3 Management Services 1.5 1.6 - - 1.5 1.6 Education 376.4 371.8 - - 376.4 371.8 Housing & Neighborhood Preservation 26.2 27.1 - - 26.2 27.1 Museums 10.3 9.6 - - 10.3 9.6 Emergency Medical Services 10.1 8.9 - - 10.1 8.9 Strategic Growth Area 1.3 0.9 - - 1.3 0.9 General Government 1.7 2.7 - - 1.7 2.7 Water & Sewer - - 107.5 103.1 107.5 103.1 Storm Water - - 19.6 16.6 19.6 16.6 Development Authority - - 10.2 11.2 10.2 11.2 Parking - - 1.9 1.7 1.9 1.7 Interest on Long-Term Debt 32.3 35.5 - - 32.3 35.5 Total Expenses 1,190.4 1,161.0 139.2 132.6 1,329.6 1,293.6 Excess Before Transfers 59.4 49.6 31.1 23.6 90.5 73.2 Transfers (17.6) (15.3) 17.6 15.3 - - Change in Net Position 41.8 34.3 48.7 38.9 90.5 73.2 Net Position – Beginning 2,672.4 2,638.1 946.2 907.3 3,618.6 3,545.4 Net Position – Ending $ 2,714.2 2,672.4$ $ 994.9 $ 946.2 $ 3,709.1 $ 3,618.6

B-8 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

Revenues

The City’s total revenues were $1,420.3 million, a $53.5 million or 3.9% increase over prior year. Increases in the waste management fee (113.6%), sewer rate monthly charges (11.7%), and storm water charge per ERU (13.7%) account for this change. The waste management fee was increased to fully cover delivery of services. The largest revenue sources for the City are property taxes at 38.3%, charges for services at 20.1%, and other taxes (e.g. sales, utility, business license, meal, and lodging) at 19.0%. Capital and operating grants and contributions, 17.0% of revenues, show an increase of $35.5 million (17.3%) from prior year due increased lane miles recorded as contributed roadways.

Program revenues are derived from the program itself and reduce the cost of the function of the City. For governmental activities, total program revenues were $356.4 million, an increase of $46.8 million from prior year. General revenues, all other revenues besides program revenues, totaled $893.4 million. This represents a decrease of $7.4 million over prior year, mainly the result of lower real estate tax revenues. For the current fiscal year, the City decreased its real estate tax rate, from $0.95 to $0.93 per $100 of assessed valuation in part to offset the increase the waste management fee increase. The tax rate on personal property of $3.70 per $100 of assessed valuation remained unchanged.

Business-type activities generated program and general revenues of $170.3 million, primarily from charges for services ($162.2 million).

Figure 2: Revenues by Source - Primary Government as of June 30, 2014

Operating Grants Capital Grants 11.5% 5.4% Other 5.7% Charges for Services 20.1%

General Property Taxes 38.3% Other Taxes 19.0%

B-9 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

Expenses

Total cost of all programs and services was $1,329.6 million, a $36.0 million or 2.8% increase over prior year. The City’s expenses cover a range of services, which as a percent of total include: education at 28.3%, public safety (police, fire, and emergency medical services) at 12.2%, and public works at 15.2%.

Expenses for governmental activities totaled $1,190.4 million, an increase of $29.4 million over prior year primarily due to additional City support towards education, salary increases totaling 3% (1% is the state mandated VRS increase for full-time employees and a 2% general increase), and increases in expenditures for Communication & Information Tech- nology due to additional depreciation resulting from the capitalization of major technology items. Other general government operating departments experienced only slight variations in spending over the previous fiscal year.

Education continues to be one of the City's highest priorities and commitments. The City's funding for education totaled $376.4 million (net of the adjustment to account for the tenancy in common legislation) and it represents 47.2% of the total School’s revenues (exhibit 41). The City's expenses towards education increased by 1.2% from prior year.

Expenses for the City’s business-type activities totaled $139.2 million, and includes expenses related to water, sewer, and storm water utility services as well as parking operations and economic development.

Figure 3: Expenses - Primary Government as of June 30, 2014

Public Works Interest on Debt Public Safety 15.2% 2.4% 12.2% Other General Government 19.7%

Human Services 8.3% Parks and Recreation 3.5% Other Business Type 2.3%

Water and Sewer 8.1% Education 28.3%

B-10 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL ANALYSIS OF THE CITY’S FUNDS

As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance related legal requirements.

Governmental funds

The focus of the City’s governmental funds is to provide information on near-term inflows, outflows and balances of spendable resources. Such information is useful in assessing the City’s financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government’s net resources available for spending at the end of the fiscal year.

The total fund balance for the governmental funds at the end of the fiscal year was $542.7 million, an increase of $7.1 million from prior fiscal year. This change is a combination of decreases in fund balances of $17.0 million in the general fund and $2.5 million in other governmental funds offset by an increase in fund balance for the capital projects’ fund of $26.6 million. Decreases in the fund balances for the general fund and other governmental funds were the combined result of decreases in taxes and fees and increases in city-wide personnel and health care costs.

At the end of the fiscal year, the classification of total governmental fund balances was as follows:

$7.5 million or 1.4% is nonspendable consisting in the City’s loans receivable and investment in inventories.

$42.2 million or 7.8% is restricted, which can be spent only for the specific purposes stipulated by external providers, such as grantors or restricted through legislation. This amount includes debt service costs ($27.0 million); federal and state grants in housing programs ($6.8 million) and other City programs ($4.0 million), seized forfeited assets ($3.6 million); and special service districts ($0.8 million).

$338.1 million or 62.3% is committed, which can only be used only for the specific purposes imposed by the formal action of City Council. Included in committed fund balance is the funding for the capital improvement program ($279.3 million), parks and recreation activities ($14.1 million), education ($16.6 million), agriculture reserve program activities ($12.1 million), tax increment financing ($10.5 million), and other smaller amounts in the nonmajor special revenue funds.

$59.4 million or 10.9% is assigned, which applies to amounts that are intended for specific purposes but do not meet the criteria to be classified as restricted or committed. The assigned amounts include $29.7 million to be used in next year’s capital program and $14.2 million for education.

$95.5 million or 17.6% is unassigned, which is the residual classification for the general fund and includes all spendable amounts not contained in the other classifications.

Items to be noted include:

Real estate taxes of $464.4 million decreased by $11.8 million from prior year. Real estate revenues are the City’s single largest revenue source and comprised 38.6% of total revenues received for the year. As mentioned earlier, City Council approved an decrease in the real estate tax rate, from $0.95 to $0.93 per $100 of assessed valuation to offset the increase in the waste management fees.

Revenues recorded for personal property taxes were higher than prior year by $4.0 million. The tax rate on personal property of $3.70 per $100 of assessed valuation remains the same as prior years. The City continues to receive PPTRA (personal property tax relief program) reimbursements from the state of $53.4 million, which are reported as state revenues.

Other Taxes revenue category, which includes taxes on general sales, utility purchases, cigarettes, hotel rooms, restaurant meal, amusement, business licenses, deeds, wills, and automobile licenses totaled $271.9 million. This represents an $1.8 million increase over the previous year. B-11 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

Selected Tax Revenues by Source FY2014 Compared to FY2013 (in Millions)

$464.4 $500 $476.2

$400 FY2014 FY2013

$300

$200

$78.7 $74.7 $56.9 $100 $56.4 $55.0 $44.0 $44.2 $55.1 $44.1 $26.6 $26.0 $44.6

$0 Real Estate Personal General Business Hotel Restaurant Utility Property Sales License

Federal and state funding of $237.6 million, 19.8% of total revenues received, decreased $3.0 million from prior year.

Charges for services increased by $24.2 million over prior year in part due to increases in the waste management fees. This fee increased as part of the City’s strategy to place the burden of paying for specific services on the users who benefit directly from those services. The waste management special revenue fund accounts for the annual operating expenses of the waste management functions, including recycling activities, waste collection, and disposal at the landfill.

City employees received a total of 3% increase (1% is the state mandated VRS increase for full-time employees and a 2% general increase). Health insurance cost increases are attributable to increased utilization and compliance with the Federal Affordable Care Act.

Fund balances of the special revenue funds had a net decrease of $2.5 million. Most of the changes were in the Sheriff’s Department ($1.9 million decrease), Parks and Recreation ($1.0 million increase), and Waste Management ($1.9 million decrease).

The capital projects fund reported $184.1 million in expenditures. Revenues received in this fund from the federal and state governments were $10.1 million and $11.2 million, respectively, which were mostly in support of transportation projects. General Obligation Public Improvement and Public Facility Revenue bonds and premiums totaling $124.9 million were issued in support of general government capital projects. The capital projects fund received cash funding totaling $55.4 million from the general fund and other special revenue funds.

B-12 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS Proprietary funds

The City’s proprietary fund statements offer short and long-term financial information about the activities that the government operates as a business, such as the water and sewer system, storm water, parking, and development authority funds. These statements provide the same type of information found in the government-wide financial statements, but in more detail. The ending net position for the proprietary funds totals $996.2 million. Notable items are as follows:

The water and sewer fund’s net position increased by $19.4 million, continuing to reflect strong financial management. Increases in charges for services of $5.5 million reflect a 11.7% increase in the monthly sewer charge which will help address compliance with federal consent order.

The net position for the storm water fund increased by $18.0 million. Increases in charges for services of $4.3 million reflect a 13.7% increase in the rate per Equivalent Residential Units. The rate increase will provide funding to continue addressing backlogs in the areas of flood control and water quality over the next several years.

The net position for the development authority, which is the City’s blended component unit, increased by $6.0 million .

The parking business activity reported a decrease of $0.5 million in net position.

GENERAL FUND BUDGETARY HIGHLIGHTS

The following is a brief review of the budgetary changes from the original to the final budget (See budget to actual comparison in Exhibit 5):

General fund departments continue to manage their budgets and expended $45.3 million less than appropriated.

The assigned fund balance for the general fund includes the planned use of fund balance for one time commitments, $2.0 million for school operations and $25.0 million for the capital projects fund for the next fiscal year.

Final budget amounts were often greater than original amounts due to the re-appropriation of prior year encumbrances which were completed in the current fiscal year. At year-end, only Communication and Information Technology had a significant encumbrance ($1.9 million) for annual maintenance contracts and future programs.

Significant positive variances were the result of the following:

; Human Services ($6.8 million or 6.3%) - due to lower expenditures ($4.1 million) incurred for Foster Care children programs.

; Communication and Information Technology ($3.2 million or 12.6%) - savings of $1.9 million were due to de- lays in starting technology projects and purchases of computers and contractual services deferred until the following year.

; Education ($15.6 million or 4.4%) - unexpended general fund funding which was returned at year-end.

; At the end of the fiscal year, unassigned fund balance for the general fund was $96.1 million or 9.5% of next fiscal year’s revenues, and is within City Council policy.

CAPITAL ASSETS

During the current fiscal year, the City’s investment in capital assets increased by $112.1 million, or 2.7%, to a total of $4,328.4 million (Table 3). This investment includes a broad range of capital assets (e.g. land, equipment, buildings, park facilities, roads, bridges, water and sewer lines, and construction in progress).

B-13 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

Major capital projects completed and placed in service during the year included:

Thalia Fire and Rescue Station ($8.9 million). This project constructed a 24,500 square feet fire and rescue station to replace the original station built in 1952. This station will also house the Fire Marshall and District Chiefs.

Oceana and Interfacility Traffic Area Conformity and Acquisition ($8.0 million). This project is part of the six-year program to protect the Oceana Naval Air Station from encroaching development (BRAC) by funding purchases of land or interest in land to facilitate the conversion of non-conforming property uses under the Navy's Office of the Chief of Naval Operations to conforming uses in the Accident Potential Zone 1. Funding for this project is split 50/50 with the state.

Police Special Operations Forensics Evidence Complex ($7.7 million). This project provided a 32,000 square feet replacement facility at the City complex for the Police Department's Special Operations, Forensics, and Property and Evidence.

Princess Anne Road/Kempsville Road Intersection Improvements ($6.9 million). This project provided funding for the study, design, and reconstruction of the intersection of these major roads to increase the capacity of intersection to meet future demands and eliminate congestion problems.

Virginia Lifelong Learning Center ($6.5 million). This project provided the construction of a joint-use library of approximately 120,000 square feet through a partnership between the City and the Commonwealth of Virginia’s Tidewater Community College.

Strategic Growth Area (SGA) Program ($6.5 million). This project provided planning and design services to build or replace public infrastructure improvements and acquire property as needed in order to support implementation of the eight SGA plans. The SGA projects were created as a means to implement the goals and vision set forth in the City’s Comprehensive Plan. These projects are designed to involve stakeholders in the affected neighborhoods and communities in the planning and design activities, and to accelerate quality development.

Communication infrastructure replacement ($6.1 million). This project replaced various safety communication infrastructure equipment associated with receiving, dispatching transponding, and answering public safety calls.

Chesapeake Beach Fire and Rescue Station ($5.6 million). This project replaced the 9,760 square feet facility with a more efficient 14,000 square feet facility.

For detailed information on the City’s capital asset activity, please refer to note 5 to the financial statements.

Ta bl e 3 Capital Assets (in Millions)

Governmental Business-Type Total Primary Activities Activities Government 2014 2013 2014 2013 2014 2013

Non-Depreciable Assets: Land $ 990.9 $ 962.2 $ 165.7 $ 165.2 1,156.6$ 1,127.4$ Agriculture Reserve Program 41.5 41.2 - - 41.5 41.2 Construction in Progress 124.7 101.0 11.2 17.0 135.9 118.0

Other Capital Assets: Infrastructure 2,097.3 2,030.8 - - 2,097.3 2,030.8 Buildings* 1,070.2 1,032.6 105.9 105.2 1,176.1 1,137.8 Machinery and Equipment* 265.1 249.1 38.6 34.5 303.7 283.6 Utility System - - 1,209.9 1,158.9 1,209.9 1,158.9 Improvements 280.5 277.3 1.5 1.5 282.0 278.8 Less: Accumulated Depreciation* (1,583.2) (1,496.0) (491.4) (464.2) (2,074.6) (1,960.2) Totals $ 3,287.0 $ 3,198.2 $ 1,041.4 $ 1,018.1 4,328.4$ 4,216.3$

* Beginning balances were restated to reflect the addition or removal of fully depreciated assets in governmental activities. B-14 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

Water Pump Station and Tank Upgrade ($7.9 million). This project provided funding for engineering study, design, and construction related to upgrade and rehabilitation of existing and construction of new water systems.

Sewer Pump Station modifications ($5.8 million). This project provided funding to upgrade or replace pump stations experiencing hydraulic and mechanical problems and stations subjected to corrosion and odor problems.

Various sanitary sewer pump stations rehabilitation ($3.20 million). This project provided funding for design, renewal and replacement of deteriorated sanitary sewer lines which permitted significant inflow or infiltration of surface or groundwater into the wastewater

Storm water infrastructure rehabilitation ($4.0 million). This project provided for the inspection, design, evaluation, and rehabilitation of storm water infrastructure throughout the City with emphasis in neighborhoods which reported storm water system needs.

Construction in progress expenditures for the fiscal year totaled $184.1 million for general government, $30.3 million for water and sewer, and $15.1 million for storm water projects. Major expenditures include funding for construction of Nimmo Parkway four-lane divided roadway between Holland Road and General Booth Boulevard (($24.4 million), modernization of the Bow Creek Recreation Center ($12.3 million), and acquisition of several parcels of land as part of the six -year program to protect the Oceana Naval Air Station from encroaching development ($8.0 million).

LONG TERM DEBT

At the end of the current fiscal year, the City had $1,287.9 million in bonds and notes outstanding and $194.7 million in other liabilities for a total of $1,482.6 in long term liabilities (Table 4).

The state constitution limits the amount of general obligation debt a governmental entity may issue to 10% of the total assessed value of real property. At the end of the fiscal year, the City’s assessed value of real property was $49.6 billion, which makes the City’s debt less than the current debt limitation of $5.0 billion.

For detailed information on the City’s long-term liabilities, please refer to note 6 to the financial statements.

Ta bl e 4 Long Term Liabilities (in Millions)

Governmental Business-Type Total Primary Activities Activities Government 2014 2013 2014 2013 2014 2013

General Obligation Bond $ 667.4 640.5$ $ - 0.2$ 667.4$ 640.7$ Public Facility Revenue Bonds 258.9 251.6 89.3 75.6 348.2 327.2 Revenue Bonds - - 226.4 190.4 226.4 190.4 State Literary Fund Loans 3.5 4.1 - - 3.5 4.1 Agriculture Reserve Program 41.5 41.2 - - 41.5 41.2 Williams Farm Property - 0.2 - - - 0.2 Revenue Note - - 0.9 0.9 0.9 0.9 Sub-total 971.3 937.6 316.6 267.1 1,287.9 1,204.7

Other Long-Term Liabilities: Premium/Discount on Bonds Sold 83.8 78.4 9.2 5.6 93.0 84.0 Accrued Compensated Leave 43.0 41.2 3.7 3.6 46.7 44.8 Estimated Claims & Judgments 25.5 25.5 - - 25.5 25.5 Landfill Closure & Post-closure Care 29.5 26.8 - - 29.5 26.8 Totals $ 1,153.1 $ 1,109.5 $ 329.5 $ 276.3 1,482.6$ 1,385.8$

B-15 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

For the fifth year in a row, the City obtained the highest possible bond rating of Triple-A from the three major ratings agencies, Fitch, Moody’s and Standard & Poor’s. Continuing to benefit from these outstanding credit ratings, the City was able to obtain an extremely low interest rate of 2.9% when it issued $85.1 million in new General Obligation Public Improvement Bonds. The bonds proceeds were used to support the construction of Nimmo Parkway, Phase V-A, the new Kellam High School, and various other City and School projects. The City also issued $45.0 million in Public Facility Revenue Bonds (PFRB), and refinanced $20.3 million, to achieve debt service savings of $1.9 million over the next 11 years. PFRB proceeds were used to fund several capital projects such as the modernization of the Bow Creek Communi- ty Recreation Center, improvements to the Laskin Road Gateway, construction of the Block 11 garage at Town Center, and improvements to reduce energy costs in school buildings. In addition, the City issued $44.8 million in Water and Sewer System Revenue Bonds to finance acquisitions, improvements, extensions, additions, and replacements to the utility system.

Estimated claims and judgments reflect estimated unpaid losses and ALAE (allocated loss adjustment expenses) as of the end of the year. The projected liability by line of business consists of 92.0% for workers compensation, 4.0% for general liability, and 4.0% for automobile liability.

Landfill closure and post-closure care liability increased $2.7 million during the year due to inclusion of additional 19 acres of capping in the projected liability. Previous estimate did not include Cell 2A which receives a small amount of waste but is now required to be included in the estimate.

ECONOMIC FACTORS AND NEXT YEAR’S BUDGET

The City’s strong financial management and conservative budgeting practices allow the City to continue its commitment to the citizens of Virginia Beach during challenging economic times. During the fiscal year, the City’s economic performance improved during the fiscal year. In September 2014, the unemployment rate was 5.1% for Virginia Beach, 5.2% for the state, and 5.7% for the U.S. Although the rates for Virginia Beach shows a slight decrease from prior year (5.2%), it is significantly lower that other cities in Hampton Roads. The Virginia Employment Commission Community Profile for Virginia Beach predicts annual employment growth in the short-tem of 1.3% and nearing 1.5% in the long term through 2020.

The per capita income for Virginia Beach was $49,898 in 2012 (most recent information available), which was 2.4% greater than the per capita income for the state at $48,715, and 12.9% greater than the nation’s at $44,200 (U.S. Bureau of Economic Analysis). The Virginia Beach median household income in 2013 increased 2.0% to $62,855 from 2012; however, it is greater than the national median household income by 20.3%.

Retail sales in Virginia Beach increased 2.4% in 2013, and sales in the first six months of 2014 were up 1.0% over the first six months of 2013. In August of 2014, the Consumer Confidence Index recorded a second consecutive reading of over 90, but declined to 83.7 in September.

Tourism is a major industry for the City of Virginia Beach. It is one of the most popular tourist destination of the East Cost, hosting nearly 6 million overnight visitors annually. Virginia Beach achieved another record year for tourism for fiscal 2013-14 and has seen increases every year since 2009, despite sequestration and the declines in the national economy during the previous few years. Hotel and restaurant sales for the fiscal year were the highest on record. For the last three calendar years, Virginia Beach has increased the number of jobs supported by tourism.

Significant factors considered in preparing the City’s budget for the 2014-15 fiscal year include the following:

The 2014-15 combined operating budgets for City and Schools total $1.8 billion, representing a 2.8% overall increase over the 2013-14 adjusted budget. The total budget supports $969.8 million in City programs and $860.6 million in School programs. The funding provided by the City to the School system totals $392.0 million and includes $19.9 million of dedicated real estate tax and $2 million from fund balance. Schools receive four of the six cent of the real estate tax rate increase adopted in the 2012-13 fiscal year. The City allocates funding to Schools via a revenue sharing formula.

B-16 CITY OF VIRGINIA BEACH, VIRGINIA MANAGEMENT’S DISCUSSION AND ANALYSIS

After five consecutive years of decline, real estate assessments are increasing 3.6% in fiscal year 2014-15. There is no change to the real estate tax rate which is $0.93 per $100 of assessed value.

The 2014-15 budget adopted the following changes:

; Personal property tax increase of $0.30, which brings the tax rate to $4.00 per $100 of value, dedicated to critical public safety projects. This rate has not changed since FY95, when it was lowered to $3.70, and is still the lowest of all seven large cities in Hampton Roads.

; Storm water fee increase from $0.416 to $0.433 per equivalent residential unit, which is expected to generate $1.5 million to cover regulatory mandates from the state.

; Sanitary sewer rates increases from $27.76 to $30.81 per month. This is the 4th year of a previously approved 4- year stepped increase and is expected to address the federal consent decree.

; Various small increases in fees for the services provided by several department such as Fire, Parks and Recreation, Planning, and Strategic Growth Area.

The adopted general fund budget for 2014-15 of $1.0 billion shows a 2.8% increase from the adopted 2013-14 budget. The primary revenue source, property taxes, is budgeted at $580.4 million compared to $565.7 million in prior year.

The fiscal year 2015-2020 Capital Improvement Program (CIP) adopted by City Council in May 2013, established a six year programmed funding totaling $1.1 billion. The program provides scheduled funding for the construction of projects for utilities ($334.8 million), schools ($219.5 million), roadways ($162.5 million), and general government ($359.3 million) such as acquisition of major equipment and computer systems, buildings, parks and recreation, and economic development.

REQUEST FOR INFORMATION

This report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the City's finances and to demonstrate the City's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the City's Finance Department, City of Virginia Beach, Municipal Center, Virginia Beach, Virginia 23456, telephone 757-385-4508, or visit the City's web site at www.vbgov.com.

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B-18 BASIC FINANCIAL STATEMENTS

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B-20 Exhibit 1 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF NET POSITION JUNE 30, 2014

Primary Government Component Units Community Governmental Business-type Development Activities Activities Total School Board Corporation ASSETS Cash and Investments $ 168,230,707 $ 125,579,539 $ 293,810,246 $ 128,669,041 $ 1,214,220 Restricted Cash & Cash Equivalents 377,265,843 99,593,234 476,859,077 - - Receivables (net) 55,356,155 26,431,887 81,788,042 776,988 3,275,703 Due from Other Governments 76,522,233 3,327,129 79,849,362 22,864,879 323,028 Internal Balances (22,518,017) 22,518,017 - - - Inventories 1,381,602 2,139,701 3,521,303 754,794 821,621 Other Assets 449,234 - 449,234 805,712 1,189,783 Land Held for Resale - 21,453,459 21,453,459 - - Capital assets (net of accumulated depreciation): Land and Improvements 1,032,382,713 165,696,894 1,198,079,607 39,670,603 7,977,302 Buildings and Improvements 836,327,001 77,930,616 914,257,617 380,690,229 18,613,574 Improvements other than Buildings 205,205,942 916,095 206,122,037 25,970,629 - Machinery and Equipment 87,319,571 11,396,129 98,715,700 41,583,238 42,491 Infrastructure 1,000,992,526 774,314,943 1,775,307,469 - - Construction in Progress 124,749,128 11,194,645 135,943,773 5,045,181 - Total Capital Assets $ 3,286,976,881 $ 1,041,449,322 $ 4,328,426,203 $ 492,959,880 $ 26,633,367 Total Assets $ 3,943,664,638 $ 1,342,492,288 $ 5,286,156,926 $ 646,831,294 $ 33,457,722

DEFERRED OUTFLOWS OF RESOURCES Debt refundings resulting in loss transactions $ 257,570 $ 1,069,172 $-1,326,742 $-$

LIABILITIES Accounts Payable $ 53,332,828 $ 13,534,498 $ 66,867,326 $ 13,073,876 $ 147,664 Accrued Liabilities 12,531,379 5,019,008 17,550,387 63,682,107 134,359 Due to Other Governments 3,118,428 - 3,118,428 87,914 - Long-term Liabilities: Due Within One Year 118,679,207 19,392,185 138,071,392 21,157,697 839,341 Due in More Than One Year 1,034,367,512 310,154,239 1,344,521,751 16,732,630 15,730,726 Total Liabilities $ 1,222,029,354 $ 348,099,930 $ 1,570,129,284 $ 114,734,224 $ 16,852,090

DEFERRED INFLOWS OF RESOURCES Debt refundings resulting in gain transactions $ 7,714,365 $ 589,435 $-8,303,800 $-$

NET POSITION Net Investment in Capital Assets $ 2,273,830,446 $ 716,074,522 $ 2,989,904,968 $ 492,959,880 $ 10,917,859 Restricted for: Capital Projects 229,852,093 64,801,139 294,653,232 - - Future Debt Service 27,007,203 43,833,211 70,840,414 - - Special Projects 15,184,741 - 15,184,741 37,810,688 - Water and Sewer Fund Operations - 120,910,028 120,910,028 - - Storm Water Fund Operations - 20,004,113 20,004,113 - - Unrestricted 168,304,006 29,249,082 197,553,088 1,326,502 5,687,773 Total Net Position $ 2,714,178,489 $ 994,872,095 $ 3,709,050,584 $ 532,097,070 $ 16,605,632

The accompanying notes are an integral part of the financial statements.

B-21 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014

Program Revenues

Operating Capital Charges for Grants and Grants and Expenses Services Contributions Contributions Primary Government: Governmental Activities: Legislative $ 1,189,512 $ - $ - $ - Executive 2,498,694 24 - - Law 3,937,096 746 - - Finance 18,521,840 1,182,543 1,427,552 - Human Resources 10,479,994 - - - Judicial 56,389,216 3,101,433 22,814,684 - Health 3,126,176 - 147,579 - Police 98,885,662 3,472,080 1,192,228 - Human Services 110,266,430 25,031,069 52,341,738 - Public Works 201,565,478 44,380,916 39,907,493 48,562,993 Parks & Recreation 46,944,369 15,114,163 3,623,253 - Library 17,811,215 760,734 264,834 - Planning 9,788,352 4,496,079 - - Agriculture 889,198 55,585 - - Economic Development 1,531,524 - - - Convention & Visitor Development 21,970,212 5,484,357 - - Communications & Information Technology 35,271,946 1,940,677 - - Emergency Communications and Citizen Services 8,948,709 141,747 128,000 - Boards and Commissions 28,205,251 3,779 81,733 - Fire 52,577,157 321,580 2,644,285 - Management Services 1,466,132 - - - Education 376,409,572 - - - Housing & Neighborhood Preservation 26,185,221 2,033,427 20,625,574 - Museums 10,314,480 7,701,899 1,024,773 - Emergency Medical Services 10,052,359 11,105 657,164 - Strategic Growth Area 1,254,362 130,459 - - General Government 1,657,913 7,532,896 16,853,873 21,208,681 Interest and Fiscal Charges 32,290,625 - - - Total Governmental Activities 1,190,428,695 122,897,298 163,734,763 69,771,674 Business-type Activities: Water and Sewer 107,549,122 122,079,274 - 4,278,235 Stormwater 19,561,223 37,087,519 - 267,597 Development Authority 10,154,302 189,011 - 2,961,298 Parking 1,902,855 2,879,228 - - Total Business-type Activities 139,167,502 162,235,032 - 7,507,130 Total Primary Government $ 1,329,596,197 $ 285,132,330 $ 163,734,763 $ 77,278,804 Component Units: Virginia Beach Community Development Corporation $ 5,348,780 $ 2,960,318 $ 2,276,587 $ - Virginia Beach School Board 794,961,419 15,965,935 143,414,642 - Total Component Units $ 800,310,199 $ 18,926,253 $ 145,691,229 $ - General Revenues: Taxes: General Property Taxes - Real Estate and Personal Property Sales Utility Business Licenses Meal City Tax on Deeds and Wills Cigarette Automobile Licenses Amusement Lodging Franchise, Bank Stock and Transient Occupancy Total City Taxes Payment from City of Virginia Beach Grants and contributions not restricted to specific programs Investment earnings Miscellaneous Transfers Total General Revenues and Transfers Change in Net Position Net Position - Beginning Net Position - Ending

The accompanying notes are an integral part of the financial statements. B-22 Exhibit 2 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014 Net (Expenses) Revenues and Changes in Net Position Primary Government Component Units Community Governmental Business-type Development Activities Activities Total School Board Corporation

$ (1,189,512) $ - $ (1,189,512) $ - $ - (2,498,670) - (2,498,670) -- (3,936,350) - (3,936,350) -- (15,911,745) - (15,911,745) -- (10,479,994) - (10,479,994) -- (30,473,099) - (30,473,099) -- (2,978,597) - (2,978,597) -- (94,221,354) - (94,221,354) -- (32,893,623) - (32,893,623) -- (68,714,076) - (68,714,076) -- (28,206,953) - (28,206,953) -- (16,785,647) - (16,785,647) -- (5,292,273) - (5,292,273) -- (833,613) - (833,613) -- (1,531,524) - (1,531,524) -- (16,485,855) - (16,485,855) -- (33,331,269) - (33,331,269) -- (8,678,962) - (8,678,962) -- (28,119,739) - (28,119,739) -- (49,611,292) - (49,611,292) -- (1,466,132) - (1,466,132) -- (376,409,572) - (376,409,572) -- (3,526,220) - (3,526,220) -- (1,587,808) - (1,587,808) -- (9,384,090) - (9,384,090) -- (1,123,903) - (1,123,903) -- 43,937,537 - 43,937,537 - - (32,290,625) - (32,290,625) -- (834,024,960) - (834,024,960) --

-18,808,387 18,808,387 - - -17,793,893 17,793,893 - - - (7,003,993)(7,003,993) -- - 976,373 976,373 - - -30,574,660 30,574,660 - - $ (834,024,960) $ 30,574,660 $ (803,450,300) $ - $ -

$ - $ - $ - $ - $ (111,875) ---(635,580,842) - $ - $ - $ - $ (635,580,842) $ (111,875)

$ 543,960,594 $ - $ 543,960,594 $ - $ - 55,990,140 - 55,990,140 - - 42,665,494 - 42,665,494 - - 43,657,877 - 43,657,877 - - 57,041,072 - 57,041,072 - - 6,377,834 - 6,377,834 - - 12,073,540 - 12,073,540 - - 9,421,028 - 9,421,028 - - 6,247,637 - 6,247,637 - - 26,252,617 - 26,252,617 - - 10,231,840 - 10,231,840 - - 813,919,673 - 813,919,673 - - ---392,169,735 - 53,412,868 - 53,412,868 245,481,983 - 3,557,973 522,661 4,080,634 145,635 220,509 22,454,268 21 22,454,289 530,505 405,446 (17,580,646) 17,580,646 - - - 875,764,136 18,103,328 893,867,464 638,327,858 625,955 41,739,176 48,677,988 90,417,164 2,747,016 514,080 2,672,439,313 946,194,107 3,618,633,420 529,350,054 16,091,552 $ 2,714,178,489 $ 994,872,095 $ 3,709,050,584 $ 532,097,070 $ 16,605,632

B-23 Exhibit 3 CITY OF VIRGINIA BEACH, VIRGINIA BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2014

Other Total Governmental Governmental General Capital Projects Funds Funds ASSETS Cash and Investments $-105,322,590 $ $ 42,935,165 $ 148,257,755 Cash and Investments - Restricted 16,616,865 318,452,357 42,196,621 377,265,843 Cash Advances 259,553 - - 259,553 Receivables (net of allowance for uncollectibles, where applicable): Property Tax 28,408,824 - - 28,408,824 Accounts 1,609,852 - 7,347,704 8,957,556 Loans 6,943,548 - 6,381,665 13,325,213 Due from: Other Funds 3,628,091 - - 3,628,091 Other Governments 68,435,192 3,227,871 4,859,170 76,522,233 Inventories 538,912 - - 538,912 Total Assets $ 231,763,427 $ 321,680,228 $ 103,720,325 $ 657,163,980

LIABILITIES Vouchers and Accounts Payable $ 26,177,749 $ 40,085,928 $ 6,424,282 $ 72,687,959 Deposits Payable 3,313,198 - - 3,313,198 Due to Other Funds - - 3,628,091 3,628,091 Intergovernmental Payables 637,047 2,335,374 146,007 3,118,428 Unearned Revenue 54,781 - 1,458,689 1,513,470 Total Liabilities $ 30,182,775 $ 42,421,302 $ 11,657,069 $ 84,261,146

DEFERRED INFLOWS OF RESOURCES Unavailable Revenue - Housing Loans $-- $ $ 493,950 $ 493,950 Unavailable Revenue - Property Taxes 29,714,077 - - 29,714,077 Total Deferred Inflows of Resources $-29,714,077 $ $ 493,950 $ 30,208,027

FUND BALANCES Nonspendable: Inventories $-538,912 $-$ $ 538,912 Loans Receivable 6,943,548 - - 6,943,548 Restricted for: Special Revenue Funds - - 14,296,052 14,296,052 Debt Service - - 27,007,203 27,007,203 Comprehensive Services Act 892,701 - - 892,701 Committed to: Education 16,616,865 - - 16,616,865 Special Revenue Funds - - 42,218,456 42,218,456 Capital Improvement Program: Engineering and Highways - 123,343,180 - 123,343,180 Buildings - 17,995,190 - 17,995,190 Parks and Recreation - 16,165,196 - 16,165,196 Coastal - 2,080,684 - 2,080,684 Economic and Tourism - 29,150,606 - 29,150,606 General Government - 90,524,070 - 90,524,070 Assigned to: Communications & Information Technology 1,948,143 - 1,948,143 Education 14,199,743 - - 14,199,743 General Government 33,641,872 - - 33,641,872 Risk Management 1,000,000 - - 1,000,000 Special Revenue Funds - - 8,601,614 8,601,614 Unassigned 96,084,791 - (554,019) 95,530,772 Total Fund Balances $ 171,866,575 $ 279,258,926 $ 91,569,306 $ 542,694,807 Total Liabilities, Deferred Inflows, and Fund Balances $ 231,763,427 $ 321,680,228 $ 103,720,325 $ 657,163,980

The accompanying notes are an integral part of the financial statements.

B-24 CITY OF VIRGINIA BEACH, VIRGINIA RECONCILIATION OF BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2014

Total Fund Balances - Governmental funds (Exhibit 3) $ 542,694,807

Amounts reported for governmental activities in the Statement of Net Position are different because:

Capital assets used in governmental activities are not current financial resources and therefore are not reported in the governmental funds. 3,285,969,159

Other long-term assets are not available to pay for current period expenditures and therefore are offset by unearned revenue in the governmental funds. 36,198,364

Deferred Inflows and Outflows of Resources used to reflect deferred gains and losses on debt (5,449,375) refunding bonds are not reported in the governmental funds.

Internal Service Funds are used by management to charge the costs of printing services, risk management, information technology, and city garage to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the Statement of Net Position. (Exhibit 1) (5,471,043)

Services provided by the general government to business-type activities are not included in the entity-wide statements. The elimination decreases net position. (2,109,252)

Internal service fund amounts payable to the general government are eliminated from the Statement of Net Position. However, the amount due from business-type activities for the Internal Service Funds loss charge back is included. 632,332

Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-term liabilities at year-end consist of:

General Obligation Bonds $ 667,420,231 State Literary Fund Loans 3,500,000 Accrued Interest on Bonds Sold 11,526,335 Agriculture Reserve Strips 41,464,092 Public Facility Revenue Bonds 258,931,899 Premium on Bonds Sold 83,780,251 Compensated Absences (annual and sick leave) 42,196,820 Landfill Closure and Post-Closure Care 29,466,875 (1,138,286,503)

Total Net Position - Governmental Activities (Exhibit 1) $ 2,714,178,489

The accompanying notes are an integral part of the financial statements.

B-25 Exhibit 4 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2014

Other Total Governmental Governmental General Capital Projects Funds Funds REVENUES General Property Taxes: Real Estate property taxes $ 428,222,563 $ - $ 36,217,104 $ 464,439,667 Personal property taxes 78,678,322 - - 78,678,322 Other Local Taxes 222,932,493 - 48,970,226 271,902,719 Fines and Forfeitures 6,298,625 - 727,879 7,026,504 Permits, Privilege Fees, and Regulatory Licenses 4,715,452 - - 4,715,452 From Use of Money and Property 5,461,473 397,849 3,422,631 9,281,953 Charges for Services 54,332,704 - 55,731,499 110,064,203 Miscellaneous 4,375,470 8,838,252 4,827,790 18,041,512 From Other Local Governments 98,153 - - 98,153 From Commonwealth 145,863,452 11,154,341 21,489,412 178,507,205 From Federal Government 18,444,890 10,054,340 30,627,929 59,127,159 Total Revenues $ 969,423,597 $ 30,444,782 $ 202,014,470 $ 1,201,882,849

EXPENDITURES Current Operating: Legislative $ 1,184,883 $ - $ - $ 1,184,883 Executive 2,528,002 - - 2,528,002 Law 3,913,804 - - 3,913,804 Finance 17,367,222 - - 17,367,222 Human Resources 10,416,987 - - 10,416,987 Judicial 13,967,384 - 41,490,854 55,458,238 Health 3,113,772 - - 3,113,772 Police 94,294,014 - 742,343 95,036,357 Human Services 101,656,014 - 8,349,517 110,005,531 Public Works 63,605,392 - 40,978,418 104,583,810 Parks and Recreation 13,276,690 - 35,614,727 48,891,417 Library 17,089,262 - 292,588 17,381,850 Planning 9,284,748 - 6,588 9,291,336 Agriculture 710,080 - 2,679,466 3,389,546 Economic Development 3,018,382 - - 3,018,382 Convention and Visitor Development 8,856,836 - 43,191,849 52,048,685 Communications and Information Technology 22,121,372 - 128,000 22,249,372 Emergency Communications and Citizen Services 9,033,409 - - 9,033,409 Boards and Commissions 34,742,684 - - 34,742,684 Strategic Growth Area 1,223,232 - - 1,223,232 Fire 45,968,000 - 1,806,858 47,774,858 Management Services 1,481,262 - - 1,481,262 Development Authority - - 736,650 736,650 Education 341,396,530 41,575,329 - 382,971,859 Housing and Neighborhood Preservation 1,863,631 - 24,275,197 26,138,828 Museums 10,200,033 - 25,740 10,225,773 General Government - - 7,489,469 7,489,469 Emergency Medical Services 8,628,006 - 872,954 9,500,960 Capital Outlay - 142,572,128 - 142,572,128 Debt Service: Principal Retirement 29,028,433 - 29,364,531 58,392,964 Interest and Fiscal Charges 15,474,757 - 13,639,448 29,114,205 Total Expenditures $ 885,444,821 $ 184,147,457 $ 251,685,197 $ 1,321,277,475 Excess (Deficiency) of Revenues over (under) Expenditures $ 83,978,776 $ (153,702,675) $ (49,670,727) $ (119,394,626)

OTHER FINANCING SOURCES (USES) Transfers In $ 7,592,690 $ 55,413,643 $ 68,848,237 $ 131,854,570 Transfers Out (108,929,895) - (22,049,200) (130,979,095) Issuance of Debt - 111,248,370 - 111,248,370 Premium on Bonds Sold 335,722 13,641,397 2,118,993 16,096,112 Proceeds of Refunding Bonds - - 20,320,000 20,320,000 Payment to Refunding Bonds Escrow Agent - - (22,353,602) (22,353,602) Agriculture Reserve Agreement - - 270,504 270,504 Total Other Financing Sources (Uses) $ (101,001,483) $ 180,303,410 $ 47,154,932 $ 126,456,859 Net Change in Fund Balance (17,022,707) 26,600,735 (2,515,795) 7,062,233 Fund Balance at Beginning of Year - As Reclassified 188,889,282 252,658,191 94,085,101 535,632,574 Fund Balance at End of Year $ 171,866,575 $ 279,258,926 $ 91,569,306 $ 542,694,807

The accompanying notes are an integral part of the financial statements. B-26 CITY OF VIRGINIA BEACH, VIRGINIA RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014

Net Change in fund balance - total governmental funds (Exhibit 4) $ 7,062,233

Amounts reported for governmental activities in the Statement of Activities (Exhibit 2) are different because:

Governmental funds report capital outlay as expenditures. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This and the net effect of various other transactions involving capital assets increased net position.

General Government Capital Outlay Expenditures $ 150,549,971 General Government Expenditures 21,995,724 Non-Capitalizable Capital Outlay Expenditures (17,086,862) Depreciation on General Government Assets (101,676,125) Contribution of Assets to General Government 48,451,385 Loss on Disposition of Assets (14,099,315) 88,134,778

Revenues in the fund statements which were subject to accrual in the prior year are additions to beginning net position and, therefore, are not reported as revenues in the Statement of Activities. 639,724

The issuance of long-term debt provides current financial resources to governmental funds while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the Statement of Activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. (49,936,289)

Net expenses for Compensated Absences reported in the Statement of Activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. (1,797,871)

Internal Service Funds are used by management to charge the costs of fleet management and management systems to individual funds and customers. Losses arising from the internal customers are added as expenditures on the Statement of Activities as charge backs. Revenues and expenditures with outside customers are included also, as are non-operating revenues and expenses. This amount is the effect of reporting internal service funds with governmental activities. (2,363,399)

Change in net position of governmental activities (Exhibit 2) $ 41,739,176

The accompanying notes are an integral part of the financial statements.

B-27 Exhibit 5 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2014

Variance Final Budget Budget Amounts Positive Original Final Actual Amounts (Negative) REVENUES General Property Taxes: Real Estate property taxes $ 427,074,330 $ 427,074,330 $ 428,222,563 $ 1,148,233 Personal property taxes 85,163,845 85,163,845 78,678,322 (6,485,523) Other Local Taxes 227,259,823 227,259,823 222,932,493 (4,327,330) Permits, Privilege Fees, and Regulatory Licenses 4,592,501 4,592,501 4,715,452 122,951 Fines and Forfeitures 5,757,400 6,039,884 6,298,625 258,741 From Use of Money and Property 5,282,570 5,296,820 5,461,473 164,653 Charges for Services 52,766,216 54,854,090 54,332,704 (521,386) Miscellaneous 7,200,420 5,218,668 4,375,470 (843,198) From Other Local Governments 253,343 253,343 98,153 (155,190) From Commonwealth 148,565,474 149,253,583 145,863,452 (3,390,131) From Federal Government 17,448,209 17,498,209 18,444,890 946,681 Total Revenues $ 981,364,131 $ 982,505,096 $ 969,423,597 $ (13,081,499)

EXPENDITURES Legislative $ 1,097,325 $ 1,206,507 $ 1,184,883 $ 21,624 Executive 2,762,829 2,837,622 2,528,002 309,620 Law 3,995,079 4,186,413 3,913,804 272,609 Finance 17,399,583 18,400,868 17,367,222 1,033,646 Human Resources 10,485,097 10,652,993 10,416,987 236,006 Judicial 13,869,401 14,725,242 13,967,384 757,858 Health 3,122,440 3,175,166 3,113,772 61,394 Police 93,151,147 96,422,200 94,294,014 2,128,186 Human Services 106,720,949 108,455,105 101,656,014 6,799,091 Public Works 64,637,700 66,602,716 63,605,392 2,997,324 Parks and Recreation 13,023,439 13,743,453 13,276,690 466,763 Library 17,578,418 18,438,306 17,089,262 1,349,044 Planning 9,656,699 10,000,503 9,284,748 715,755 Agriculture 784,013 818,618 710,080 108,538 Economic Development 2,771,193 3,468,272 3,018,382 449,890 Convention and Visitor Development 8,902,941 9,062,790 8,856,836 205,954 Communications and Information Technology 23,457,648 25,307,226 22,121,372 3,185,854 Emergency Communications and Citizen Services 10,525,863 10,685,745 9,033,409 1,652,336 Boards and Commissions 35,933,179 37,853,391 34,742,684 3,110,707 Strategic Growth Area 1,141,113 1,320,877 1,223,232 97,645 Fire 45,854,388 47,044,067 45,968,000 1,076,067 Management Services 1,509,081 1,566,649 1,481,262 85,387 Education 354,119,795 356,951,317 341,396,530 15,554,787 Housing and Neighborhood Preservation 1,762,100 1,879,759 1,863,631 16,128 Museums 11,552,874 12,026,647 10,200,033 1,826,614 Emergency Medical Services 8,550,938 8,796,191 8,628,006 168,185 Debt Service: Principal Retirement 29,628,432 29,628,432 29,028,433 599,999 Interest and Fiscal Charges 15,455,001 15,455,001 15,474,757 (19,756) Total Expenditures $ 909,448,665 $ 930,712,076 $ 885,444,821 $ 45,267,255 Excess (Deficiency) of Revenues over (under) Expenditures $ 71,915,466 $ 51,793,020 $ 83,978,776 $ 32,185,756

OTHER FINANCING SOURCES (USES) Transfers In $ 547,124 $ 7,598,988 $ 7,592,690 $ (6,298) Transfers Out (106,126,414) (109,018,082) (108,929,895) 88,187 Premium on Refunding Bonds Sold - - 335,722 335,722 Total Other Financing Sources (Uses) $ (105,579,290) $ (101,419,094) $ (101,001,483) $ 417,611 Net Change in Fund Balance (33,663,824) (49,626,074) (17,022,707) 32,603,367 Fund Balance at Beginning of Year - As Reclassified 188,889,282 188,889,282 188,889,282 - Fund Balance at End of Year $ 155,225,458 $ 139,263,208 $ 171,866,575 $ 32,603,367

The accompanying notes are an integral part of the financial statements.

B-28 This Page Intentionally Left Blank

B-29 Exhibit 6 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF NET POSITION PROPRIETARY FUNDS JUNE 30, 2014

Governmental Business-Type Activities - Enterprise Funds Activities

Water and Development Nonmajor Internal Service Sewer Storm Water Authority Parking Total Funds ASSETS Current Assets: Cash and Investments $ 99,045,685 $ 15,781,707 $ 8,019,302 $ 2,732,845 $ 125,579,539 $ 19,972,952 Accounts Receivable - Net 18,184,918 6,004,886 26,248,663 - 50,438,467 1,795 Intergovernmental Receivables 3,327,129 - - - 3,327,129 - Inventory 2,139,701 - - - 2,139,701 842,690 Total Current Assets $ 122,697,433 $ 21,786,593 $ 34,267,965 $ 2,732,845 $ 181,484,836 $ 20,817,437

B-30 Noncurrent Assets: Cash and Investments - Restricted $ 69,513,273 $ 28,481,826 $ 1,598,135 $ - $ 99,593,234 $ - Land Held for Resale - - 21,453,459 - 21,453,459 - Capital Assets: Land 12,971,547 131,395,838 19,954,509 1,375,000 165,696,894 - Site Improvements - - - 1,457,642 1,457,642 265,782 Buildings 4,232,809 - 101,654,157 - 105,886,966 - Utility System 1,010,113,901 199,844,845 - - 1,209,958,746 - Construction in Progress 7,263,434 3,931,211 - - 11,194,645 - Machinery and Equipment 27,067,748 10,930,440 565,065 79,844 38,643,097 5,669,562 Less: Accumulated Depreciation (410,574,666) (54,333,614) (25,858,997) (621,391) (491,388,668) (4,927,622) Total Capital Assets $ 651,074,773 $ 291,768,720 $ 96,314,734 $ 2,291,095 $ 1,041,449,322 $ 1,007,722 Total Noncurrent Assets $ 720,588,046 $ 320,250,546 $ 119,366,328 $ 2,291,095 $ 1,162,496,015 $ 1,007,722 Total Assets $ 843,285,479 $ 342,037,139 $ 153,634,293 $ 5,023,940 $ 1,343,980,851 $ 21,825,159

DEFERRED OUTFLOWS OF RESOURCES Debt Refundings Resulting in Loss Transactions $ - $ - $ 1,069,172 $ - $ 1,069,172 $ - Support and Maintenance - - - - - 154,420 Total Deferred Outflows of Resources $ - $ - $ 1,069,172 $ - $ 1,069,172 $ 154,420 Governmental Business-Type Activities - Enterprise Funds Activities

Water and Development Nonmajor Internal Service Sewer Storm Water Authority Parking Total Funds LIABILITIES Current Liabilities: Vouchers and Accounts Payable $ 3,925,770 $ 546,419 $ 3,305,230 $ 109,102 $ 7,886,521 $ 1,164,071 Deposits Payable 140,929 - - - 140,929 - Accrued Interest Payable 2,961,855 337,388 1,254,922 - 4,554,165 - Construction Contracts Payable 3,978,670 1,784,384 - - 5,763,054 - Unearned Revenue 306,890 - 17,024 - 323,914 - Current Portion of Long-term Liabilities 11,110,835 1,622,550 6,641,730 17,070 19,392,185 6,400,763 Total Current Liabilities $ 22,424,949 $ 4,290,741 $ 11,218,906 $ 126,172 $ 38,060,768 $ 7,564,834 Long-term Liabilities (less current portion) 199,733,440 23,967,414 86,438,591 14,794 310,154,239 19,885,788 Total Liabilities $ 222,158,389 $ 28,258,155 $ 97,657,497 $ 140,966 $ 348,215,007 $ 27,450,622

DEFERRED INFLOWS OF RESOURCES

B-31 Debt Refundings Resulting in Gain Transactions $ - $ - $ 589,435 $ - $ 589,435 $ -

NET POSITION Net Investment in Capital Assets $ 442,991,599 $ 267,077,678 $ 3,714,150 $ 2,291,095 $ 716,074,522 $ 1,007,722 Restricted for: Capital Projects 40,143,954 24,657,185 - - 64,801,139 - Future Debt Service 17,081,509 2,040,008 24,711,694 - 43,833,211 - Operations 120,910,028 20,004,113 - - 140,914,141 - Unrestricted (Deficit) - - 28,030,689 2,591,879 30,622,568 (6,478,765) Total Net Position $ 621,127,090 $ 313,778,984 $ 56,456,533 $ 4,882,974 $ 996,245,581 $ (5,471,043)

Reconciling Items: Elimination of Internal Activities - Indirect Cost 2,174,119 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds (697,199) Adjustment to reflect the consolidation of blended component unit activities as an enterprise fund (2,850,406) Total Net Position of Business-type activities (Exhibit 1) $ 994,872,095

The accompanying notes are an integral part of the financial statements. Exhibit 7 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2014

Governmental Business-Type Activities - Enterprise Funds Activities

Water and Development Nonmajor Internal Service Sewer Storm Water Authority Parking Total Funds OPERATING REVENUES Charges for Services $ 114,790,882 $ 37,029,104 $ 3,431,096 $ 2,878,923 $ 158,130,005 $ 39,706,124 Insurance Recovery - - - - - 229,392 Miscellaneous 951,959 33,167 295,171 - 1,280,297 100 Total Operating Revenues $ 115,742,841 $ 37,062,271 $ 3,726,267 $ 2,878,923 $ 159,410,302 $ 39,935,616

OPERATING EXPENSES Cost of Goods Sold $ 23,188,120 $ - $ - $ - $ 23,188,120 $ 11,615,986 B-32 Personal Services 21,088,727 6,990,362 - 345,080 28,424,169 6,964,932 Fringe Benefits 7,517,592 2,487,288 - 109,215 10,114,095 2,661,872 Contractual Services 4,857,257 128,647 1,796,583 883,996 7,666,483 2,942,659 Internal Services 2,666,974 1,091,259 - 51,045 3,809,278 868,913 Other Charges 16,827,143 2,915,028 2,460,942 272,576 22,475,689 16,600,179 Leases and Rentals - - - 201,000 201,000 - Land Structure Maintenance - 1,754,139 - - 1,754,139 4,222 Depreciation 24,291,460 4,110,897 2,661,886 36,441 31,100,684 381,561 Total Operating Expenses $ 100,437,273 $ 19,477,620 $ 6,919,411 $ 1,899,353 $ 128,733,657 $ 42,040,324

OPERATING INCOME (LOSS) $ 15,305,568 $ 17,584,651 $ (3,193,144) $ 979,570 $ 30,676,645 $ (2,104,708) Governmental Business-Type Activities - Enterprise Funds Activities

Water and Development Nonmajor Internal Service Sewer Storm Water Authority Parking Total Funds NONOPERATING REVENUES (EXPENSES) From Federal Government $ 936,823 $ 267,597 $ - $ - $ 1,204,420 $ - Interest Income 404,934 88,253 22,388 7,086 522,661 63,416 Gain (Loss) From Sale of Assets 510,914 23,631 - 305 534,850 (439,945) Payment Under Support Agreement - - 12,192,923 (410,000) 11,782,923 - Interest and Fiscal Agent Fees (7,104,439) (17,408) (3,181,197) (282,865) (10,585,909) - City of Norfolk Water Services True Up 3,256,963 - - - 3,256,963 - Total Nonoperating Revenues (Expenses) $ (1,994,805) $ 362,073 $ 9,034,114 $ (685,474) $ 6,715,908 $ (376,529)

INCOME (LOSS) BEFORE CONTRIBUTIONS AND TRANSFERS $ 13,310,763 $ 17,946,724 $ 5,840,970 $ 294,096 $ 37,392,553 $ (2,481,237)

Capital Contributions - Tap Fees and Other 6,060,333 - 110,892 - 6,171,225 - B-33 Transfers In - 29,019 - - 29,019 - Transfers Out - - - (800,000) (800,000) (104,494)

CHANGE IN NET POSITION $ 19,371,096 $ 17,975,743 $ 5,951,862 $ (505,904) $ 42,792,797 $ (2,585,731)

Total Net Position at Beginning of Year - Restated 601,755,994 295,803,241 50,504,671 5,388,878 (2,885,312)

Total Net Position at End of Year $ 621,127,090 $ 313,778,984 $ 56,456,533 $ 4,882,974 $ (5,471,043)

Reconciling Items: Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds. (222,232) Adjustment to reflect the consolidation of blended component unit activities as an enterprise fund 6,107,423 Change in Net Position of Business-type activities (Exhibit 2) $ 48,677,988

The accompanying notes are an integral part of the financial statements. Exhibit 8 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2014

Governmental Business-Type Activities - Enterprise Funds Activities

Water and Development Nonmajor Internal Service Sewer Storm Water Authority Parking Total Funds CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from Customers and Users $ 114,693,264 $ 36,372,820 $ 3,391,772 $ 2,878,923 $ 157,336,779 $ 39,935,264 Receipts from (Payments for) Interfund Services Provided (3,247,989) - (457,159) - (3,705,148) - Other Operating Cash Receipts 951,959 33,167 33,720 - 1,018,846 100 Cash Payments to Suppliers of Goods and Services (47,072,855) (5,481,053) (4,139,500) (1,427,802) (58,121,210) (32,439,214) Cash Payments to Employees for Services (28,483,862) (9,522,845) -(442,215) (38,448,922) (9,638,510) Net Cash Provided (Used) By Operating Activities $ 36,840,517 $ 21,402,089 $ (1,171,167) $ 1,008,906 $ 58,080,345 $ (2,142,360) B-34 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Receipts from Other Funds $ - $ 29,019 $ - $ - $ 29,019 $ - City of Norfolk Water Services True Up 3,256,963 - - - 3,256,963 - Payments Under Support Agreement - - - (692,865) (692,865) - Payments to Other Funds - - - (800,000) (800,000) (104,494) Net Cash Provided (Used) By Noncapital Financing Activities $ 3,256,963 $ 29,019 $ - $ (1,492,865) $ 1,793,117 $ (104,494)

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Capital Contributions $ 2,883,217 $ - $ 12,192,923 $ - $ 15,076,140 $ - Interest Paid on Long-term Debt (5,893,066) (1,030,743) (3,588,909) - (10,512,718) - Acquisition and Construction of Capital Assets (31,821,509) (16,908,259) - - (48,729,768) (212,462) Proceeds from Sale of Bonds 44,845,000 - - - 44,845,000 - From Federal Government 936,823 267,597 - - 1,204,420 - Proceeds from Sale of Salvage 510,914 23,631 - 305 534,850 (274,945) Principal Paid on Capital Debt (7,796,175) (1,232,016) (4,745,000) - (13,773,191) - Net Cash Provided (Used) By Capital and Related Financing Activities $ 3,665,204 $ (18,879,790) $ 3,859,014 $ 305 $ (11,355,267) $ (487,407) Governmental Business-Type Activities - Enterprise Funds Activities

Water and Development Nonmajor Internal Service Sewer Storm Water Authority Parking Total Funds CASH FLOWS FROM INVESTING ACTIVITIES: Interest and Dividends Received $ 404,934 $ 88,253 $ 22,388 $ 7,086 $ 522,661 $ 63,416 Payments on Vanguard Landing Loan - - (2,850,406) - (2,850,406) - Net Cash Provided (Used) By Investing Activities $ 404,934 $ 88,253 $ (2,828,018) $ 7,086 $ (2,327,745) $ 63,416

Net Increase (Decrease) in Cash and Temporary Investments 44,167,618 2,639,571 (140,171) (476,568) 46,190,450 (2,670,845)

Cash and Temporary Investments, July 1 124,391,340 41,623,962 9,757,608 3,209,413 178,982,323 22,643,797

Cash and Temporary Investments, June 30 $ 168,558,958 $ 44,263,533 $ 9,617,437 $ 2,732,845 $ 225,172,773 $ 19,972,952

RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Operating Income (Loss) $ 15,305,568 $ 17,584,651 $ (3,193,144) $ 979,570 $ 30,676,645 $ (2,104,708)

B-35 Adjustments to Reconcile Operating Income (Loss) to Net Cash Provided (Used) By Operating Activities: Depreciation and Amortization Expense 24,291,460 4,110,897 2,661,886 36,441 31,100,684 381,561 (Increase) Decrease in Accounts Receivable (97,618) (656,284) - - (753,902) (252) (Increase) Decrease in Intergovernmental Receivables (3,247,989) - (304,333) - (3,552,322) - (Increase) Decrease in Inventory 155,982 - 167,742 - 323,724 (25,417) (Increase) Decrease in Deferred Outflow of Resources - - 117,707 - 117,707 26,278 Increase (Decrease) in Vouchers and Accounts Payable 273,778 408,020 (637,989) (12,454) 31,355 (408,116) Increase (Decrease) in Accrued Interest Payable - - 38,819 - 38,819 - Increase (Decrease) in Deposits Payable 40,954 - - - 40,954 - Increase (Decrease) in Unearned Revenue (4,075) - - - (4,075) - Increase (Decrease) in Deferred Inflow of Resources - - (21,855) - (21,855) - Increase (Decrease) in Accrued Compensated Leave 122,457 (45,195) - 5,349 82,611 (11,706) Total Adjustments $ 21,534,949 $ 3,817,438 $ 2,021,977 $ 29,336 $ 27,403,700 $ (37,652)

Net Cash Provided (Used) By Operating Activities $ 36,840,517 $ 21,402,089 $ (1,171,167) $ 1,008,906 $ 58,080,345 $ (2,142,360)

NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES: Capital Contributions of Capital Assets $ 3,177,116 $ - $ 110,892 $ - $ 3,288,008 $ -

The accompanying notes are an integral part of the financial statements. Exhibit 9 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF FIDUCIARY NET POSITION JUNE 30, 2014

Agency Trust Funds Funds

ASSETS Cash and Investments $ 61,186,728 $ 340,270

LIABILITIES Vouchers and Accounts Payable $ - $ 340,270

NET POSITION Held in Trust for Other Postemployment Benefits and Pension Benefits $ 61,186,728

The accompanying notes are an integral part of the financial statements.

B-36 Exhibit 10 CITY OF VIRGINIA BEACH, VIRGINIA STATEMENT OF CHANGES IN FIDUCIARY NET POSITION FOR THE YEAR ENDED JUNE 30, 2014

Trust Funds

ADDITIONS Contributions: From Primary Government $ 12,814,824 From Plan Members 4,268,977 Total Contributions 17,083,801 Investment Earnings: Increase (Decrease) in the Fair Value of Investments 6,748,413 Interest and Dividends 73,029 Total Investment Earnings 6,821,442 Less Investment Expense 51,180 Net Investment Earnings 6,770,262

Total Additions $ 23,854,063

DEDUCTIONS Benefits $ 16,540,839 Administrative Expenses 3,626

Total Deductions $ 16,544,465

Change in Net Position 7,309,598

Net Position at Beginning of Year 53,877,130

Net Position at End of Year $ 61,186,728

The accompanying notes are an integral part of the financial statements.

B-37 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The present City of Virginia Beach, Virginia (the City), was formed on January 1, 1963, by the merger of Princess Anne County and the former smaller City of Virginia Beach. This merger created one of the largest cities in the Commonwealth of Virginia with an area of 310 square miles and an estimated population of 452,281.

The City operates under the Council-Manager form of government. The elected eleven-member City Council, vested with the legislative powers, appoints the City Manager who is the executive and administrative head of the City government.

The City provides a full range of services for its citizens. These services include police and fire protection, collection and disposal of refuse, water and sewer services, storm water management, parks and recreation facilities, museums, libraries, and maintenance of streets and highways. Other services provided include public education in grades kindergarten through twelfth, public health and social services, certain technical and special education services, mental health assistance, agriculture services, housing services, and judicial activities.

The following is a summary of the significant accounting policies of the City of Virginia Beach:

A. The Financial Reporting Entity

1. Component Units

As defined by accounting principles generally accepted in the United States of America, the financial reporting entity consists of the primary government (City of Virginia Beach), as well as its component units that are legally separate organizations for which the City Council is financially accountable.

The accompanying financial statements present the City of Virginia Beach and its component units. The financial data of the component units are included in the City’s reporting entity because of the significance of their operational or financial relationship with the City of Virginia Beach.

Blended component units, although legally separate entities are, in substance, part of the City’s operations and so data from these units are combined with data of the primary government. The Virginia Beach Development Authority (Authority) is presented as a blended component unit and is included in the City’s reporting entity. The City has responsibility through support agreements for debt payments on outstanding Public Facility Revenue Bonds which are recorded on the Authority’s financial records.

Blended Component Unit - Virginia Beach Development Authority - The Development Authority was established for the specific purpose of attracting new industries and the expansion of existing industries. The Authority’s Commissioners are appointed by the City Council. The Authority is authorized to issue industrial development bonds after approval by the City Council and to purchase land to improve and sell for development. In addition, the Authority facilitates economic development projects as needed by City Council. Complete financial statements of the Authority may be obtained by writing to the Virginia Beach Development Authority, 222 Central Park Avenue, Suite 1000, Virginia Beach, VA 23462.

Discretely presented component units are entities that are legally separate from the City, but for which the City is financially accountable, or whose relationship with the City is such that exclusion would cause the City’s financial statements to be misleading or incomplete. These component units are reported in separate columns to emphasize that they are legally separate from the City. All component units have a June 30, 2014 year-end.

a. School Board - The School Board is a legally separate entity that is responsible for elementary and secondary education within the City. The members of the School Board are elected by the voters; however, the School Board is fiscally dependent upon the City because the City Council annually approves its budget, levies the necessary taxes to finance operations and approves the borrowing of money and issuance of bonds. Separate financial statements including statistical information of the School Board may be obtained by writing to the Virginia Beach School Board, 2512 George Mason Drive, Virginia Beach, Virginia 23456.

B-38 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

A. The Financial Reporting Entity (continued)

1. Component Units (continued)

b. Virginia Beach Community Development Corporation - The Community Development Corporation was organized in September 1985 for the purpose of expanding and improving opportunities for low and moderate income households in Virginia Beach, Virginia. The Board of Directors for the Community Development Corporation is appointed by City Council. Funding received by the Community Development Corporation from the City is in the form of grants. Complete financial statements of the Virginia Beach Community Development Corporation may be obtained by writing to Virginia Beach Community Development Corporation, 2700 International Parkway, Suite 300, Virginia Beach, VA 23452.

2. Contributions to Certain Other Entities

Annually, the City contributes to various organizations on behalf of the citizens of Virginia Beach. These organizations are not considered entities qualifying for inclusion in this report. The reasons for not including the subject organizations in this report are due to the level of control the City exercises over these entities and the lack of a financial benefit or burden relationship. Contributions during the year-ended June 30, 2014 were as follows:

American Water Works Association Research $ 26,205 Atlantic Wildfowl Museum 51,431 Boardwalk Arts Festival 50,500 Contemporary Art Center 240,000 Eastern Virginia Medical School 433,033 Hampton Roads Economic Development Alliance 412,059 Hampton Roads Planning District Commission 455,412 Safe Drinking Water Act 160,000 Tidewater Community College 5,100 Transportation District of Hampton Roads 6,121,825 Virginia Aquarium and Marine Science Center Foundation 62,115 Virginia Beach Maritime Historical Museum 59,630 Virginia Beach SPCA 30,000 Virginia Dare Soil and Water Conservation District 8,000 Volunteer Fire Squads 8,160 Volunteer Rescue Squads 56,500 WHRO TV 137,228 Total $ 8,317,198

B. Government-Wide and Fund Financial Statements

The basic financial statements include both government-wide (based upon the City as a whole) and fund financial statements. While the previous model emphasized fund types (the total of all funds on a particular type), in the new reporting model the focus is on either the City as a whole or major individual funds (within the fund financial statements). Both the government-wide and fund financial statements (within the basic financial statements) categorize primary activities as either Governmental or Business-Type. In the government-wide Statement of Net Position, both the Governmental and Business-Type Activities columns are presented on a consolidated basis by column and are reflected on a full accrual, and economic resources basis, which incorporates long-term assets and receivables as well as long-term debt and obligations. The City generally first uses restricted assets for expenses incurred for which both restricted and unrestricted assets are available. The City may defer the use of restricted assets based on a review of the specific transaction.

The statement of activities demonstrates the degree to which the direct expenses of a given function or segments are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment.

B-39 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

B. Government-Wide and Fund Financial Statements (continued)

The program revenues must be directly associated with the function (public safety, public works, etc.) or a Business- Type activity. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported as general revenues. The City does not allocate indirect expenses. The operating grants include operating-specific and discretional (either operating or capital) grants while the capital grants column reflects capital-specific grants.

Fund financial statements are provided for Governmental Funds, Proprietary Funds, and Fiduciary Funds. By definition, the assets of the Fiduciary Funds are being held for the benefit of a third-party and cannot be used to address activities or obligations of the government; therefore, these funds are excluded from the government-wide statements. Major individual Governmental Funds and major Enterprise Funds are reported as separate columns in the fund financial statements.

The City reports the following major Governmental Funds:

The General Fund is the City’s primary operating fund. It accounts for all financial resources of the City, except those required to be accounted for in another fund. Revenues are derived primarily from property and other local taxes, state and federal distributions, licenses, permits, charges for service, and interest income. A significant part of the General Fund’s revenues is used principally to finance the operations of the City of Virginia Beach School Board.

The Capital Projects Fund is used to account for the financial resources for the acquisition or construction of major capital facilities within the City.

The City reports the following major Proprietary Funds:

The Water and Sewer Fund provides water service and sanitary sewer waste collection and transmission services to Virginia Beach citizens and accounts for operations that are financed in a manner similar to private business enterprises.

The Storm Water Fund accounts for the activities of the Storm Water Utility which charges a fee for operational and capital needs for Storm Water management in the City.

The Development Authority Fund was established for the purpose of attracting new industries and the expansion of existing industries. These services are financed through fees for Industrial Revenue Bonds and other sources.

Additionally, the City reports the following fund types:

Internal Service Funds account for the financing of goods and services provided to other departments and agencies of the City or to other governmental units on a cost reimbursement basis. The City utilizes Internal Service Funds for its City Garage, Risk Management, School Site Landscaping, Information Technology operations, Telecommunications and Subscriptions.

Special Revenue Funds account for revenue derived from specific sources that are restricted by legal and regulatory provisions to finance specific activities.

Law Library - accounts for the revenues and expenditures of providing legal information and research. Revenues are raised through a set charge per civil court case and donations, which are used for library operations.

B-40 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

B. Government-Wide and Fund Financial Statements (continued)

Sandbridge Tax Increment Financing - accounts for the incremental growth in real estate tax revenues within the district. These incremental revenues are generated by assessment growth beyond the base year, and are used to support beach and shoreline restoration in the Sandbridge district as established by City Council.

Housing and Neighborhood Preservation - accounts for the combined activities of the Federal Community Development Block Grant (CDBG), Federal Housing Assistance Grant, Workforce Housing Revolving and Community Development Loan and programs. This fund supports the administration of both capital improvement projects in target neighborhoods and various other housing programs. The uses of fund balance are restricted to the federal programs that generated the funds.

Development Authority - accounts for financial resources dedicated to the economic development of the City.

Town Center Special Service District - established to provide for the maintenance of public parking facilities and other infrastructure in conjunction with realizing a long-term City Council goal of developing a town center which is supported by revenues from an additional real estate tax rate applied to each property owner in the Central Business District (CBD) within the Pembroke area of the City.

Forfeited Assets - accounts for the City’s share of Federal revenues derived from any Federal agency where money or assets are seized. If the Commonwealth’s Attorney is involved in the case, the department too gets a portion of the funds. All State seizures are divided with the Commonwealth’s Attorney receiving 25% and the Police Department receiving 75%. All real estate seized is split 50%/50% between the Commonwealth’s Attorney and the Police Department. Fund balance must be used in compliance with Federal and State regulations to fund Police or Commonwealth’s Attorney projects.

Federal Section Eight Program - accounts for funds received from the Federal Department of Housing and Urban Development to provide rental assistance to low and moderate income families. A separate fund is required by the Federal government and fund balance must be used for rental assistance.

Sheriff's Department - accounts for the cost of the care and custody of persons placed in the Virginia Beach Correctional Center by the courts and for the operation of the Sheriff’s Department, as established by City Council.

Waste Management - accounts for funds generated through monthly service charges for providing services to our residents for collection, management and disposal of solid waste, recyclable materials and other refuse. In addition, this fund is responsible for the operation of the City’s landfill and serving as a conduit between the City and the Southeastern Public Service Authority, which is the agency responsible for the regional waste disposal program.

Parks and Recreation - accounts for revenues raised through Parks and Recreation programs. This fund also receives dedicated funding from a portion of the real estate taxes to support and maintain the City’s recreation centers.

Tourism Investment Program - accounts for the revenue streams to fund tourism related capital projects and expenditures for oceanfront programs and events, maintenance, operating costs, and debt service of tourism-related projects, as established by City Council. This fund receives dedicated funding from a percentage of the following local taxes: amusement, hotel room, and restaurant meal tax receipts.

Central Business District South Tax Increment Financing - accounts for incremental growth in real estate tax revenues and debt service funding of public parking and other public improvements in this business district. Fund balance is maintained to meet planned construction and debt service costs for improvements in this district as approved by City Council.

Sandbridge Special Service District - accounts for the revenues raised by the additional real estate tax, hotel tax and other Sandbridge related revenue. The Virginia Beach code restricts the uses of fund balance to Capital Improvement Program projects associated with beach and shoreline restoration and maintenance within the Sandbridge District.

B-41 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

B. Government-Wide and Fund Financial Statements (continued)

Tourism Advertising Program - accounts for revenue and expenses related to tourism advertising. This fund receives dedicated funding from a percentage of the hotel room tax and restaurant meal tax. There is a City Council appointed committee that oversees the use of these funds.

Agriculture Reserve Program - accounts for revenue and expenses to promote and encourage the preservation of farmland in the rural southern portion of the City, in which agricultural uses predominate. This is a voluntary purchase of development rights rather than regulatory, as established by City Council. Fund balance will be used for payments of future interest costs of U.S Treasury Securities and the maturing interest on each agreement.

Emergency FEMA - accounts for receipts from the Federal Emergency Management Agency (FEMA), and for the cost of providing urban search and rescue services in support of disaster declarations as well as reimbursements to the City for the cost of local disasters. The level of fund balance is subject to final audit by the Inspector General.

Open Space - accounts for the acquisition and preservation of land in the City of Virginia Beach. This fund receives dedicated revenues from a percentage of the restaurant meal tax.

Combined Area Dredging Projects - established to provide for neighborhood channel dredging of creeks and rivers. Support for the dredging operations is provided by additional real estate taxes assessed on residents of this special service district.

Wetlands Board Mitigation - accounts for the fines assessed for the destruction of wetlands and are to be used for the purchase of land and re-creation of wetlands.

Grants Consolidated - accounts for certain Commonwealth of Virginia and Federal Grants (with matching local funds, if required).

Fiduciary Funds are used to account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations and other governmental units. The Fiduciary Funds are Agency Funds (Special Welfare, Escheat Property Agency Funds), the Pension Trust Fund and the Other Postemployment Trust Fund. The Agency Funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The Other Postemployment Benefit and Pension Trust Funds account for the assets in essentially the same manner as a Proprietary Fund using the economic resources measurement focus.

C. Basis of Accounting

The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the Proprietary Fund and Fiduciary Fund financial statements with the exception of Agency Funds which have no measurement focus. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenues as soon as all eligibility requirements imposed by provider have been met.

The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All Governmental Funds are accounted for using a current financial resources measurement focus and the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual (i.e., when they become both measurable and available). "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. The term available is limited to collection within forty-five days of the fiscal year end. Levies made prior to the fiscal year end but which are not available are recorded as unearned. Expenditures are recorded when the related fund liability is incurred, if measurable (except for unmatured interest on general long-term debt which is recognized when due and paid). Interest on general long-term debt is recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in Governmental Funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as other financing sources.

B-42 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

C. Basis of Accounting (continued)

The following is a list of the major revenue sources that meet the "susceptible to accrual" criteria:

General Property Taxes Interest on Deposits General Sales Taxes Revenue from Commonwealth Utility Taxes Revenue from Federal Government Hotel Taxes Amusement Taxes Restaurant Taxes

Other Post Employment Benefits Plan financial statements are prepared using the accrual basis of accounting. City and School Board retiree’s contributions are recognized in the period in which the contributions are due. Employer contributions to each plan are recognized when due and both the City and School Board have made a formal commitment to provide the contributions. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan.

Unearned revenues also arise when resources are received by the government before it has a legal claim to them. In subsequent periods, when both revenue recognition criteria are met, or when the government has a legal claim to the resources, the liability for unearned revenue is removed from the balance sheet and revenue is recognized.

Unbilled Water and Sewer and Storm Water Enterprise Funds accounts receivable for services provided through June 30 are included in the financial statements.

As a general rule the effects of interfund activity have been eliminated from the government-wide financial statements. Exceptions to this general rule are payments in lieu of taxes and other charges between the City’s Water and Sewer Function and Storm Water Function and various other functions of the City. Elimination of these charges would distort the direct costs and program revenues reported for the various functions. Proprietary Funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a Proprietary Fund’s principal ongoing operations. The principal operating revenues of the Enterprise Funds and the City’s Internal Service Funds are charges to customers for sales and service. Operating expenses for Enterprise Funds and Internal Service Funds include the cost of sales and services, personnel, contractual services, land structures and improvements, other charges, internal service charges and depreciation. All other revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

D. Capital Assets

Capital assets, which include property, plant, equipment, and infrastructure assets (e.g. roads, bridges, curbs and gutters, sidewalks, drainage systems) are reported in the applicable Governmental or Business-Type Activities columns in the government-wide financial statements.

The City defines capital assets as assets with an initial, individual cost of more than $5,000 and are recorded as expenditures in the Governmental Funds and as assets in the government-wide financial statements. Depreciation is recorded on capital assets on a government-wide basis using the straight-line method and the following estimated useful lives:

Building and Improvements 40 years Site Improvements 40 years Equipment 5-10 years Roadway Network 40 years Bridge Network 50 years Hurricane Protection Network 50 years Landfill Network Percentage of Completion

B-43 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

D. Capital Assets (continued)

Depreciation of exhaustible capital assets used by City Proprietary Funds and the blended Development Authority are recorded as an expense against their operations and accumulated depreciation is reported on the Proprietary Funds' balance sheets. Depreciation has been provided over the estimated useful lives using the straight-line method of depreciation.

The utility system in the Water and Sewer Enterprise Fund has been recorded at cost since July 1, 1976 and contributed capital asset additions have been recorded at their estimated fair market value in the year contributed as determined by the City's utility engineers. Prior to that date, the utility system was recorded at "estimated historical cost depreciated" as determined by independent professional engineers.

Depreciation on the utility system, based on costs described above, and other capital assets of the City Proprietary Funds have been charged to operations and was computed as follows:

Utility System Water (exclusive of machinery and equipment) Less: estimated salvage value of 20% of costs 20-100 years Utility System Storm Water 5-50 years Buildings and Improvements 40 years Site Improvements 40 years Machinery and Equipment 5-10 years

Interest incurred during the construction phase of capital assets of Business-Type Activities is included as part of the capitalized value of the assets constructed.

All capital assets are reported at cost or estimated historical cost, if actual cost was not available. The value of historical buildings is included in assets.

E. Operating Budget Process

The City follows these procedures in establishing the budgetary data reflected in the financial statements:

1. The City Manager is required by the City Charter to present a proposed operating budget at least 90 days before the beginning of each fiscal year which begins July 1. The proposed operating budget must be balanced with projected expenditures equal to estimated revenues and/or the required financing from the proper undesignated fund balances. The necessary budget ordinances are also submitted at this time.

2. The City Council is required by the City Charter to hold a public hearing on the budget at which time all interested persons are given an opportunity to comment. The notice of the time and place must be published at least seven days prior to the hearing. In addition, City Council holds budget workshops with the City Manager that are open to the media and public.

3. If the proposed operating budget is not legally adopted by the City Council upon one reading of the budget ordinances by June 1, the operating budget is automatically adopted as proposed.

4. The City Manager or the Director of Management Services is hereby authorized to approve transfers of appropriations in an amount up to $100,000 between any Appropriation Units included in this ordinance. The City Manager shall make a monthly report to the City Council of all transfers between $25,000 and $100,000. In addition, the City Manager may transfer, in amounts necessary, appropriations from all Reserves for Contingencies except Reserve for Contingencies - Regular, within the intent of the Reserve as approved by City Council.

Additional appropriations require one reading of the ordinance for approval and must be offset by additional estimated revenues and/or a transfer from the proper undesignated fund balances. Additional appropriations that

B-44 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

E. Operating Budget Process (continued)

exceed 1% of the total estimated revenues shown in the adopted budget require one reading by City Council for approval after a public hearing.

5. Annual budgets are adopted for the General Fund, the Debt Service Fund, Enterprise Funds and all Special Revenue Funds except for Wetlands Board Mitigation, Development Authority and the Grants Consolidated Fund. The Grants Consolidated Fund’s budget is adopted on a project-length basis along with the City Capital Projects Fund. The budget for these funds is adopted on a basis consistent with Generally Accepted Accounting Principles (GAAP).

6. The accounting system is employed as a budgetary management control device to monitor the individual departments or bureaus/divisions within departments. The legal level of budgetary control is at the organizational unit level as noted in the separately issued budget report. Additional controls are exercised administratively on some budget units, personnel positions and capital outlay items and the appropriations related thereto. A budget unit is an activity (e.g. Waste Collection) of an organizational unit (e.g. Public Works Department). Each budget unit manager is authorized to transfer appropriations within their respective unit up to a maximum of $10,000 without City Manager approval. The City Manager or the Director of Management Services is authorized to transfer appropriations up to a maximum of $100,000. See Note 1E4 above.

7. Unexpended appropriations lapse (except for the City Capital Projects and Grants Funds) and are closed to the proper fund balances at the end of each fiscal year (June 30). (However, appropriations for the subsequent fiscal year are increased in the amount necessary to satisfy the outstanding encumbrances at June 30.) The current operating budget ordinance approved by City Council stipulated that an undesignated General Fund Balance of 8% to 12% of the following year’s budgeted revenues for contingency and emergency situations, not to be used to support appropriations already approved, except upon subsequent authorization by City Council.

8. Capital Projects for the City are budgeted separately from the Operating Budget. Since the City has over 344 projects in its Capital Improvements Program and an annual limitation (without a referendum) on the amount of bonds that may be issued, allocations for capital projects represent funding by phases of a number of projects based upon their anticipated execution of contractual obligations. The appropriations for Capital Projects require one reading of the ordinance for approval after public hearings on the City's Capital Improvement Program. The accounting, encumbering, and controlling of the funds are based upon the project length of each individual project which may be over several years. Therefore, budgetary comparisons are not presented for Capital Projects in this report. Appropriations reallocated to new or existing capital projects require one reading of the ordinance by City Council for approval.

9. The federal and state grants in the Grants Consolidated Fund are budgeted separately from the Operating Budget and do not parallel the City's fiscal year. Expenditures are restricted by the grantor agency and are subject to financial and compliance audits (Note 9B). Annual revenues and expenditures are reported within the applicable Special Revenue Funds.

There were supplemental amendments to the Operating Budget, other than for encumbrances (Note 1E7), of approximately $278,998 during the 2014 Fiscal Year. The amendments were primarily funded through increases in estimated revenue and the General Fund balance.

10. All expenditures were within existing appropriations for the governmental major funds.

F. Inventories

All inventories, except in the Water and Sewer Enterprise Fund, Development Authority, the General Fund’s Virginia Aquarium and Marine Science Center and the City Garage Internal Service Fund, are reported at cost using the first-in, first-out inventory method.

B-45 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

F. Inventories (continued)

Reported inventories are accounted for under the consumption method (i.e., recorded as expenditures when used) in the remaining Governmental Funds.

The Water and Sewer Enterprise Fund and the General Fund’s Virginia Aquarium and Marine Science Center and the City Garage Internal Service Fund inventories are reported at cost using the moving weighted average cost inventory method. See Note 1.G. for Development Authority Enterprise Fund.

G. Land and Building Inventory Held For Resale

Land and building inventory for Development Authority is stated at the lower of net realizable value or original purchase price plus capitalized interest, if applicable, and development cost.

H. Accrued Compensated Leave

Annual leave, according to a graduated scale based on years of employment, is credited to each employee as it accrues. A permanent City employee, not participating in the VRS Hybrid Plan, may carry-forward a maximum of 50 days. All full-time employees hired on or after January 1, 2014, except hazardous duty employees, and those hired before this date, which make the irrevocable decision to participate in the Hybrid Plan shall accrue and use Paid Time Off. Those participating in the Hybrid Plan may carry-forward a maximum of 24 days.

City employees not participating in the Hybrid Plan are granted one sick leave day per month and may accumulate an unlimited number of sick leave days; however, no payment is made by the City on the unused portion upon employment termination (except on the condition of retirement). In accordance with Governmental Accounting Standards Board Statement (GASB) Number 16, an accrual has been made in the financial statements for these payments.

Compensated leave for the City (current and non-current) is recorded in the government-wide financial statements. For Proprietary Funds the current and long-term accrued compensated leave liabilities are recorded in the appropriate fund. The current portion of compensated leave is based upon the estimated leave usage in the subsequent year increased by cost of living salary increase.

I. Fund Balances

Fund balance is divided into five classifications based primarily on the extent to which the City is bound to observe constraints imposed upon the use of the resources in the governmental funds. The classifications are as follows:

Nonspendable - The nonspendable fund balance category includes amounts that cannot be spent because they are not in spendable form, or are legally or contractually required to be maintained intact. The “not in spendable form” criterion includes items that are not expected to be converted to cash.

Restricted - Fund balance is reported as restricted when constraints placed on the use of resources are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or is imposed by law through constitutional provisions or enabling legislation (City ordinances). Enabling legislation authorizes the City to assess, levy, charge, or otherwise mandate payment of resources (from external resource providers) and includes a legally enforceable requirement that those resources be used only for the specific purposes stipulated in the legislation. Legal enforceability means that the City can be compelled by an external party such as citizens, public interest groups, or the judiciary to use resources created by enabling legislation only for the purposes specified by the legislation.

Committed - The committed fund balance classification includes amounts that can be used only for the specific purposes imposed by formal action (ordinance) of City Council. Those committed amounts cannot be used for any other purpose unless City Council removes or changes the specified use by taking the same type of action (ordinance) it employed to previously commit those amounts. In contrast to fund balance that is restricted by enabling legislation, committed fund balance classification may be redeployed for other purposes with appropriate due process. Constraints B-46 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

I. Fund Balances (continued)

imposed on the use of committed amounts are imposed by City Council, separate from the authorization to raise the underlying revenue; therefore, compliance with these constraints are not considered to be legally enforceable.

Committed fund balance also incorporates contractual obligations to the extent that existing resources in the fund have been specifically committed for use in satisfying those contractual requirements. It also includes the long-term amount of loans approved by City Council.

Assigned - Amounts in the assigned fund balance classification are intended to be used by the City for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. In the General Fund, assigned amounts represent intended uses established by City Council’s, the City Manager or by a City official delegated that authority by appropriate action.

Unassigned - Unassigned fund balance is the residual classification for the general fund and includes all spendable amounts not contained in the other classification. In other governmental funds, the unassigned classification is used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned.

The City applies restricted resources first when expenditures are incurred for purposes for which either restricted or unrestricted (committed, assigned, and unassigned) amounts are available. Similarly, within unrestricted fund balance, committed amounts are reduced first followed by assigned, and then unassigned amounts when expenditures are incurred for purposes for which amounts in any of the unrestricted fund balance classifications could be used.

J. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates.

K. Fund Balance Policy

It is the City Council’s policy that there shall be retained in the General Fund an unassigned fund balance of 8% to 12% of the following year’s projected revenues. It is desired that a goal of 10% be maintained. This level equates to approximately one month of operating expenses.

L. Miscellaneous

1. Cash and Investments

Cash invested at June 30 is included in the various cash accounts reflected in the financial statements. Investments are stated at amortized cost or at their fair value (Note 8). Interest earnings on investments are allocated to the appropriate funds based upon the average monthly cash balance of each fund. Qualified investments in State Treasurer’s LGIP, AIM and SNAP are reported at amortized cost. All others are reported at fair value (Note 8).

Other Post Employment Benefit investments are reported at fair value, which for the City and School Board is determined by the most recent bid and asking prices as obtained from markets of such investments. Securities for which market quotations are not readily available are valued at their fair value as determined in good faith by the custodian under the direction of the Board of Trustees of the Virginia Pooled OPEB Trust Fund. A valuation service may be engaged to assist in the determination of fair value.

B-47 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

L. Miscellaneous (continued)

2. Proprietary Funds' Other Charges

This category mainly consists of General Fund charges (e.g., data processing, buildings and grounds maintenance, indirect costs) to the Water and Sewer, Storm Water and Resort Parking Enterprise Funds as well as Internal Service Funds except Risk Management, and the Development Authority. For Risk Management it represents premiums and claims payments (including current estimated claims and judgments). The Development Authority other charges consist of selling, lease and lease hold improvements, professional services and other general expenses.

3. Statement of Cash Flows

For purposes of the statements of cash flows, all highly liquid debt instruments and certificates of deposit, with a maturity of three months or less, are grouped into cash and temporary investments. Proprietary Funds participate in a centralized cash and investment pool and therefore, separate information on cash equivalents (i.e., investments with maturities of three months or less upon acquisition) for the funds is not applicable.

4. Bond Premiums and Discounts

Bond premiums and discounts are deferred and amortized over the life of the bonds using the straight-line method, which approximates the effective interest method. Bonds are reported net of the applicable bond premium or discount.

5. Internal Balances

The amount reported in the Statement of Net Position for internal balances represents support payments to the blended component unit Development Authority during the fiscal year just ended.

M. Net Position

The difference between assets plus deferred outflows of resources less liabilities plus deferred inflows of resources in the government-wide statement of net position must be labeled as net position. GAAP further require that net position be subdivided into three categories: net investment in capital assets, restricted net position; and unrestricted net position.

N. Long-Term Obligations

In the government-wide financial statements, and Proprietary Fund types in the financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable Governmental Activities, Business-Type Activities, or Proprietary Fund type statement of net position. Bond premiums and deferred loss on refunding bonds as well as issuance costs are deferred and amortized over the life of the bonds.

In the fund financial statements, Governmental Fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds, are reported as debt service expenditures.

O. Restricted Assets - Cash and Investments

Certain proceeds of the Primary Government’s revenue bond issuance and certificates of participation have been set aside in separate bank accounts as a reserve for future debt service payments. In addition, inclusive in this category are option deposits, funds held for capital projects and improvements and grant awards.

B-48 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

P. Unrestricted Net Position - Governmental Activities

Inclusive in Governmental Activities unrestricted net position are ending committed fund balances of certain Special Revenue Funds which have been earmarked for specific purposes by City Council. These funds are, but are not limited to, Agriculture Reserve Fund, Major Projects Fund, Open Space Fund, Tourism Growth Investment Fund, and Tourism Advertising Program Fund.

Q. Restricted Net Position

Some primary government and component unit net position amounts are subject to various restrictions. Bond resolutions restrict the net position of the Water and Sewer, Storm Water and Debt Service Funds for operations. The Master Water and Sewer Resolution restricts net position of the Water and Sewer Enterprise Fund for the cost of operation, maintenance and debt service costs. The agreement of Trust, dated January 1, 2000, restricts the net position of the Storm Water Enterprise Fund in a similar manner. The ending fund balance of the Debt Service Fund is restricted for future debt costs.

Certain amounts in the General Fund, Special Revenue Funds, and component units are restricted through other enabling legislation.

R. Deferred Outflows and Inflows of Resources

Deferred outflows of resources represent a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The City’s deferred outflows of resources consist of the amount by which the principal and premium of a refunding bond exceed the net carrying amount of the refunded debt. The deferred outflow is being amortized over the remaining life of the refunded debt.

Deferred inflows of resources represents an acquisition of net position that applies to a future period and so will not be recognized as a revenue until then. The City’s deferred inflows of resources consist of the amount by which the net carrying amount of refunded debt exceed the principal and premium of a refunding bond. The deferred inflow is being amortized over the remaining life of the refunded debt. Under the modified accrual basis of accounting, the City has revenues which are applicable to a future period, and will not be recognized until the period they become available. These amounts are recorded on the governmental funds balance sheet as a deferred inflow of resources.

B-49 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

2. FUND BALANCES – NONMAJOR GOVERNMENTAL FUNDS

Nonmajor governmental fund balance is classified as nonspendable, restricted, committed, assigned and/or unassigned (Note 1I) based primarily on the extent to which the City is bound to observe constraints imposed upon the use of these resources. The constraints placed on fund balance for the nonmajor governmental funds are presented below:

Restricted: Federal and State Grants $ 9,432,753 Special Service Districts 839,328 Public Safety 3,358,972 Judicial Programs 664,999 Total Special Revenue Funds $ 14,296,052 Future Debt Service 27,007,203 Total Restricted $ 41,303,255

Committed: Tax Increment Financing $ 10,508,789 Public Works 338,064 Parks and Recreation Activities 14,663,791 Convention and Visitor Bureau 3,702,915 Educational 364,846 Agriculture Program 12,065,051 Judicial 575,000 Total Committed $ 42,218,456

Assigned: Tax Increment Financing $ 1,788,190 Convention and Visitor Bureau 398,316 Educational 5,000 Special Service District 835,801 Judicial Programs 428,117 Public Works 700,000 Parks and Recreation Activities 4,446,190 Total Assigned $ 8,601,614

Unas s i g ned: Judicial Programs $ (554,019)

Total Fund Balance $ 91,569,306

3. RECEIVABLES AND ACCRUED LIABILITIES

A. Receivables

Receivables at June 30, 2014 consist of the following:

Primary Government Governmental Business-Type Activities Activities Total Real Estate Taxes $ 15,905,605 $ - $ 15,905,605 Personal Property Taxes 23,536,180 - 23,536,180 Loans 13,325,213 - 13,325,213 Due from Other Government 76,522,233 3,327,129 79,849,362 Accounts 23,778,977 29,156,310 52,935,287 Gross Receivables $ 153,068,208 $ 32,483,439 $ 185,551,647 Less: Allowance for Uncollectibles (21,189,820) (2,724,423) (23,914,243) Net Receivables - Entity Wide$ 131,878,388 $ 29,759,016 $ 161,637,404

Major Funds – Governmental General Fund Capital Projects Total Real Estate Taxes $ 15,905,605 $ - $ 15,905,605 Personal Property Taxes 23,536,180 - 23,536,180 Accounts 1,609,852 - 1,609,852 Loans 6,943,548 - 6,943,548 Intergovernmental Accounts 68,435,192 3,227,871 71,663,063 Due from Other Funds 3,628,091 - 3,628,091 Gross Receivables $ 120,058,468 $ 3,227,871 $ 123,286,339 Less: Allowance for Uncollectibles (11,032,961) - (11,032,961) Net Receivables $ 109,025,507 $ 3,227,871 $ 112,253,378

B-50 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

3. RECEIVABLES AND ACCRUED LIABILITIES (continued)

A. Receivables (continued)

Major Funds – Proprietary Virginia Beach Water and Development Sewer Storm Water Authority Total Accounts $ 20,891,491 $ 6,022,736 $ 26,248,663 $ 53,162,890 Intergovernmental Accounts 3,327,129 - - 3,327,129 Gross Receivables $ 24,218,620 $ 6,022,736 $ 26,248,663 $ 56,490,019 Less: Allowance for Uncollectibles (2,706,573) (17,850) - (2,724,423) Net Receivables $ 21,512,047 $ 6,004,886 $ 26,248,663 $ 53,765,596

The intergovernmental accounts receivable represents the amount due from the City of Chesapeake for their share of the cost of Lake Gaston water reserve.

Component Units

Receivables at June 30, 2014 consist of the following: Community School Development Board Corporation Total Notes, Deed of Trust $ - $ 2,182,103 $ 2,182,103 Accrued Interest - 630,304 630,304 Intergovernmental 22,864,879 323,028 23,187,907 Accounts 776,988 463,296 1,240,284 Net Receivables $ 23,641,867 $ 3,598,731 $ 27,240,598

B. Property Taxes Receivable

An annual ad valorem tax is levied by the City on the assessed value of real and tangible personal property. These levies are made each year on July 1 and January 1 for real property and tangible personal property, respectively. Taxes levied on these dates become liens on the subject property on the date of levy. Real property taxes are payable in two installments on December 5 and June 5. Personal property taxes are payable on June 5, however, pro-rated bills on automobiles are also payable throughout the year on the portion of the year they are owned if not owned a full year. These taxes are considered delinquent when not paid by the due dates and subject to penalties and interest charges by the City Treasurer. City property tax revenues are recognized when levied and collected.

The City calculates its allowance for uncollectible taxes by using historical collection data. Furthermore, the taxes receivable amount uncollected 45 days after June 30 is recorded as unearned revenue for the fund financial statements.

During Fiscal Year 2014 the real property rate was $0.93 per $100 of assessed valuation (100% of fair market value except for public service corporation properties); an additional $.06 per $100 of assessed valuation is charged to those residents of Sandbridge; an additional $.45 per $100 of assessed valuation is charged to all real estate within Town Center Special Service District; an additional $.184 per $100 of assessed valuation is charged to all real estate within the Old Donation Special Service District; an additional $.363 per $100 of assessed valuation is charged to all real estate within the Bayville Creek Special Service District, not exempt from taxation; an additional $.1594 per $100 of assessed valuation is charged to all real estate within the Shadowlawn Special Service District; taxes on all real estate that has been classified as an energy efficient building, not exempt from taxation, at a rate of $0.78 on each $100 of assessed valuation thereof; taxes on buildings that are individually listed on the Virginia’s Landmarks Register, not including the real estate or land on which the building is located, so long as the building is maintained in a condition such that it retains the characteristics for which it was listed on the Virginia Landmarks Register at a rate of $0.49 on each $100 of assessed valuation thereof; the personal property rate was $3.70 per $100 of assessed valuation (100% of fair market value). Other personal property tax rates exist for qualified equipment. There are no limits currently on the property tax B-51 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

3. RECEIVABLES AND ACCRUED LIABILITIES (continued)

B. Property Taxes Receivable (continued)

rates which may be established by the City Council. In addition, City Council is the only governmental entity that has the local taxing authority.

C. Intergovernmental Receivables - Primary Government and School Board Component Unit – Entity Wide

1. The following revenues were due from the Commonwealth of Virginia at June 30, 2014:

Primary Government Governmental Activities General Sales Tax $ 4,993,821 Telecommunications Tax 3,802,766 Reimbursements 466,571 Franchise Tax 624,454 Violations-Red Light Cameras 144,357 Automobile Licenses 804,944 Personal Property Tax Relief Act 53,412,868 Recordation Fees 495,356 Other Grants, Entitlements, & Shared Revenues 2,120,644 Sheriff's Department 1,286,153 Capital Projects 690,059 Grants Consolidated 810,393 Total Due from Commonwealth $ 69,652,386

School Board Component Unit

State Share Sales Tax $ 5,686,874 Special Education-Regional Program 4,187,962 Technology Initiative 3,729,831 Juvenile Detention Center 202,495 Other Grants, Entitlements and Shared Revenues 64,874 Total Due from Commonwealth-Governmental Funds $ 13,872,036 School Health Insurance Internal Service Fund-Health Insurance-City Line of Duty 133,308 Total Due from Commonwealth-Governmental Activities $ 14,005,344

2. The following revenues were due from various Federal agencies at June 30, 2014:

Primary Government Governmental Activities Public Assistant Grants $ 1,568,082 Law Enforcement 19,780 Grants Consolidated 2,042,846 Housing Assistance 616,035 Capital Improvements 2,537,812 Federal Home Grants 69,395 Total Due from Federal Government $ 6,853,950

B-52 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

3. RECEIVABLES AND ACCRUED LIABILITIES (continued)

C. Intergovernmental Receivables - Primary Government and School Board Component Unit – Entity Wide (continued)

School Board Component Unit Adult Basic Eduction $ 67,187 Carl Perkins 773,055 DODEA MCASP 403,342 DODEA SF-LEP 95,098 Medicaid 391,073 National School Meal Program 713,901 NJROTC 76,646 Preschool Incentive 89,392 Title I 3,735,122 Title II 478,471 Title III 90,712 Title IV 71,385 Title VI-B 1,825,154 Other Grants, Entitlements and Shared Revenues 48,997 Total Due from Federal Government $ 8,859,535 Agency Funs-Payroll Deductions and Fringe Benefits $ 228

3. The following revenues were due from other Local governments at June 30, 2014:

The Federal Section Eight Program Special Revenue Fund was due $15,897 from other service providers and authorities.

D. Allowances For Uncollectible Accounts Receivable

Allowances for uncollectible accounts receivable are generally established using historical collection data, specific account analysis and subsequent cash receipts. The allowances at June 30, 2014 are as follows:

a. General Fund $ 11,032,961 b. Water and Sewer Fund 2,706,573 c. Storm Water Fund 17,850 Total $ 13,757,384

E. The major components of Accrued Liabilities at June 30, 2014 consist of the following:

Primary Government Governmental Business-Type Activities Activities Total Accrued Interest Payable $ 11,526,335 $ 4,554,165 $ 16,080,500 Deposits Payable 1,005,044 140,929 1,145,973 Unearned Revenue - 323,914 323,914 Total Accrued Liabilities $ 12,531,379 $ 5,019,008 $ 17,550,387

Component Units Community School Development Board Authority Total Accrued Interest Payable $ - $ 58,820 $ 58,820 Unearned Revenue 8,459,898 - 8,459,898 Deposits Payable 75,000 75,539 150,539 Accrued Salaries 55,147,209 - 55,147,209 Total Accrued Liabilities $ 63,682,107 $ 134,359 $ 63,816,466

B-53 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

4. UNEARNED REVENUE

Unearned revenue represents amounts for which asset recognition criteria have been met, but for which revenue recognition criteria have not been met. Under the modified accrual basis of accounting, such amounts are measurable, but not available. Under the full accrual basis of accounting, such amounts are measurable, but are unearned.

Unearned revenue consists of the following as of June 30, 2014:

A. General Fund

Aquarium - Advanced Ticket Receipts $ 54,781 $ 54,781 B. Special Revenue Funds – Nonmajor

Waste Management - Unearned billings $ 1,292,643 Federal Section Eight Program - Advance receipts 14,988 Parks and Recreation - Advance class registration 151,058 $ 1,458,689 C. Enterprise Funds

Development Authority - Miscellaneous receipts $ 17,024 Water and Sewer - Customers and Developers Tap and Meter Fees 306,890 Total Enterprise Funds $ 323,914

D. School Board Component Unit

General Fund - Summer School Tuition and School Rentals $ 391,316 School Grants Fund - Early Reading Intervention, Technology Initiative, and other grants 501,484 Other Governmental Funds - School Caferterias and Cell Towers - Charges for Services 389,991 Total Unearned Revenue - Governmental Funds $ 1,282,791 School Health Insurance Internal Service Fund - Prepayment of July health insurance premiums 7,177,107 Total Unearned Revenue - Governmental Activities $ 8,459,898

5. CAPITAL ASSETS AND LAND HELD FOR RESALE

A. Land and Building Inventory Held for Resale – Development Authority

Oceana West Corporate Park $ 1,555,548 Corporate Landing 10,315,525 Town Center Beacon Building & Land 4,877,946 Town Center Parking Lot 110,892 Hunt Club 2 200,305 Headquarters Hotel Site 4,393,243 Total Land and Building Held for Resale $ 21,453,459

B-54 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

5. CAPITAL ASSETS AND LAND HELD FOR RESALE (continued)

B. Governmental Activities

The following is a summary of the changes in capital assets for the fiscal year ended June 30, 2014:

Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 962,229,935 $ 32,731,318 $ 4,042,632 $ 990,918,621 Agriculture Reserve Program 41,193,588 270,504 - 41,464,092 Construction in Progress 101,004,841 134,746,439 111,002,152 124,749,128 Total Capital Assets Not Being Depreciated$ 1,104,428,364 $ 167,748,261 $ 115,044,784 $ 1,157,131,841

Other Capital Assets: Buildings and Improvements $ 685,990,401 $ 28,972,642 $ 74,400 $ 714,888,643 School Buildings 346,751,276 44,489,157 35,926,818 355,313,615 Site Improvements 277,257,370 3,241,592 - 280,498,962 Site Improvements - Internal Service Funds 265,782 - - 265,782 Equipment 243,141,013 25,023,463 8,821,703 259,342,773 Equipment - ISF* 5,778,115 167,795 276,348 5,669,562 Roadway Network 1,833,809,876 65,953,337 137 1,899,763,076 Landfill Network 18,574,535 101,618 - 18,676,153 Bridge Network 80,481,418 467,674 - 80,949,092 Hurricane Protection Network 97,680,665 - - 97,680,665 Total Other Capital Assets at Historical Cost$ 3,589,730,451 $ 168,417,278 $ 45,099,406 $ 3,713,048,323

Less Accumulated Depreciation For: Buildings and Improvements $ 190,530,476 $ 17,676,843 $ 38,025 $ 208,169,294 School Buildings 32,268,250 6,619,221 13,181,508 25,705,963 Site Improvements 67,994,896 7,301,143 - 75,296,039 Site Improvements - ISF 262,528 235 - 262,763 Equipment 154,568,792 26,584,699 8,125,586 173,027,905 Equipment - ISF 4,439,548 381,326 156,015 4,664,859 Roadway Network 975,488,284 45,845,246 - 1,021,333,530 Landfill Network 17,075,780 800,187 - 17,875,967 Bridge Network 32,102,404 1,552,135 - 33,654,539 Hurrican Protection Network 21,258,810 1,953,614 - 23,212,424 Total Accumulated Depreciation $ 1,495,989,768 $ 108,714,649 $ 21,501,134 $ 1,583,203,283

Total Capital Assets Being Depreciated, Net $ 2,093,740,683 $ 59,702,629 $ 23,598,272 $ 2,129,845,040 Governmental Activities Capital Assets, Net $ 3,198,169,047 $ 227,450,890 $ 138,643,056 $ 3,286,976,881

Governmental Activities capital assets net of accumulated depreciation at June 30, 2014 are comprised of the following:

General Government Capital Assets, Net $ 2,951,612,638 Internal Service Fund Capital Assets, Net 335,364,243 Total $ 3,286,976,881

B-55 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

5. CAPITAL ASSETS AND LAND HELD FOR RESALE (continued)

B. Governmental Activities (continued)

Depreciation was charged to governmental functions as follows:

Finance $ 1,093,813 Human Resources 44,660 Judicial 302,300 Health 9,883 Police 2,946,760 Public Works 74,314,962 Parks and Recreation 3,269,357 Libraries 424,407 Planning 460,176 Economic Development 13,235 Convention & Visitors Bureau 348,241 Communications & Information Technology 12,967,013 Boards and Commisions 1,379 EMS 36,894 Fire 3,915,682 Management Services 267 Human Services 753,128 Education and Transfer to School 6,619,221 Housing & Neighborhood Preservation 41,185 Museums 41,497 General Government 526,186 Emergency Medical Services 584,403 Total $ 108,714,649

C. Component Unit - School Board

Capital Assets activity for the year ended June 30, 2014 was as follows:

Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land $ 39,670,603 $ - $ - $ 39,670,603 Construction in Progress 71,559,129 22,762,926 89,276,874 5,045,181 Total Capital Assets Not Being Depreciated $ 111,229,732 $ 22,762,926 $ 89,276,874 $ 44,715,784

Capital Assets Being Depreciated Buildings $ 564,511,524 $ 83,191,262 $ 8,883,898 $ 638,818,888 Improvement Other Than Buildings 52,403,215 9,546,551 - 61,949,766 Machinery and Equipment 105,462,962 9,411,679 3,809,731 111,064,910 Total Capital Assets Being Depreciated $ 722,377,701 $ 102,149,492 $ 12,693,629 $ 811,833,564

Less Accumulated Depreciation For: * Buildings $ 231,532,436 $ 26,896,011 $ 299,788 $ 258,128,659 Improvement Other Than Buildings 33,729,887 2,249,250 - 35,979,137 Machinery and Equipment 64,731,963 8,174,852 3,425,143 69,481,672 Total Accumulated Depreciation $ 329,994,286 $ 37,320,113 $ 3,724,931 $ 363,589,468

Total Capital Assets Being Depreciated, Net $ 392,383,415 $ 64,829,379 $ 8,968,698 $ 448,244,096 Component Unit School Board, Capital Assets, Net$ 503,613,147 $ 87,592,305 $ 98,245,572 $ 492,959,880

* All depreciation was charged to School Board Component Unit.

B-56 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

5. CAPITAL ASSETS AND LAND HELD FOR RESALE (continued)

D. Business-Type Activities

The following is a summary of the changes in capital assets for the fiscal year ended June 30, 2014:

Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 165,181,951 $ 516,488 $ 1,545 $ 165,696,894 Construction in Progress 16,995,523 57,846,068 63,646,946 11,194,645 Total Capital Assets Not Being Depreciated$ 182,177,474 $ 58,362,556 $ 63,648,491 $ 176,891,539

Other Capital Assets: Buildings and Improvements $ 105,244,966 $ 642,000 $ - $ 105,886,966 Site Improvements 1,457,642 - - 1,457,642 Utility System 1,158,907,793 62,910,128 11,859,175 1,209,958,746 Machinery and Equipment 34,480,861 5,387,267 1,225,031 38,643,097 Total Other Capital Assets at Historical Cost$ 1,300,091,262 $ 68,939,395 $ 13,084,206 $ 1,355,946,451

Less Accumulated Depreciation For: Buildings and Improvements $ 25,232,902 $ 2,723,448 $ - $ 27,956,350 Site Improvements 505,106 36,441 - 541,547 Utility System 412,381,611 25,971,003 2,708,811 435,643,803 Machinery and Equipment 26,056,200 2,369,792 1,179,024 27,246,968 Total Accumulated Depreciation $ 464,175,819 $ 31,100,684 $ 3,887,835 $ 491,388,668

Total Capital Assets Being Depreciated, Net $ 835,915,443 $ 37,838,711 $ 9,196,371 $ 864,557,783 Business-Type Activities Capital Assets, Net$ 1,018,092,917 $ 96,201,267 $ 72,844,862 $ 1,041,449,322

Depreciation expense was charged to Business-Type Activities as follows:

Water and Sewer $ 24,291,460 Storm Water 4,110,897 Development Authority 2,661,886 Resort Parking 36,441 Total $ 31,100,684 E. Major Fund - Water and Sewer Enterprise Fund Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 12,669,816 $ 301,731 $ - $ 12,971,547 Construction in Progress 11,689,321 41,754,649 46,180,536 7,263,434 Total Capital Assets Not Being Depreciated $ 24,359,137 $ 42,056,380 $ 46,180,536 $ 20,234,981

Other Capital Assets: Buildings and Improvements $ 3,590,809 $ 642,000 $ - $ 4,232,809 Utility System 976,268,875 45,704,201 11,859,175 1,010,113,901 Machinery and Equipment 24,221,235 3,751,803 905,290 27,067,748

Total Other Capital Assets at Historical Cost$ 1,004,080,919 $ 50,098,004 $ 12,764,465 $ 1,041,414,458

Less Accumulated Depreciation For: Buildings and Improvements $ 2,307,628 $ 93,315 $ - $ 2,400,943 Utility System 369,102,244 22,641,462 2,708,811 389,034,895 Machinery and Equipment 18,441,428 1,556,683 859,283 19,138,828 Total Accumulated Depreciation $ 389,851,300 $ 24,291,460 $ 3,568,094 $ 410,574,666

Total Capital Assets Being Depreciated, Net $ 614,229,619 $ 25,806,544 $ 9,196,371 $ 630,839,792 Water and Sewer Capital Assets, Net $ 638,588,756 $ 67,862,924 $ 55,376,907 $ 651,074,773

B-57 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

5. CAPITAL ASSETS AND LAND HELD FOR RESALE (continued)

F. Major Fund – Storm Water Enterprise Fund Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 131,201,523 $ 194,315 $ - $ 131,395,838 Construction in Progress 5,306,202 16,091,419 17,466,410 3,931,211 Total Capital Assets Not Being Depreciated$ 136,507,725 $ 16,285,734 $ 17,466,410 $ 135,327,049

Other Capital Assets: Utility System $ 182,638,918 $ 17,205,927 $ - $ 199,844,845 Machinery and Equipment 9,586,488 1,635,464 291,512 10,930,440

Total Other Capital Assets at Historical Cost$ 192,225,406 $ 18,841,391 $ 291,512 $ 210,775,285

Less Accumulated Depreciation For: Utility System $ 43,279,367 $ 3,329,541 $ 291,512 $ 46,317,396 Machinery and Equipment 7,234,862 781,356 - 8,016,218 Total Accumulated Depreciation $ 50,514,229 $ 4,110,897 $ 291,512 $ 54,333,614

Total Capital Assets Being Depreciated, Net $ 141,711,177 $ 14,730,494 $ - $ 156,441,671 Storm Water Capital Assets, Net $ 278,218,902 $ 31,016,228 $ 17,466,410 $ 291,768,720

G. Major Fund - Virginia Beach Development Authority Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 19,935,612 $ 20,442 $ 1,545 $ 19,954,509 Total Capital Assets Not Being Depreciated$ 19,935,612 $ 20,442 $ 1,545 $ 19,954,509

Other Capital Assets: Buildings and Improvements $ 101,654,157 $ - -$ $ 101,654,157 Machinery and Equipment 593,294 - 28,229 565,065 Total Other Capital Assets at Historical Cost$ 102,247,451 $ - $ 28,229 $ 102,219,222

Less Accumulated Depreciation For: Buildings $ 22,925,274 $ 2,630,133 -$ $ 25,555,407 Machinery and Equipment 300,066 31,753 28,229 303,590 Total Accumulated Depreciation $ 23,225,340 $ 2,661,886 $ 28,229 $ 25,858,997

Total Capital Assets Being Depreciated, Net$ 79,022,111 $ - -$ $ 76,360,225 Development Authority Capital Assets, Net$ 98,957,723 $ 2,641,444 $ 1,545 $ 96,314,734

All depreciation was charged to Virginia Beach Development Authority.

H. Component Unit - Virginia Beach Community Development Corporation

Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 7,402,602 $ 574,700 -$ $ 7,977,302

Other Capital Assets: Buildings and Improvements $ 26,629,935 $ 1,531,595 -$ $ 28,161,530 Vehicles 64,905 20,154 17,250 67,809 Total Other Capital Assets at Historical Cost$ 26,694,840 $ 1,551,749 $ 17,250 $ 28,229,339

Less Accumulated Depreciation $ 8,544,883 $ 1,029,623 $ 1,232 $ 9,573,274 Component Unit - Va. Beach Community Dev.$ 25,552,559 $ 1,096,826 $ 16,018 $ 26,633,367

B-58 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

5. CAPITAL ASSETS AND LAND HELD FOR RESALE (continued)

I. Construction in Progress

1. Governmental Activities and School Board Component Unit

In accordance with the City’s accounting policies, these projects will not be transferred from Construction in Progress until completion. Construction in progress is comprised of the following:

Expended through Outstanding Unobligated June 30, 2014 Commitments Balance Gove r nme nt Ac ti vi ti e s Engineering and Highways $ 76,661,957 $ 123,343,180 $ 179,448,186 Buildings 15,850,301 17,995,190 55,202,940 Parks and Recreation 27,439,307 16,165,196 36,366,147 Virginia Beach Development Authority 1,505,623 - - Coastal 2,235,447 2,080,684 38,298,084 Economic and Tourism 1,056,493 29,150,606 23,079,220 Total Other Capital Assets at Historical Cost $ 124,749,128 $ 188,734,856 $ 332,394,577

School Board Component Unit Buildings and Improvements Other than Buildings $ 5,045,181 $ 18,184,304 $ -

2. Business-Type Activities

In accordance with the City’s accounting policies, these projects will not be transferred from Construction in Progress into the various capital asset accounts until substantially completed. Construction in Progress for Business-Type Activities is comprised of the following at June 30, 2014:

Expended through Outstanding Unobligated June 30, 2014 Commitments Balance Water & Sewer Utility Projects $ 7,263,434 $ 29,894,527 $ 60,404,951 Storm Water Projects 3,931,211 14,294,992 49,558,003 Total Business-Type Activities $ 11,194,645 $ 44,189,519 $ 109,962,954

6. LONG-TERM DEBT

A. A Summary of Changes In Long-Term Liabilities

1. Primary Government - Governmental Activities

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year General Obligation Bonds $ 640,448,095 $ 85,055,000 $ 58,082,864 $ 667,420,231 $ 58,799,390 State Literary Fund Loans 4,125,000 - 625,000 3,500,000 625,000 Public Facility Revenue Bonds 251,574,514 41,307,385 33,950,000 258,931,899 21,076,209 Williams Farm Property 212,500 - 212,500 - - Agriculture Reserve Program 41,193,588 270,504 - 41,464,092 - Total Tax Supported Debt $ 937,553,697 $ 126,632,889 $ 92,870,364 $ 971,316,222 $ 80,500,599

Other Debt: Landfill Closure & Post-Closure Care $ 26,826,185 $ 2,640,690 -$ $ 29,466,875 -$ Premiums 78,449,778 16,096,113 10,765,640 83,780,251 7,713,807 Accrued Compensation Leave 41,234,932 25,663,233 23,877,068 43,021,097 24,593,377 Estimated Claims & Judgements 25,462,274 11,249,594 11,249,594 25,462,274 5,871,424 Governmental Activities Long-Term Debt $ 1,109,526,866 $ 182,282,519 $ 138,762,666 $ 1,153,046,719 $ 118,679,207

B-59 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

A. A Summary of Changes In Long-Term Liabilities (continued)

2. Primary Government - Business-Type Activities

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year General Obligation Bonds $ 222,016 -$ $ 222,016 $ - -$ Revenue Bonds 190,379,822 44,845,000 8,806,175 226,418,647 10,113,130 Public Facility Revenue Bonds 75,580,486 23,987,615 10,240,000 89,328,101 5,693,791 Revenue Note 947,939 - - 947,939 947,939 Total Tax Supported Debt $ 267,130,263 $ 68,832,615 $ 19,268,191 $ 316,694,687 $ 16,754,860

Less/Add Deferred Amounts: For Issuance Premiums 5,618,386 4,373,977 788,521 9,203,842 437,077 Less Bond Discount (107,674) - (63,683) (43,991) - Total Bonds Payable $ 272,640,975 $ 73,206,592 $ 19,993,029 $ 325,854,538 $ 17,191,937

Accrued Compensated Leave 3,609,277 2,218,776 2,136,167 3,691,886 2,200,248 Business-Type Activities Long-Term Debt $ 276,250,252 $ 75,425,368 $ 22,129,196 $ 329,546,424 $ 19,392,185

3. Major Fund - Water and Sewer Enterprise Fund (Included in Business-Type Activities)

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year Revenue Bonds $ 164,959,822 $ 44,845,000 $ 7,796,175 $ 202,008,647 $ 9,083,130 $ 164,959,822 $ 44,845,000 $ 7,796,175 $ 202,008,647 $ 9,083,130

Less/Add Deferred Amounts: For Issuance Premiums 3,842,134 2,636,406 404,013 6,074,527 404,013 Total Bonds Payable $ 168,801,956 $ 47,481,406 $ 8,200,188 $ 208,083,174 $ 9,487,143

Accrued Compensated Leave 2,638,644 1,698,858 1,576,402 2,761,101 1,623,692 Water and Sewer Long-Term Debt $ 171,440,600 $ 49,180,264 $ 9,776,590 $ 210,844,275 $ 11,110,835

4. Major Fund – Storm Water Enterprise Fund (Included in Business-Type Activities)

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year General Obligation Bonds $ 222,016 -$ $ 222,016 -$ -$ Double Barrel and Revenue 25,420,000 - 1,010,000 24,410,000 1,030,000 $ 25,642,016 -$ $ 1,232,016 $ 24,410,000 $ 1,030,000

Less/add Deferred Amounts: For Issuance Premiums 314,106 - 33,063 281,043 33,064 Total Bonds Payable $ 25,956,122 -$ $ 1,265,079 $ 24,691,043 $ 1,063,064

Accrued Compensation Leave 944,118 497,994 543,191 898,921 559,486 Storm Water Long-Term Debt $ 26,900,240 497,994$ $ 1,808,270 $ 25,589,964 $ 1,622,550

B-60 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

A. A Summary of Changes In Long-Term Liabilities (continued)

5. Major Fund - Development Authority Enterprise Fund (Included in Business-Type Activities)

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year Public Facility Revenue Bonds $ 75,580,486 $ 23,987,615 $ 10,240,000 $ 89,328,101 $ 5,693,791 Revenue Note 947,939 - - 947,939 947,939 Total Bonds Payable $ 76,528,425 $ 23,987,615 $ 10,240,000 $ 90,276,040 $ 6,641,730 For Issuance Premiums 1,462,146 1,737,571 351,445 2,848,272 - Less Bond Discount (107,674) - (63,683) (43,991) - Virginia Beach Development Authority$ 77,882,897 $ 25,725,186 $ 10,527,762 $ 93,080,321 $ 6,641,730

6. Component Unit - School Board

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year Accrued Compensated Leave $ 20,288,657 $ 8,266,774 $ 7,953,104 $ 20,602,327 $ 8,191,697 Estimated Claims and Judgements 15,850,000 143,242,000 141,804,000 17,288,000 12,966,000 Long-Term Liabilities $ 36,138,657 $ 151,508,774 $ 149,757,104 $ 37,890,327 $ 21,157,697

7. Component Unit - Virginia Beach Community Development Corporation

Amounts Balance Balance Due Within July 1, 2013 Additions Reductions June 30, 2014 One Year Notes Payable $ 16,106,937 $ 1,621,585 $ 1,158,455 $ 16,570,067 $ 839,341 Component Unit Long-Term Debt - Va. Beach Development Corp. $ 16,106,937 $ 1,621,585 $ 1,158,455 $ 16,570,067 $ 839,341

B-61 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued) B. Bonds, Notes and Loans Payable Proprietary Percentage Outstanding Balance True Storm Water & Bond Issue/Purpose Dated Issue Amount Interest Water % Sewer% VBDA% CITY General Obligation Bonds and Loans: 2014A PI 4/22/2014$ 85,055,000 2.920553 - - - $ 85,055,000 2013A PI 4/17/2013 22,885,000 2.587348 - - - 22,885,000 2013B PI Refunding 4/17/2013 33,795,000 2.143873 - - - 28,095,000 Pleasure House Point 7/10/2012 6,000,000 0.25 - - - 5,375,106 2012A PI 4/18/2012 65,000,000 2.849726 - - - 58,500,000 2012B PI Refunding 4/18/2012 19,630,000 2.413515 - - - 19,630,000 2011A PI 6/29/2010 90,000,000 3.212396 - - - 76,500,000 2010-1 QSCB 7/8/2010 4,875,000 5.31 - - - 3,735,000 2010 Recovery Zone 3/15/2010 5,995,000 3.038509 - - - 5,015,000 2010A PI 5/25/2010 60,000,000 2.97032 - - - 48,000,000 2009 PI Refunding 1/26/2010 20,755,000 3.041988 - - - 19,550,000 2009B PI Refunding 1/26/2010 78,875,000 2.910179 - - - 78,205,000 2009 PI 6/16/2009 72,000,000 3.655747 - - - 43,200,000 2008 PI 3/25/2008 90,000,000 4.161171 - - - 45,000,000 2008 VPSA 12/1/2008 6,350,705 - - - - 4,893,891 2008 Refunding 5/13/2008 51,625,000 2.881742 - - - 4,515,000 2007 PI 3/27/2007 75,000,000 4.003699 - - - 37,500,000 2005 PI 12/15/2005 80,000,000 4.270424 - - - 8,000,000 2004B PI Refunding 10/1/2004 114,855,000 3.688578 - - - 69,545,000 2004A PI 6/1/2004 65,000,000 4.354874 1.13 - - 3,250,000 2002 State Literary 1/1/2002 7,500,000 3 - - - 3,000,000 1996A School 11/14/1996 4,151,083 3 - - - 726,290 1996 State Literary 3/1/1996 2,500,000 3 - - - 250,000 1996 State Literary 3/1/1996 2,500,000 3 - - - 250,000 1995A PI 12/21/1995 2,096,324 3 - - - 244,944 Total General Obligation Bonds and Loans $ 670,920,231 Revenue Bonds:* 2013 W&S Revenue 11/13/2013 $ 44,845,000 3.641572 - 100 - $ 44,845,000 2010A Storm Water Revenue 11/16/2010 20,000,000 3.170505 100 - - 18,410,000 2010B Storm Water Refunding 11/16/2010 7,380,000 2.607102 100 - - 6,000,000 2010A W&S Revenue 6/29/2010 65,000,000 3.475462 - 100 - 60,395,000 2010B W&S Refunding 6/29/2010 8,410,000 3.02756 - 100 - 7,955,000 2010C W&S Refunding 6/29/2010 24,950,000 3.156061 - 100 - 22,980,000 2005 W&S Revenue & Refund 10/5/2005 92,700,000 4.2312375 - 100 - 57,215,000 2002 W&S Revenue 10/15/2002 28,000,000 4.8066 - 100 - 4,740,000 1998 Taxable W&S Revenue 8/28/1998 5,774,218 4.3 - 100 - 1,956,472 1997 Taxable W&S Revenue 1/30/1997 7,190,048 4.75 - 100 - 1,816,757 1994 Taxable W&S Revenue 1/18/1995 1,405,031 4.5 - 100 - 105,418 Total Revenue Bonds and Notes $ 226,418,647 Public Facility Revenue Bonds: 2014A Public Facility Revenue 6/18/2014 $ 44,975,000 2.984041 - - 41.76$ 44,975,000 2014B Public Facility Revenue 6/18/2014 20,320,000 2.430979 - - 25.62 20,320,000 2013A Public Facility Revenue 6/19/2013 20,960,000 2.599602 - - - 20,960,000 2012A Public Facility Revenue 4/18/2012 22,580,000 2.599602 - - - 21,360,000 2012B Public Facility Refunding 4/18/2012 25,640,000 2.448956 - - 21.12 24,455,000 2010A Public Facility Revenue 5/25/2010 17,000,000 2.582319 - - - 10,200,000 2010B Public Facility Revenue 5/25/2010 98,035,000 2.993556 - - 24.84 95,855,000 2010C Public Facility Refunding 5/25/2010 40,450,000 3.396935 - - 31.31 39,955,000 2007A Public Facility Revenue 6/26/2007 96,835,000 4.5444247 - - 19.51 56,675,000 2007B Public Facility Revenue 6/26/2007 4,030,000 6.296255 - - 100.00 3,290,000 2005A Public Facility Revenue 5/1/2005 94,900,000 3.2284162 - - 12.02 4,195,000 2005B Public Facility Revenue 5/1/2005 9,000,000 4.965915 - - 89.00 6,020,000 Total Public Facility Bonds: $ 348,260,000 Other Long-Term Debt: Agriculture Reserve Program Various $ 41,464,092 Various - - - $ 41,464,092 Note Payable-Town Center 6/8/2000 - - - - - 947,939 Total Other Long-Term Obligations $ 42,412,031 Grand Total Bonds, Notes and Loans Payable $ 1,288,010,909

* Water and Sewer and Storm Water Enterprise Funds B-62 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

B. Bonds, Notes and Loans Payable (continued)

Defeased Debt - In current and prior years, the City defeased certain general obligation, public improvement, and public utility bonds by placing funds in irrevocable escrow accounts to provide for future debt service payments on the defeased debt. Accordingly, the escrow account assets and liabilities for the defeased debt are not included in the City's financial statements. At June 30, 2014, the outstanding balance of the defeased debt, including current year defeased debt, is $181.6 million, and is considered in-substance defeased. Included in this total is $7.4 million for the Water and Sewer Fund.

C. Summary of Recent Refundings

1. Advance Refunding of Public Facility Revenue Bonds

On April 18, 2014, the City issued $20,320,000 of Public Facility Refunding Revenue Bonds, Series 2014B to refund portions of the 2005A Series Public Facility Revenue Bonds. The refunding bonds combined with $2.2 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $28.3 million of Public Facility Revenue Bonds. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net assets. The net carrying amount of the old debt exceeded the reacquisition price by $1,125,000. This difference is being netted against the new debt and amortized over the remaining life of the refunded debt, which is equal to the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 11 years by $1.9 million and resulted in an economic gain of $1.6 million. The 2005A bonds will be called 5/1/15.

2. Current and Advance Refunding of General Obligation Public Improvement Bonds

On April 17, 2013, the City issued $33,795,000 of General Obligation Public Improvement Refunding Bonds, Series 2013B to refund portions of the 2003B and 2005 Series General Obligation Public Improvement Bonds. The refunding bonds combined with $4.27 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $47.6 million of General Obligation Public Improvement Bonds. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net position. The net carrying amount of the old debt exceeded the reacquisition price by $545,000. This difference is displayed as a deferred inflows of resources. The remaining life of the refunded debt is equal to the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 13 years by $3.9 million and resulted in an economic gain of $3.4 million. The 2003B and 2005 Refunded bonds were called on 5/17/13 with the remainder to be called on 1/15/16.

3. Advance Refunding of General Obligation Public Improvement Bonds

On April 18, 2012, the City issued $19.63 million of General Obligation Public Improvement Refunding Bonds, Series 2012B to refund portions of the 2003A and 2004A Series General Obligation Public Improvement Bonds. The refunding bonds combined with $4.6 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $32.6 million of General Obligation Public Improvement Bonds. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net position. The net carrying amount of the old debt exceeded the reacquisition price by $2,620,000. This difference was displayed as a deferred inflows of resources. The remaining life of the refunded debt is equal to the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 13 years by $3.1 million and resulted in an economic gain of $2.6 million. The 2003A and 2004A Refunded bonds were called on 5/1/13 with the remainder to be called on 7/15/14.

B-63 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

C. Summary of Recent Refundings (continued)

4. Advance Refunding of Public Facility Revenue Bonds Series 2003A and Series 1998 Lease Revenue Bonds

On June 20, 2012, the City issued $25.64 million of Public Facility Refunding Revenue Bonds, Series 2012B. The refunding bonds combined with $5.3 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $43.2 million of Public Facility Revenue bonds. Included in the bonds sold were $5.4 million in Public Facility Refunding Revenue Bonds to refund debt currently held by the Virginia Beach Development Authority. The remaining bonds were sold to refund debt currently outstanding for the City. As a result, the refunded bonds are considered to be defeased and the City’s portion of the liability has been removed from the government activities column of the statement of net position. The City’s net carrying amount of the old debt exceeded the reacquisition price by $3,085,486. This difference was displayed as deferred inflows of resources. The remaining life of the refunded debt is equal to the life of the new debt issued.

This advance refunding was undertaken to reduce total debt service payments over the next 12 years by $5.3 million and resulted in an economic gain of $4.3 million. The 1998 Lease Revenue Bonds and 2003A Public Facility Revenue Bonds refunded were called on 7/23/12 and 12/1/13.

5. Advance Refunding of Public Facility Revenue Bonds Series 2002, 2003, 2005 and 2007

On May 25, 2010, the City issued $98.035 million of Public Facility Refunding Revenue Bonds, Series 2010B and $40.45 million of Public Facility Refunding Revenue Bonds, Series 2010C. The refunding bonds combined with $19.03 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $137.5 million of Public Facility Revenue bonds. Included in the bonds sold were $37.015 million in Public Facility Refunding Revenue Bonds to refund debt currently held by the Virginia Beach Development Authority. The remaining bonds were sold to refund debt currently outstanding for the City. As a result, the refunded bonds are considered to be defeased and the City’s portion of the liability has been removed from the government activities column of the statement of net position. The reacquisition price exceeded the net carrying amount of the old debt currently held by $985,000. This difference was displayed as a deferred outflows of resources. The remaining life of the refunded debt is equal to the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 13 years by $6.36 million and resulted in an economic gain of $4.1 million. The refunded bonds will be called at various dates beginning 8/1/12 and ending 7/15/17.

6. Advance Refunding of General Obligation Public Improvement Bonds

On January 26, 2010, the City issued $20.755 million of General Obligation Public Improvement Bonds, Series 2009A and $78.875 million of General Obligation Public Improvement Bonds, Series 2009B. The refunding bonds combined with $12 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $100 million of General Obligation Public Improvement Bonds. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net position. The reacquisition price exceeded the net carrying amount of the old debt currently held by $.37 million. This difference was displayed as deferred outflows of resources. The remaining life of the refunded debt is equal to the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 13 years by $8.03 million and resulted in an economic gain of $5.6 million. The refunded bonds will be called at various dates between 6/1/11 and 6/1/19.

B-64 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

C. Summary of Recent Refundings (continued)

7. Advance Refunding of Water and Sewer Revenue Bonds

On June 29, 2010, the City issued $8.41 million of Water and Sewer Refunding Revenue Bonds, Series 2010B and $24.95 million of Water and Sewer Refunding Revenue Bonds, Series 2010C. The refunding bonds combined with $1.01 million in premiums to provide resources to purchase U.S. Government, State and Local Government Series securities that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $30.64 million of Water and Sewer Revenue bonds. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the business-type activities column of the statement of net position. The reacquisition price exceeded the net carrying amount of the old debt currently held by $2.72 million. This difference was displayed as deferred outflows of resources. The remaining life of the refunded debt is equal to the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 18 years by $1.7 million and resulted in an economic gain of $1.4 million. The refunded bonds are callable beginning 10/1/12 and ending 10/1/15.

D. A Summary of Annual Requirements to Amortize All Bonds and Notes Payable

Annual Debt Service requirements to maturity for General Obligation Bonds are as follows:

Year Endi ng Gove r nme ntal Ac ti vi ti e s June 30 Principal Interest 2015 $ 59,424,390 $ 29,710,369 2016 56,894,318 27,093,688 2017 54,034,860 24,372,397 2018 50,948,194 21,798,280 2019 48,419,035 19,153,873 2020-2024 208,886,556 65,583,504 2025-2029 142,972,878 26,866,944 2030-2034 49,340,000 4,720,099 $ 670,920,231 $ 219,299,154

Annual Debt Service requirements to maturity for Revenue Bonds are as follows:

Year Endi ng Business-Type Activities June 30 Prinicpal Interest 2015 $ 10,113,130 $ 10,017,975 2016 10,426,806 9,625,435 2017 10,857,707 9,199,147 2018 10,240,728 8,759,613 2019 10,705,276 8,320,251 2020-2024 54,750,000 34,907,914 2025-2029 54,885,000 22,076,757 2030-2034 40,295,000 10,581,666 2035-2039 24,145,000 1,980,275 Totals $ 226,418,647 $ 115,469,033

B-65 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

D. A Summary of Annual Requirements to Amortize All Bonds and Notes Payable (continued)

Annual Debt Service requirements to maturity for Public Facility Revenue Bonds are as follows:

Year Endi ng Governmental Activities Business-Type Activities June 30 Principal Interest Principal Interest 2015 $ 21,076,209 $ 11,155,298 $ 5,693,791 $ 3,990,821 2016 19,390,366 10,610,539 6,284,634 3,883,360 2017 20,008,720 9,706,674 6,921,280 3,569,154 2018 20,766,160 8,766,101 7,333,840 3,234,659 2019 21,551,160 7,769,568 7,073,840 2,879,914 2020-2024 106,888,933 23,315,887 36,906,067 8,869,707 2025-2029 36,339,551 5,710,404 14,345,449 2,344,077 2030-2034 12,910,800 1,194,173 4,769,200 517,458 $ 258,931,899 $ 78,228,644 $ 89,328,101 $ 29,289,150

See Note 6N for additional debt to maturity information on Enterprise Revenue Note outstanding balance of $947,939.

Debt service requirements for general obligation bonds are principally met by the General Fund. Also, for the Governmental Activities, Landfill Closure and Post-Closure Care, Federal Arbitrage Rebate (there are no set maturity dates for these liabilities) will be liquidated by the General Fund. Compensated absences (except School Board and most Proprietary Funds) will be liquidated by the General Fund. Internal Service Funds predominately serve the Governmental Funds. Accordingly, long-term liabilities for them are included as part of the above totals for Governmental Activities in Note 1A1. Claims and Judgments are liquidated by the Risk Management Fund.

Interest expense incurred on the above noted debt for the year ended June 30, 2014, was $51,308,508. Of this amount, $2,406,656 was capitalized in the Major Enterprise Funds and in the Business-Type Activities.

E. Agricultural Reserve Program

On May 9, 1995, City Council adopted an ordinance establishing the Agricultural Reserve Program (“ARP”). The primary purpose of the ordinance is to promote and encourage the preservation of farmland in the rural southern portion of the City. Through ARP, the City acquires development rights in designated areas within the southern portion of the City through the purchase of agricultural land preservation easements. Landowners who meet certain eligibility criteria may sell an easement to the City while holding fee simple title to the land and continuing to farm. The City acquires these development rights by executing installment purchase agreements with the landowners.

These agreements provide for the payment of the principal balance of the agreement in a single installment due approximately twenty-five years after execution of the agreement. Interest on the unpaid principal balance is payable semi-annually. On May 9, 1995, the City Council originally dedicated a one and one-half cent increase in the real estate tax to finance the program; on May 11, 2004, the City Council reduced this amount to one cent; on May 9, 2006 the City Council reduced the tax rate to nine tenths of one cent.

These obligations constitute indebtedness within the meaning of Article VII, Section 10 of the Virginia Constitution and will be general obligations of the City, pledging the full faith and credit and unlimited taxing power of the City. By policy, interest and principal payments will be paid from a dedicated portion of real estate taxes. Principal payments will be made from maturing zero coupon Treasury securities purchased from the dedicated portion of real estate taxes.

B-66 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

E. Agricultural Reserve Program (continued)

As of June 30, 2014, 89 installment purchase agreements totaling 9,085 acres at a total purchase price of $41,464,092 have been executed.

Annual Debt Service requirements to maturity for Agricultural Reserve Program: Year Endi ng June 30 Prinicpal Interest 2015 $ - $ 2,234,013 2016 - 2,234,013 2017 - 2,234,013 2018 - 2,234,013 2019 - 2,234,013 2020-2024 10,195,146 10,041,997 2025-2029 11,347,306 5,996,642 2030-2034 8,991,932 3,854,316 2035-2039 10,929,708 878,438 Totals $ 41,464,092 $ 31,941,458 F. Legal Debt Margin

The Legal Debt Margin is a charter requirement which sets the upper limit on the amount of debt Virginia Beach may issue. At June 30, 2014, the legal debt margin was $4.2 billion. However, the City Council has adopted four affordability polices that restrict the amount of debt below the amount indicated by the “Legal Debt Margin”, including a ceiling of $2,800 net debt per capita.

G. Water and Sewer Enterprise Revenue Bonds

Water and Sewer Revenue Bonds are obligations of the City, payable solely from pledged revenues of the System (Water and Sewer Fund), subject to the prior application thereof to the payment of Operating Expenses. The City will fix, charge, collect and revise its fees, rates and other charges for the use of and for the services furnished by the system so as to produce revenues sufficient to meet its cash requirements each fiscal year.

H. Storm Water Revenue Bonds

Storm Water Revenue Bonds are obligations of the City, payable solely from pledged revenues of the System (Storm Water Fund), subject to the prior application thereof to the payment of Operating Expenses. The City will fix, charge, collect and revise its fees, rates and other charges for the use of and for the services furnished by the system so as to produce revenues sufficient to meet its cash requirements each fiscal year.

I. Debt Service Expenditures Principal* Interest and Fiscal General Government City: Retirement Charges Total General Obligation Bonds $ 58,082,864 $ 27,390,968 $ 85,473,832 State Literary Fund Loans 625,000 123,750 748,750 Public Facility Revenue Bonds 18,000,000 11,125,587 29,125,587 Williams Farm IPA 212,500 5,312 217,812 Agriculture Reserve Program - 2,232,706 2,232,706 Bank Charges & Bond Issuance Costs - 820,950 820,950 Total Tax Supported Debt Service $ 76,920,364 $ 41,699,273 $ 118,619,637

Principal* Interest and Fiscal Retirement Charges Total Enterprise Funds: General Obligation Bond $ 222,016 $ 4,440 $ 226,456 Revenue Bonds 8,806,176 9,174,873 17,981,049 Public Facility Revenue Bonds 4,145,000 3,483,578 7,628,578 Bank Charges & Bond Issuance Costs - 380,901 380,901 Total Enterprise Debt Service $ 13,173,192 $ 13,043,792 $ 26,216,984

Total Debt Service $ 90,093,556 $ 54,743,065 $ 144,836,621

* Excludes bonds refunded

B-67 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

J. Accrued Compensated Leave

The accrued compensated leave is as follows at June 30, 2014:

Primary Government Governmental Business-Type School Board Activities Activities Component Unit Total City - Annual $ 30,684,878 $ 2,968,953 $ - $ 33,653,831 City - Compensatory 8,513,484 179,192 - 8,692,676 City - Sick 3,822,735 543,741 - 4,366,476 School - Annual - - 9,532,620 9,532,620 School - Sick - - 9,220,062 9,220,062 School - Personal - - 1,849,645 1,849,645 Total $ 43,021,097 $ 3,691,886 $ 20,602,327 $ 67,315,310

K. Authorized But Unissued Bonds

Purpose June 30, 2014

General Obligation Debt: 2012 Charter Bonds $ 9,073,072 2013 Charter Bonds 45,068,816 2014 Charter Bonds 66,400,000 Total General Obligation Debt $ 120,541,888

Water and Sewer Debt: 2012 W & S Revenue Bonds $ 25,242,666 2013 W & S Revenue Bonds 27,000,000 2014 W & S Revenue Bonds 27,000,000 Total Water and Sewer Debt $ 79,242,666

Storm Water Utility Revenue Bonds: 2006 Storm Water Utility Revenue Bonds $ 448,440 2008 Storm Water Utility Revenue Bonds 6,000,000 2011 Storm Water Utility Revenue Bonds 16,300,000 2013 Storm Water Utility Revenue Bonds 12,500,000 2014 Storm Water Utility Revenue Bonds 9,000,000 Total Storm Water Utility Debt $ 44,248,440

Total Authorized and Unissued Debt - June 30, 2014 $ 244,032,994

L. Revenue Covenants

Management believes the City is in compliance with all significant financial covenants contained in the various bond indentures, including those found in the Master Resolution adopted February 1992 for the Water & Sewer Revenue Bonds.

M. Notes Payable - Discretely Presented Component Unit Community Development Corporation

Various mortgage loan agreements and notes payable with interest at 3.25% to 7.1%, collateralized by real property. $ 16,570,067

B-68 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

6. LONG-TERM DEBT (continued)

N. Notes Payable - Component Unit Virginia Beach Development Authority

Notes Payable – Town Center

Details of Other Notes Payable as of June 30, 2014, are as follows:

Note Payable: Wells Fargo - Town $ 947,939

On March 6, 2000, the Authority and Town Center Associates, L.L.C. entered into an agreement for the development of the Town Center. Financing for the purchase of the land for future phases beyond Phase I of this project was obtained from First Union National Bank/Wachovia in the amount of $5,500,000. Total advances on this loan may not exceed $11,135,000, to include accrued interest through December 2006. The original loan agreement was signed on June 8, 2000 and called for semi-annual interest payments starting November 30, 2000, with all principal and interest due December 1, 2006. Under the terms of this agreement, the Authority was not required to make any principal or interest payments on this loan until November of 2008; and the intention is to not make principal or interest payments, except to the extent funds are available from the sale of this land. To date, $1,260,228 has been added to the original principal of the loan in the form of interest. As of June 30, 2014 the outstanding balance was $947,939. The loan is secured by a surety bond provided by Town Center Associates, L.L.C. in the full outstanding amount of the loan.

In November of 2012, the Authority approved the Phase V Development Agreement. This agreement specifies that the developer has an obligation to make payments to the City in an amount totaling $3,850,000 beginning in 2015. The developer’s payments can be offset by the real estate taxes generated by improvements constructed by the developer on Block 9 of Town Center (the remaining land purchased with loan discussed above).

In May 2013, the Authority approved extending the Town Center note payable to May 2014. The interest rate for the note is the LIBOR rate plus 1.70%. In April of 2014, the Authority approved extending the Town Center Note payable through April 2015. The interest rate for the note is the LIBOR rate plus 2.25%.

O. Compliance

Management believes the City has no violations of finance related legal and contractual provisions.

P. Public Facility Revenue Bonds and Associated VBDA Support Agreements

The Virginia Beach Development Authority (VBDA), a blended component unit of the City, issued Public Facility Revenue Bonds (PFRB), Series 2002A & B to finance the acquisition of a public parking facility for the Town Center Project - Phase I. The Series 2002 Bonds are limited obligations of the Authority, payable from certain payments to be made by the City pursuant to a Support Agreement dated June 1, 2002, as amended.

The Authority issued Public Facility Revenue Bonds, Series 2003, 2005A & B, and 2007A & B, to finance acquisition of three public parking garages and appurtenant structures for the Town Center Project – Phases II and III. In June 2014 the VBDA issued $20.5 million in Public Facility Revenue Bonds to purchase the Block 11 garage in Town Center- Phase V. It is anticipated that the VBDA will acquire the Block 11 garage with those funds by the end of 2014.

The Authority issued Public Facility Revenue Bonds, Series 2010B & C, Series 2012B, and 2014B to advance refund certain maturities of the previously issued PFRB series and its Lease Revenue Bonds, Series 1998.

A portion of the Public Facility Revenue Bonds, Series 2003, 2005A, 2007A, 2010A, Series 2012A, and 2014A was used to finance acquisition and construction of various capital improvements in the City of Virginia Beach.

The obligation of the City is subject to annual appropriation by the City Council and therefore, these bonds do not constitute a general obligation debt of the City or a pledge of the full faith and credit of the City. The bonds are limited obligations of the Authority, payable solely from payments made by the City pursuant to a Support Agreement dated September 1, 2003, as supplemented and amended.

B-69 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

7. ASSETS AND OBLIGATIONS UNDER LEASES

Operating Leases Governmental Activities

Social Services Facility

The City is leasing the Social Services Facility through a financing arrangement with the Virginia Beach Development Authority. Under the arrangement, the Authority issued $9,800,000 in tax-exempt Lease Revenue Bonds to finance the Facility. In June 2012, the remaining balance of the Lease Revenue Bonds for Social Services was refinanced with a public facility revenue bond.

The leasing arrangement allows additional rent of $50,000 to be paid semi-annually to be placed in a reserve to be used as needed for capital and structural improvements, maintenance and repair of the facility. These payments have been suspended temporarily, and will be reassessed annually, be to reinstated as needed for capital improvements.

8. DEPOSITS AND INVESTMENTS

Custodial credit risk – All cash of the City including the School Board Component Unit (excluding the School Board Activity Funds) is maintained in accounts collateralized in accordance with the Virginia Security for Public Deposits Act, Section 2.2-4400 et. seq. of the Code of Virginia or covered by Federal depository insurance.

The City has compensating balance arrangements with two financial institutions. Bank of America provides services to the City while a $3.5 million balance is maintained in a demand deposit account. A fluctuating checking balance based on monthly investment services is a requirement of Branch Banking & Trust (BB&T).

As of June 30, 2014, the City had the following investments. Except for the investments in the State Non Arbitrage Program (SNAP), Virginia Investment Pool (VIP), and Local Government Investment Pool (LGIP), all investments are in an internal investment pool. Weighted Average Fair Maturities Investment Type Value (in months) Certificates of Deposit $ 116,500,000 1.4 State Treasurer's Local Government Investment Pool (LGIP) 165,000,000 0.28 Virginia Investment Pool (VIP) 10,030,272 0.02 BB&T Insured Cash Sweep 100,039,944 0.17 Commercial Paper Disc. – Amortizing 57,916,450 0.3 U. S. Government Securities 63,000,000 1.84 State Non Arbitrage Program – SNAP 68,555,823 0.12

Total Fair Value $ 581,042,489 Portfolio Weighted Average Maturity 0.64

Reconciliation of total deposits and investments to the government-wide financial statements at June 30, 2014:

School Board Primary Component Government Unit Total Cash and Investments $ 293,810,246 $ 128,669,041 $ 422,479,287 Restricted Cash and Cash Equivalents 476,859,077 - 476,859,077 Fiduciary Funds 340,270 16,583,387 16,923,657 Total $ 771,009,593 $ 145,252,428 $ 916,262,021

Less: Cash on Deposit (335,219,532) Total Market Value of Investments at June 30, 2014 $ 581,042,489

B-70 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

8. DEPOSITS AND INVESTMENTS (continued)

Interest Rate Risk:

As a means of limiting its exposure to fair value loses arising from rising interest rates, the City’s investment policy limits maximum final stated maturities of investments to five years. In addition, the City will structure the investment portfolio so that securities mature to meet cash requirements and by investing operating funds primarily in shorter-term securities.

Investments of debt proceeds held by bond trustees are governed by provisions of the debt agreements. Reverse and escrow funds may be invested in securities exceeding five years to maturity if the maturities of such investments are made to coincide as nearly as practicable with the expected use of the funds.

The City assumes all investments will be held until maturity or until called at their par value. However, an investment may be sold at an earlier date to meet certain obligations or if the investment’s credit quality drops. This makes the City’s investments sensitive to market rate fluctuations. To mitigate the impact of market rate fluctuations, the City maintains enough liquidity to meet its short-term needs with a smaller portion invested in long-term government-sponsored organizations and high-quality corporate notes.

Credit Risk:

Credit risk is the risk an investor is subject to as a result of the credit quality of investments in debt securities. Statutes as well as the City’s investment policy authorize the City to invest in obligations of the United States or agencies thereof; the Commonwealth of Virginia or political subdivisions thereof; obligations of the International Bank for Reconstruction and Development (World Bank); the Asian Development Bank; the African Development Bank; commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Commercial Paper Record; bankers’ acceptance instruments; repurchase agreements which are collateralized with securities approved for direct investment; State Treasurer’s Local Government Investment Pool (LGIP); and corporate notes with at least a rating of Aa by Moody's or AA by Standard and Poor's.

The LGIP is an externally managed investment pool that is not registered with the Securities Exchange Commission but is managed as a “2a-7 like pool”. Pursuant to the Code of Virginia, the Treasury Board of the Commonwealth sponsors the LGIP and has delegated certain functions to the State Treasurer. The LGIP reports to the Treasury Board at their regularly scheduled monthly meetings. The LGIP values portfolio securities by the amortized cost method and on a monthly basis this valuation is compared to current market to monitor any variance. The fair value of the City’s position in the pool is the same as the value of the pool shares.

Custodial Credit Risks Investments – For an investment, this is the risk that, in the event of a failure of the counterparty, the City will not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. The City requires that all investments be clearly marked as to ownership and to the extent possible, be registered in the name of the City. In addition, the City pre-qualifies the financial institutions, brokers/dealers, intermediaries and advisors with which the City will do business.

The City’s rated debt investments as of June 30, 2014 were rated by Standard & Poor’s and Moody’s and/or an equivalent national rating organization and the ratings are presented below using the respective rating scale from both agencies.

AAA A1/P1/F1+

State Treasurer's Local Government Investment Pool (LGIP)$ 165,000,000 $ - U. S. Government Securities 63,000,000 - State Non Arbitrage Program (SNAP) 68,555,823 -

Concentration of Credit Risk: Concentration of credit risk represents the risk of investments in any one issue that represents five percent or more of investments. The City’s investment policy limits the amount it can invest in commercial paper and bankers’ acceptance instruments. By policy, investments in commercial paper are limited to 35% of the total available for investment, and not more than 5% of the total available for investment can be invested in any one issuing corporation. Bankers’ acceptance instruments shall not exceed 50% of the total investment portfolio’s book value on the date of acquisition. B-71 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

8. DEPOSITS AND INVESTMENTS (continued)

Credit Risk: (continued)

At June 30, 2014, investments in bankers’ acceptance instruments and U.S. Government Securities are recorded at fair value. All other investments are reported utilizing amortized cost due to maturity dates less than one year. The fair valuing of bankers’ acceptance instruments and U.S. Government Securities at June 30, 2014 resulted in a net increase of $302,924.

All City and School Board Funds participate in a centralized cash and investment pool. Interest earnings on investments are allocated to the appropriate funds based upon the average monthly cash balance of each fund. As of June 30, 2014, $21,884 in interest income was reported in designated funds and subsequently transferred to the General Fund.

9. COMMITMENTS AND CONTINGENCIES

A. Litigation

The City is a named defendant in litigation filed by parties concerning alleged personal injuries, property damage, and other causes of action. The City is vigorously defending all cases and expects no losses will be incurred which would have a material effect on the City's financial position.

B. Intergovernmental Grants, Entitlements, and Shared Revenues

Furthermore, the U.S. Congress passed legislation called the "Single Audit Act Amendment of 1996" which required most governmental recipients of federal assistance to have an annual independent organization-wide financial and compliance audit. The results thereof are incorporated in this report. The amounts, if any, of expenditures which may be disallowed by these audits cannot be determined at this time although the City expects such amounts, if any, to be immaterial.

C. City Manager Employment Contract

On December 6, 2011, City Council adopted an ordinance extending the contract of employment for the City Manager for the period December 1, 2011, through November 30, 2013. On August 27, 2013 City Council approved the extension of the City Manager’s contract through November 30, 2015. In the event the City Manager's employment is terminated by the City Council and certain conditions are met, the City Council must continue to compensate the former City Manager for a period of twelve months.

D. Salaries Payable

The outstanding School Board Component Unit Funds' amount represents salaries due (2 months) to schoolteachers who have opted to be paid over a twelve-month period, and to substitute and supplemental school personnel.

E. Landfill Closure

On August 8, 1984, the City entered into two agreements with Southeastern Public Service Authority of Virginia (SPSA). Under the first agreement, which continues until January 2018, the City agreed to use SPSA's solid waste disposal system to dispose of solid waste generated within and collected by the City. For this service, the City agreed to pay tipping fees to SPSA.

Under the second agreement, which expires December 31, 2015, the City agreed to accept at its sanitary landfill ash and process residue generated by SPSA's refuse derived fuel processing plant. For these disposal services, SPSA agreed to pay the City the reasonable costs incurred in operating the landfill, including all operating costs as well as capital expenditures relative to regulatory compliance. Federal and State laws and regulations require that a final cover be placed on the landfill site when it stops accepting waste and to perform maintenance and monitoring functions at the site for 30 years after closure. B-72 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

9. COMMITMENTS AND CONTINGENCIES (continued)

E. Landfill Closure (continued)

The total capacity of the developed cells at the landfill is 8.75 million tons. Future development will increase the total landfill capacity to 13.572 million tons. The City used 3.597 million tons prior to the date of the agreements (August 1984). Total usage to date has been estimated at 8.2 million tons.

To date, approximately 93.41 percent of the developed landfill has been used. Based on a 2012 study, the present value of the estimated cost for both closure and post-closure care is $29,466,875, an amount based on landfill capacity used to date. Until another cell of the landfill is opened, no additional estimated closure and post-closure care costs will be recognized, except for the effects of inflation, changes in estimates, changes in technology or changes in laws or regulations. This amount is reflected in the government-wide financial statements.

These estimates are subject to adjustment for inflation and to account for any changes in landfill conditions, regulatory requirements, technologies, or cost estimates. The City is required by law to submit a worksheet that demonstrates the ability to fund landfill closure and post-closure care costs.

F. Water Services Contract

The City and Norfolk have entered into a Water Services Contract effective July 1, 1993 expiring in the year 2030. The Services Contract establishes engineering, water quality, and operational standards for Norfolk to receive, convey, treat, and deliver Lake Gaston water to the City.

Norfolk is required to reset rates every two years based upon a cost of services study performed by an independent consulting firm that compares projected versus actual water expenses. On a biennial basis an adjustment is made based upon the actual costs incurred in the previous two years.

G. Encumbrances

Encumbrance accounting, the recording of purchase orders, contracts, and other monetary commitments in order to reserve an applicable portion of an appropriation is used as an extension of formal budgetary control by the City. At June 30, 2014 the City had outstanding encumbrances as follows:

General Fund Communications and Information Technology $ 1,948,143 General Government 2,088,334 Human Services 792,187 Libraries 703,762 Museums and Cultural Arts 1,245,793 Sandler Center for the Performing Arts 696,605 Police 443,415 Public Works 1,068,683 Parks and Recreation 452,404 Vehicle Replacement 397,541 Total General Fund $ 9,836,867 Capital Projects Fund Engineering and Highways $ 123,343,180 Buildings 17,995,190 Parks and Recreation 16,165,196 Coastal 2,080,684 Economic and Tourism 29,150,606 Total Capital Projects Fund $ 188,734,856 Nonmajor Special Revenue Funds 2,616,874 Total $ 201,188,597

B-73 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

10. INTERFUND BALANCES AND TRANSACTIONS, FUND RESULTS AND RECONCILIATIONS

A. Interfund Transfers

Interfund transfers for the year ended June 30, 2014 were made up of the following:

Nonmajor General Nonmajor Parking Internal Transfer To: Fund Governmental Enterprise Service Total General Fund $ - $ 7,592,690 -$ -$ $ 7,592,690 Capital Project 42,914,296 11,594,853 800,000 104,494 55,413,643 Storm Water Fund - 29,019 - - 29,019 Nonmajor Governmental 66,015,599 2,832,638 - - 68,848,237 Total $ 108,929,895 $ 22,049,200 $ 800,000 $ 104,494 $ 131,883,589

Purpose:

Transfers From General Fund:

$ 42,914,296 Capital Project Funds: Funding for Pay-As-You-Go Capital Project Funds. 66,015,599 Nonmajor Governmental Funds: Funding for Special Revenue Programs.

Transfers From Nonmajor Governmental Funds:

$ 7,592,690 General Fund: Special Revenue Funds, primarily surplus funds from Sandbridge TIF and Agriculture Reserve. 11,594,853 Capital Projects Funds: Funding for Pay-As-You Go Capital Projects. 29,019 Storm Water Fund: Funding for support of Storm Water operations. 2,832,638 Nonmajor Governmental Funds: Funding for support of existing programs

Transfer From Nonmajor Enterprise Funds:

$ 800,000 Capital Project Funds: Economic and Tourism.

Transfer From Internal Service Funds:

$ 104,494 Capital Project Funds: Funding for Communications System Capital.

B. Net Position Deficit

The following Primary Government fund has a deficit balance in equity at June 30, 2014:

Internal Service Fund: Risk Management $ 18,712,506

The deficit in the Risk Management Fund represents the actuarially estimated liability for future claims. The rate structure for the Risk Management Fund is continually being evaluated for adjustments thereto.

C. Accounting Changes, Restatements and Fund Combinations

The beginning fund balance of the General Fund was reclassified to reflect the addition of the Print Shop Internal Service Fund which was closed effective June 30, 2013. This fund has achieved its objective. The ending fund balance for this internal service fund will now be reflected as a portion of the unassigned fund balance for the General Fund. All activity will be reflected with the General Fund Financial Statements. As a result of this combination the beginning fund balance of the General Fund has been reclassified to reflect a balance of $188,889,282 (includes the addition of $216,220).

B-74 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

11. RISK MANAGEMENT

A. Primary Government Self-Insurance Program

The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City is also exposed to the risk of loss for employee medical benefits. These benefits are accounted for in the School Health Insurance Internal Service Fund. This fund accounts for and finances this joint self-insured program between the City and the School Board. During Fiscal Year 1973, the City established a Risk Management Fund (an internal service Fund) to account for and finance its uninsured risks of loss. Under this program, the Risk Management Fund provides coverage for up to a maximum of $1,000,000 for each workers’ compensation claim, $2,000,000 for each general and auto liability claim, $50,000 for each fire and property claim, and $2,000,000 for each public officials (errors and omissions) claim. The insurance coverage for each major category of risk is the same as those reported in the prior fiscal year. There have not been any reductions in commercial insurance coverage from the prior year and the amount of settlements applied against this coverage in each of the past three years did not exceed the commercial insurance. The City has $10 million of excess insurance coverage per claim and $20 million aggregate.

All funds of the City participate in the program (except for School Board Component Unit Funds) and make payments to the Risk Management Fund based on normal underwriting criteria and each agency’s loss experience. The City uses an actuary to aid in the determination of self-insurance liabilities.

The estimated claims and judgments liability of $25,462,274 reported in the Fund at June 30, 2014 is based on the requirements of Governmental Accounting Standards Board Statement No. 10, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. The City prepares a biannual update of the actuarial liability and believes the estimates contained in its latest actuarial analysis, dated June 30, 2013, substantially reflects estimated claims and judgments for the period ending June 30, 2014.

Beginning Claims & Changes Claims Balance at Liability in Estimates Payments Year-End 2012-2013 $ 23,584,444 $ 12,149,718 $ 10,271,888 $ 25,462,274 2013-2014 $ 25,462,274 $ 11,249,594 $ 11,249,594 $ 25,462,274

B. School Board Self-Insurance Program

The School Board is self-insured for a portion of its risks. This self-insurance coverage for Fire and Property Insurance is $100,000 per occurrence and 1% of the total insured value of the damaged covered property when such loss or damage results from a named storm (minimum deductible - $250,000 per occurrence); Boiler and Machinery is $10,000 per occurrence; School Leaders Liability (errors and omissions) is $350,000 per occurrence; Employee Dishonesty is $1,000 per occurrence; General Liability is $350,000 per occurrence; Vehicle Liability is $350,000 per occurrence; Vehicle Catastrophic Fleet Damage is $60,000 per occurrence; and Workers’ Compensation is $800,000 per occurrence.

Commercial insurance is purchased to cover the amount in excess of the above self-insured levels for specific losses. When economically feasible, commercial insurance is purchased to cover certain exposures completely. The amount of settlements did not exceed insurance coverage for each of the past three fiscal years.

The insurance coverage is substantially the same as in prior fiscal years, except for Fire and Property Insurance. During 2006, the coastal property insurance marketplace faced severe capacity restrictions as reinsurers recovered from catastrophic losses from Hurricanes Katrina and Rita. the property insurance program for the School Board was greatly affected due to the heavy coastal exposures. The insurance marketplace offered very little capacity for coverage limits and the premiums associated with this coverage were costly. A hurricane modeling study combined with a thorough analysis of insured buildings and their proximity to the water resulted in a considerable reduction in insurance coverage limits.

B-75 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

11. RISK MANAGEMENT (continued)

B. School Board Self-Insurance Program (continued)

Claims processing and payments for all insurance claims are made through commercial carriers and third-party administrators.

The School Board uses the information provided by the third-party administrators to aid in the determination of self- insurance liabilities. The computed liability as of June 30, 2014 is $7,896,000 (undiscounted) as follows:

Beginning -of Current-Year Balance at Fis cal Fis cal-Year Claims & Changes Claims Fis cal Year Liability in Estimates Payments Year-End 2012-2013 $ 7,886,000 $ 4,014,814 $ 4,628,814 $ 7,272,000 2013-2014 $ 7,272,000 $ 6,246,000 $ 5,622,000 $ 7,896,000

Effective January 1, 2000, the School Board established a self-insured health care benefits program for all School Board and City employees. Certain claims expenses paid on behalf of each employee during a single policy year are covered by excess loss insurance with a specific stop-loss limit of $500,000. The amount of settlements did not exceed insurance coverage for each of the past three fiscal years. Claims processing and payments for all health care claims are made through third-party administrators. The School Board uses the information provided by the third-party administrators and a health care benefits consultant to aid in the determination of self-insurance liabilities. The computed liability as of June 30, 2014 is $9,392,000 (undiscounted), as follows:

Beginning -of Current-Year Balance at Fiscal Fiscal-Year Claims & Changes Claims Fiscal Year Liability in Estimates Payments Year-End 2012-2013 $ 8,673,000 $ 129,897,947 $ 129,992,947 $ 8,578,000 2013-2014 $ 8,578,000 $ 136,996,000 $ 136,182,000 $ 9,392,000

C. Surety Bonds

All City employees, including employees of elected constitutional officers (Commissioner of the Revenue, Treasurer, Commonwealth's Attorney, Sheriff, Clerk of the Circuit Court), are bonded in favor of the City in the amount of $1,000,000. This bond is written by the Travelers Insurance Company.

The Commonwealth of Virginia has secured a blanket bond for the City Treasurer and Finance Director ($1,600,000) Commissioner of Revenue ($3,000) and the Sheriff ($30,000) which covers the bonds required by law or contract for the position they hold. The bond is written by Travelers Casualty and Surety Company of America.

The Commonwealth of Virginia also provides coverage through the “Faithful Performance of Duty Bond Plan” in the amount of $500,000 for the constitutional officers. This does take the place of a separate bond required by law or contract.

All School Board employees are covered by a faithful performance bond in the amount of $100,000 to protect the School Board in the event of fraudulent acts.

12. RETIREMENT

A. Virginia Retirement System

Plan Description

Name of Plan: Virginia Retirement System (VRS) Identification of Plan: Agent and Cost-Sharing, Multiple Employer Pension Plan Administering Entity: Virginia Retirement System (System)

B-76 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

12. RETIREMENT (continued)

A. Virginia Retirement System (continued)

Plan Description (continued)

The City is a separate cost-sharing pool within VRS, and makes contributions based on rates set by VRS’s actuarial calculations of the annual required contributions. All full-time, salaried permanent (professional) employees of public school divisions and employees of participating employers are automatically covered by VRS upon employment. Members earn one month of service credit for each month they are employed and they and their employer are paying contributions to VRS. Members are eligible to purchase prior public service, active duty military service, certain periods of leave and previously refunded VRS service as service credit in their plan.

Within the VRS Plan, the System administers three different benefit plans for local government employees – Plan 1, Plan 2, and, Hybrid. Each plan has different eligibility and benefit structures as set out in the table below:

VRS VRS HYBRID PLAN 1 PLAN 2 RETIREMENT PLAN

About VRS Plan 1 About VRS Plan 2 About the Hybrid Retirement Plan VRS Plan 1 is a defined benefit plan. VRS Plan 2 is a defined benefit plan. The Hybrid Retirement Plan The retirement benefit is based on a The retirement benefit is based on a combines the features of a defined member’s age, creditable service and member’s age, creditable service and benefit plan and a defined average final compensation at average final compensation at contribution plan. Most members retirement using a formula. retirement using a formula. hired on or after January 1, 2014 are Employees are eligible for VRS Plan Employees are eligible for VRS Plan in this plan, as well as VRS Plan 1 1 if their membership date is before 2 if their membership date is on or and VRS Plan 2 members who were July 1, 2010, and they were vested as after July 1, 2010, or their eligible and opted into the plan of January 1, 2013. membership date is before July 1, during a special election window. 2010, and they were not vested as of (See “Eligible Members”) January 1, 2013. • The defined benefit is based on a member’s age, creditable service and average final compensation at retirement using a formula.

• The benefit from the defined contribution component of the plan depends on the member and employer contributions made to the plan and the investment performance of those contributions.

• In addition to the monthly benefit payment payable from the defined benefit plan at retirement, a member may start receiving distributions from the balance in the defined contribution account, reflecting the contributions, investment gains or losses, and any required fees.

January 1, 2013. before July 1, 2010, and they were This includes: not vested as of January 1, 2013. • State employees* • School division employees Hybrid Opt-In Election Hybrid Opt-In Election • Political subdivision employees* VRS non-hazardous duty covered VRS Plan 2 members were allowed • Judges appointed or elected to an Plan 1 members were allowed to to make an irrevocable decision to original term on or after January 1, make an irrevocable decision to opt opt into the Hybrid Retirement Plan 2014 into the Hybrid Retirement Plan during a special election window • Members in VRS Plan 1 or VRS during a special election window held January 1 through April 30, Plan 2 who elected to opt into the held January 1 through April 30, 2014. plan during the election window 2014. held January 1-April 30, 2014; the The Hybrid Retirement Plan’s plan’s effective date for opt-in The Hybrid Retirement Plan’s effective date for eligible VRS Plan 2 members was July 1, 2014 effective date for eligible VRS Plan 1 members who opted in was July 1, members who opted in was July 1, 2014. *Non-Eligible Members 2014. Some employees are not eligible to If eligible deferred members returned participate in the Hybrid Retirement If eligible deferred members returned to work during the election window, Plan. They include: to work during the election window, they were also eligible to opt into the • Members of the State Police they were also eligible to opt into the Hybrid Retirement Plan. Officers’ Retirement System Hybrid Retirement Plan. (SPORS) Members who were eligible for an • Members of the Virginia Law Members who were eligible for an optional retirement plan (ORP) and Officers’ Retirement System optional retirement plan (ORP) and have prior service under VRS Plan 2 (VaLORS) had prior service under VRS Plan 1 were not eligible to elect the Hybrid • Political subdivision employees were not eligible to elect the Hybrid Retirement Plan and remain as VRS who are covered by enhanced Retirement Plan and remain as VRS Plan 2 or ORP. benefits for hazardous duty Plan 1 or ORP. employees

Retirement Contributions Retirement Contributions Retirement Contributions Members contribute up to 5% of Same as VRS Plan 1. A member’s retirement benefit is their compensation each month to funded through mandatory and their member contribution account voluntary contributions made by the through a pre-tax salary reduction. member and the employer to both Some school divisions and political the defined benefit and the defined subdivisions elected to phase in the contribution components of the plan. required 5% member contribution; Mandatory contributions are based all employees will be paying the full on a percentage of the employee’s 5% by July 1, 2016. Member creditable compensation and are contributions are tax-deferred until required from both the member and they are withdrawn as part of a the employer. Additionally, retirement benefit or as a refund. The members may choose to make employer makes a separate voluntary contributions to the actuarially determined contribution defined contribution component of to VRS for all covered employees. the plan, and the employer is VRS invests both member and required to match those voluntary B-78 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 employer contributions to provide contributions according to specified funding for the future benefit percentages. payment.

Creditable Service Creditable Service Creditable Service Creditable service includes active Same as VRS Plan 1. Defined Benefit Component: service. Members earn creditable Under the defined benefit service for each month they are component of the plan, creditable employed in a covered position. It service includes active service. also may include credit for prior Members earn creditable service for service the member has purchased or each month they are employed in a additional creditable service the covered position. It also may include member was granted. A member’s credit for prior service the member total creditable service is one of the has purchased or additional factors used to determine their creditable service the member was eligibility for retirement and to granted. A member’s total creditable calculate their retirement benefit. It service is one of the factors used to also may count toward eligibility for determine their eligibility for the health insurance credit in retirement and to calculate their retirement, if the employer offers the retirement benefit. It also may count health insurance credit. toward eligibility for the health insurance credit in retirement, if the employer offers the health insurance credit.

Defined Contributions Component: Under the defined contribution component, creditable service is used to determine vesting for the employer contribution portion of the plan.

Vesting Vesting Vesting Vesting is the minimum length of Same as VRS Plan 1. Defined Benefit Component: service a member needs to qualify Defined benefit vesting is the for a future retirement benefit. minimum length of service a Members become vested when they member needs to qualify for a future have at least five years (60 months) retirement benefit. Members are of creditable service. Vesting means vested under the defined benefit members are eligible to qualify for component of the Hybrid Retirement retirement if they meet the age and Plan when they reach five years (60 service requirements for their plan. months) of creditable service. VRS Members also must be vested to Plan 1 or VRS Plan 2 members with receive a full refund of their member at least five years (60 months) of contribution account balance if they creditable service who opted into the leave employment and request a Hybrid Retirement Plan remain refund. vested in the defined benefit component. Members are always 100% vested in the contributions that they make. Defined Contributions Component: Defined contribution vesting refers to the minimum length of service a member needs to be eligible to B-79 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

withdraw the employer contributions from the defined contribution component of the plan.

Members are always 100% vested in the contributions that they make.

Upon retirement or leaving covered employment, a member is eligible to withdraw a percentage of employer contributions to the defined contribution component of the plan, based on service. • After two years, a member is 50% vested and may withdraw 50% of employer contributions. • After three years, a member is 75% vested and may withdraw 75% of employer contributions. • After four or more years, a member is 100% vested and may withdraw 100% of employer contributions.

Distribution is not required by law until age 70½.

Average Final Compensation Average Final Compensation Average Final Compensation A member’s average final A member’s average final Same as VRS Plan 2. It is used in the compensation is the average of the compensation is the average of their retirement formula for the defined 36 consecutive months of highest 60 consecutive months of highest benefit component of the plan. compensation as a covered compensation as a covered employee. employee.

Service Retirement Multiplier Service Retirement Multiplier Service Retirement Multiplier The retirement multiplier is a factor Same as Plan1 for service earned, The retirement multiplier is 1.0%. used in the formula to determine a purchased or granted prior to January final retirement benefit. The 1, 2013. For non-hazardous duty For members that opted into the B-80 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 retirement multiplier for non- members the retirement multiplier is Hybrid Retirement Plan from VRS hazardous duty members is 1.7%. 1.65% for creditable service earned, Plan 1 or VRS Plan 2, the applicable The retirement multiplier for sheriffs purchased or granted on or after multipliers for those plans will be and regional jail superintendents is January 1, 2013. used to calculate the retirement 1.85%. The retirement multiplier of benefit for service credited in those eligible political subdivision plans. hazardous duty employees other than sheriffs and regional jail superintendents is 1.7% or 1.85% as elected by the employer.

Normal Retirement Age Normal Retirement Age Normal Retirement Age Age 65. Normal Social Security retirement Defined Benefit Component: age. Same as VRS Plan 2.

Defined Contribution Component: Members are eligible to receive distributions upon leaving employment, subject to restrictions.

Earliest Unreduced Retirement Earliest Unreduced Retirement Earliest Unreduced Retirement Eligibility Eligibility Eligibility Members who are not in hazardous Members who are not in hazardous Defined Benefit Component: duty positions are eligible for an duty positions are eligible for an Members are eligible for an unreduced retirement benefit at age unreduced retirement benefit when unreduced retirement benefit when 65 with at least five years (60 they reach normal Social Security they reach normal Social Security months) of creditable service or at retirement age and have at least five retirement age and have at least five age 50 with at least 30 years of years (60 months) of creditable years (60 months) of creditable creditable service. service or when their age and service service or when their age and service equal 90. equal 90. Hazardous duty members are eligible for an unreduced retirement benefit Hazardous duty members are eligible Defined Contribution Component: at age 60 with at least five years of for an unreduced retirement benefit Members are eligible to receive creditable service or age 50 with at at age 60 with at least five years of distributions upon leaving least 25 years of creditable service. creditable service or age 50 with at employment, subject to restrictions. least 25 years of creditable service.

Earliest Reduced Retirement Earliest Reduced Retirement Earliest Unreduced Retirement Eligibility Eligibility Eligibility Members may retire with a reduced Members may retire with a reduced Defined Benefit Component: benefit as early as age 55 with at benefit as early as age 60 with at Members may retire with a reduced least five years (60 months) of least five years (60 months) of benefit as early as age 60 with at creditable service or age 50 with at creditable service. least five years (60 months) of least 10 years of creditable service. creditable service.

Defined Contribution Component: Members are eligible to receive distributions upon leaving employment, subject to restrictions.

Cost-of-Living Adjustment Cost-of-Living Adjustment Cost-of-Living Adjustment (COLA) in Retirement (COLA) in Retirement (COLA) in Retirement The Cost-of-Living Adjustment The Cost-of-Living Adjustment Defined Benefit Component: B-81 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

(COLA) matches the first 3% (COLA) matches the first 2% Same as VRS Plan 2. increase in the Consumer Price Index increase in the CPI-U and half of any for all Urban Consumers (CPI-U) additional increase (up to 2%), for a Defined Contribution Component: and half of any additional increase maximum COLA of 3%. Not applicable. (up to 4%) up to a maximum COLA of 5%.

Eligibility: Eligibility: Eligibility: For members who retire with an Same as VRS Plan 1 Same as VRS Plan 1 and VRS Plan unreduced benefit or with a reduced 2. benefit with at least 20 years of creditable service, the COLA will go into effect on July 1 after one full calendar year from the retirement date.

For members who retire with a reduced benefit and who have less than 20 years of creditable service, the COLA will go into effect on July 1 after one calendar year following the unreduced retirement eligibility date.

Exceptions to COLA Effective Exceptions to COLA Effective Exceptions to COLA Effective Dates: Dates: Dates: The COLA is effective July 1 Same as VRS Plan 1 Same as VRS Plan 1 and VRS Plan following one full calendar year 2. (January 1 to December 31) under any of the following circumstances: • The member is within five years of qualifying for an unreduced retirement benefit as of January 1, 2013. • The member retires on disability. • The member retires directly from short-term or long-term disability under the Virginia Sickness and Disability Program (VSDP). • The member Is involuntarily separated from employment for causes other than job performance or misconduct and is eligible to retire under the Workforce Transition Act or the Transitional Benefits Program. • The member dies in service and the member’s survivor or beneficiary is eligible for a monthly death-in- service benefit. The COLA will go into effect on July 1 following one full calendar year (January 1 to December 31) from the date the monthly benefit begins.

B-82 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

Disability Coverage Disability Coverage Disability Coverage Members who are eligible to be Members who are eligible to be Eligible political subdivision and considered for disability retirement considered for disability retirement school division (including VRS Plan and retire on disability, the and retire on disability, the 1 and VRS Plan2 opt-ins) participate retirement multiplier is 1.7% on all retirement multiplier is 1.65% on all in the Virginia Local Disability service, regardless of when it was service, regardless of when it was Program (VLDP) unless their local earned, purchased or granted. earned, purchased or granted. governing body provides and employer-paid comparable program Most state employees are covered Most state employees are covered for its members. under the Virginia Sickness and under the Virginia Sickness and Disability Program (VSDP), and are Disability Program (VSDP), and are State employees (including VRS not eligible for disability retirement. not eligible for disability retirement. Plan 1 and VRS Plan2 opt-ins) participating in the Hybrid VSDP members are subject to a one- VSDP members are subject to a one- Retirement Plan are covered under year waiting period before becoming year waiting period before becoming the Virginia Sickness and Disability eligible for non-work related eligible for non-work related Program (VSDP), and are not disability benefits. disability benefits. eligible for disability retirement.

Hybrid members (including VRS Plan 1 and VRS Plan 2 opt-ins) covered under VSDP or VLDP are subject to a one-year waiting period before becoming eligible for non- work related disability benefits.

Purchase of Prior Service Purchase of Prior Service Purchase of Prior Service Members may be eligible to purchase Same as VRS Plan 1. Defined Benefit Component: service from previous public Same as VRS Plan 1. employment, active duty military service, an eligible period of leave or Defined Contribution Component: VRS refunded service as creditable Not applicable. service in their plan. Prior creditable service counts toward vesting, eligibility for retirement and the health insurance credit. Only active members are eligible to purchase prior service. When buying service, members must purchase their most recent period of service first. Members also may be eligible to purchase periods of leave without pay.

The System issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information for VRS. A copy of the most recent report may be obtained from the VRS website at http://www.varetire.org/Pdf/Publications/2013-annual-report.pdf, or by writing to the System’s Chief Financial Officer at P.O. Box 2500, Richmond, VA, 23218-2500.

B-83 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

12. RETIREMENT (continued)

A. Virginia Retirement System (continued)

Funding Policy

Plan members are required by Title 51.1 of the Code of Virginia (1950), as amended, to contribute 5.00% of their creditable compensation toward their retirement. All or part of the 5.00% member contribution may be assumed by the employer. Beginning July 1, 2012 new employees were required to pay the 5% member contribution. In addition, for existing employees, employers were required to begin making the employee pay the 5% member contribution. This could be phased in over a period up to 5 years and the employer is required to provide a salary increase equal to the amount of the increase in the employee paid member contribution.

In addition, the City and School Board are required to contribute the remaining amounts necessary to fund its participation in the VRS using the actuarial basis specified by the Code of Virginia and approved by the VRS Board of Trustees. The City and employees’ contribution rate for the fiscal year ended 2014 was 20.68% of annual covered payroll. The School Board (non-teacher employees) contribution rate for the fiscal year ended 2014 was 14.11% of annual covered payroll.

The School Board 2014 contribution to the VRS statewide teacher pool was $62,857,681. This amount represented 16.66% of annual covered payroll for 2014. The contribution for 2013 was $63,194,423 and 16.66% of annual covered payroll. The contribution for 2012 was $42,884,174 and 11.33%, of annual covered payroll. The actual contribution for each of these years was equal to the required contribution.

Annual Pension Cost

For the Fiscal Year ended 2014, the City’s annual pension cost of $53,239,952 was equal to the City’s actual contributions. For 2014, the School Board’s annual pension cost of $5,646,424 was equal to the School Board’s actual contributions.

Three-Year Trend Information for City of Virginia Beach

Net Pension Fiscal Year Annual Pension Percentage of Obligation Ending Cost (APC) APC Contributed (Assets)

City

June 30, 2014 $ 53,239,952 100.00% $ - June 30, 2013 $ 54,955,790 100.00% $ - June 30, 2012 $ 49,174,585 100.00% $ -

Virginia Beach Non-Teacher Employees

June 30, 2014 $ 5,646,424 100.00% -$ June 30, 2013 $ 5,686,650 100.00% -$ June 30, 2012 $ 4,488,305 100.00% -$

Virginia Beach School Teachers

June 30, 2014 $ 62,857,681 100.00% $ - June 30, 2013 $ 63,194,423 100.00% $ - June 30, 2012 $ 42,884,174 100.00% $ -

B-84 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

12. RETIREMENT (continued)

A. Virginia Retirement System (continued)

Annual Pension Cost (continued)

The FY 2014 required contribution was determined as part of the June 30, 2011 actuarial valuation using the entry age actuarial cost method. The actuarial assumptions at June 30, 2011 included (a) an investment rate of return (net of administrative expenses) of 7.0%, (b) projected salary increases ranging from 3.75% to 5.60% per year for general government employees, 3.75% to 6.20% per year for teachers, and 3.50% to 4.75% for employees eligible for enhanced benefits available to law enforcement officers, firefighters, and sheriffs, and (c) a cost-of-living adjustment of 2.50% per year for Plan 1 employees and 2.25% for Plan 2 employees. Both the investment rate of return and the projected salary increases include an inflation component of 2.50%. The actuarial value of the City’s assets is equal to the modified market value of assets. This method uses techniques that smooth the effects of short-term volatility in the market value of assets over a five-year period. The City’s unfunded actuarial accrued liability is being amortized as a level percentage of projected payrolls on an open basis. The remaining amortization period at June 30, 2011 for the Unfunded Actuarial Accrued Liability (UAAL) was 30 years.

Funded Status and Funding Progress

As of June 30, 2013 for the City, the most recent actuarial valuation date, the plan was 70.28% funded. The actuarial accrued liability for benefits was $1,676,863,639, and the actuarial value of assets was $1,178,523,280, resulting in an unfunded actuarial accrued liability (UAAL) of $498,340,359. The covered payroll (annual payroll of active employees covered by the plan) was $284,964,878, and the ratio of the UAAL to the covered payroll was 174.88%.

As of June 30, 2013 for the School Board, the most recent actuarial valuation date, the plan was 82.67% funded. The actuarial accrued liability for benefits was $191,185,052, and the actuarial value of assets was $158,045,061, resulting in an unfunded actuarial accrued liability (UAAL) of $33,139,991. The covered payroll (annual payroll of active employees covered by the plan) was $40,464,375, and the ratio of the UAAL to the covered payroll was 81.90%.

The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability (AAL) for benefits.

B. Sheriff’s Supplemental Retirement Plan

1. Plan Description

The Sheriff’s Supplemental Plan is a defined contribution pension plan established by the Sheriff and approved by City Council to provide additional retirement benefits to all full-time employees of the Sheriff who have at least one year of service. Benefits vest after five years of service. The city code of Virginia Beach, Virginia establishes a Deferred Compensation Board (“Board”) to supervise, administer and implement the Plan. *As of August 31, 2013 there were 508 participants in the plan.

Contributions to the plan are made from the Sheriff's Special Revenue Fund and are approved by City Council prior to the end of each plan year. Contributions cannot exceed an amount equal to 15 percent of the compensation of all participants during the year. Contributions shall be allocated to the participants’ accounts by the proportion of the participant’s base salary to total base salary of all participants. Participant contributions are not allowed. Contributions for the plan year ending August 31, 2013 were $12,024. *The employer’s expense for this defined contribution plan is equal to the above contributions for the period ending August 31, 2013. There is no employer liability as all approved contributions have been paid.

2. Significant Accounting Principles

Basis of Accounting. The Sheriff’s Supplemental Retirement Plan’s financial statements are prepared using the accrual basis of accounting. Employer contributions are recognized in the period that the contributions are due.

B-85 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

12. RETIREMENT (continued)

B. Sheriff’s Supplemental Retirement Plan (continued)

2. Significant Accounting Principles (continued)

Method Used to Value Investments. Investments are stated at fair value at August 31, 2011. The investment policy adopted by the Board sets forth the goals and objectives of the investment options available to the Plan. The Board chooses which investment options will be available under the Plan and will monitor the investments options’ compliance to the investment policy. The Plan’s authorized investments consist of funds in 9 major asset classes defined by either investment objective or risk category. The Plan’s investment policy states that the average duration of the portfolio will not exceed 5 years, as a means of managing its exposure to fair value losses arising from increasing interest rates.

The Plan limits its exposure to custodial credit risk by maintaining its investments in custodial accounts. Wells Fargo Bank, N.A. serves as custodian to the Plan. In addition, it manages it credit risk by monitoring the investment options offered to ensure they are operating in full accordance with their current published prospectus and their performance criteria is measured against the applicable performance standards as described in the investment policy. Exposure to concentrations of credit risk is managed by ensuring the Plan offers at least one fund in each of 9 major asset classes, as stated in the investment policy.

A stand-alone financial report can be obtained by contacting Sheriff Ken Stolle, City of Virginia Beach Sheriff’s Office, 2501 James Madison Avenue, Virginia Beach, VA 23456.

13. OTHER POSTEMPLOYMENT BENEFITS

Plan Description. The City and School Board Other Postemployment Benefit Plans are each a single-employer, defined benefit plan, administered by the City and School Board in accordance with State and City statutes. Section 15.2-1500 of the Virginia State Code provides that every locality shall provide for the governmental functions of the locality, including employment of the officers and other employees. In connection with this employment, the City has established certain plans to provide post-employment benefits other than pensions as defined in Section 15.2-1545 of the Virginia Code to retirees and their spouses and eligible dependents. Employees who retire with at least 25 years of service with the City and School Board as well those who retire on a work-related disability compensable under the Workers’ Compensation Act before age 65 are eligible for access to health insurance coverage. This benefit is payable until the retiree becomes eligible for Medicare.

Separate financial statements can be obtained from VML/VACO Finance, 1108 East Main Street, Suite 801, Richmond, VA 23219.

B-86 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

13. OTHER POSTEMPLOYMENT BENEFITS (continued)

benefit is payable until the retiree becomes eligible for Medicare. The City and School Board has determined that all current employees and retirees shall contribute to the cost of their health care coverage and no level of benefit shall be provided free of charge. The retiree contribution rate shall be based on the experience of the plan, the City’s and School Board’s annual contribution amount and the remaining premium cost. Annual OPEB Cost. For 2014, the City and School Board’s annual OPEB cost of $7,101,900 was equal to its required contribution. The City placed in its OPEB Trust a total of $1,043,800. The balance of the City’s annual OPEB cost was paid during the year for health insurance subsidies for current retirees. The School Board’s OPEB cost for 2014 totaled $6,041,800 and exceeded its annual required contribution of $5,700,900 by $340,900. This overage was withdrawn from the School Boards Trust Account and returned to the School Board. The City and School Board’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2014, 2013 and 2012 are presented below: City

Fiscal Year Annual OPEB Percentage of Annual Net OPEB Ended Cos t OPEB Cos t Contributed Oblig ation 6/30/2014 $ 7,101,900 100% $ - 6/30/2013 $ 8,871,000 100% $ - 6/30/2012 $ 8,714,600 100% $ -

School Board

Fiscal Year Annual OPEB Percentage of Annual Net OPEB Ended Cos t OPEB Cos t Contributed Oblig ation 6/30/2014 $ 5,700,900 100% $ - 6/30/2013 $ 7,858,100 100% $ - 6/30/2012 $ 7,721,500 100% $ -

Funded Status and Funding Progress. The funded status of the plan as of January 1, 2014, was as follows:

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplemental information following the notes to the financial statements, presents multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

B-87 CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

13. OTHER POSTEMPLOYMENT BENEFITS (continued)

In the January 1, 2014, actuarial valuation, for the years ending June 30, 2014 and 2015 the projected unit credit method was used. The actuarial assumptions included a 7.5% investment rate of return (net of administrative expenses) and an annual healthcare cost trend assumption of 5.9% initially, graded to 4.5% over 83 years with no projected salary increase assumed. An inflation rate assumption of 2.5% was incorporated in the actuarial valuation. Employer and retiree contributions are assumed to increase at the same rate as the medical cost trend assumptions. There were no additional postretirement benefit increases assumed. Unfunded actuarial accrued liabilities for each organization are being amortized as a level dollar amount over an open 30 year period. The remaining amortization period is 30 years.

B-88 This Page Intentionally Left Blank

B-89 REQUIRED

SUPPLEMENTAL

INFORMATION

(Unaudited)

B-90 VIRGINIA RETIREMENT SYSTEM REQUIRED SUPPLEMENTAL INFORMATION SCHEDULE OF FUNDING PROGRESS (UNAUDITED)

In accordance with the Governmental Accounting Standards Board, the following information is a required part of the basic financial statements.

B-91 CITY OF VIRGINIA BEACH REQUIRED SUPPLEMENTAL INFORMATION SCHEDULES OF FUNDING PROGRESS FOR VRS – UNAUDITED

City Employees

(a) (b) (b-a) (a/b) (c)

Unfunded Actuarial (Overfunded) Actuarial Accrued Accrued UAAL as a Actuarial Value of Liability Liability Funded Covered Percentage of Valuation Date Assets (AAL) (UAAL) Ratio Payroll Covered Payroll

June 30, 2013 $ 1,178,523,280 $ 1,676,863,639 $ 498,340,359 70.28% $ 284,964,878 174.88% June 30, 2012 $ 1,137,764,995 $ 1,659,201,183 $ 521,436,188 68.57% $ 283,727,245 183.78% June 30, 2011 $ 1,139,545,339 $ 1,579,038,961 $ 439,493,622 72.17% $ 275,816,830 159.34%

Virginia Beach Non-Teacher Employees

(a) (b) (b-a) (a/b) (c)

June 30, 2013 $ 158,045,061 $ 191,185,052 $ 33,139,991 82.67% $ 40,464,375 81.90% June 30, 2012 $ 153,700,081 $ 192,573,584 $ 38,873,503 79.81% $ 40,059,396 97.04% June 30, 2011 $ 155,756,190 $ 187,196,469 $ 31,440,279 83.20% $ 40,672,520 77.30%

Virginia Beach School Teachers

(a) (b) (b-a) (a/b) (c)

June 30, 2013 $ NA* $ NA* $ 728,802,096 62.0% $ 381,520,230 191.03% June 30, 2012 $ NA* $ NA* $ 816,243,577 62.4% $ 376,868,337 216.59% June 30, 2011 $ NA* $ NA* $ 701,200,990 66.6% $ 384,012,915 182.60% *NA=Not Available

Note: Source Virginia Retirement System (VRS) Actuarial Valuation Reports.

B-92 CITY OF VIRGINIA BEACH REQUIRED SUPPLEMENTAL INFORMATION SCHEDULES OF FUNDING PROGRESS Other Postemployment Benefits – UNAUDITED

City

(a) (b) (b-a) (a/b) (c)

January 1, 2010 $ 9,558,773 $ 79,295,953 $ 69,737,180 12.05% $ 285,407,357 24.40% January 1, 2012 $ 20,982,000 $ 93,542,000 $ 72,560,000 22.43% $ 283,026,400 25.64% January 1, 2014 $ 29,363,100 $ 83,582,300 $ 54,219,200 35.13% $ 290,297,000 18.68%

School Board

(a) (b) (b-a) (a/b) (c)

January 1, 2010 $ 8,648,413 $ 75,347,493 $ 66,699,080 11.50% $ 432,476,829 15.40% January 1, 2012 $ 17,306,300 $ 77,083,800 $ 59,777,500 22.45% $ 409,662,700 14.59% January 1, 2014 $ 23,164,800 $ 65,951,300 $ 42,786,500 35.12% $ 421,065,100 10.16%

Schedules of Employer Contributions

City

Year Ended Annual Required Percentage Date Contribution Contributed

June 30, 2012 $ 8,714,600 100% June 30, 2013 $ 8,871,000 100% June 30, 2014 $ 7,101,900 100%

School Board

Year Ended Annual Required Percentage Date Contribution Contributed

June 30, 2012 $ 7,721,500 100% June 30, 2013 $ 7,858,100 100% June 30, 2014 $ 5,700,900 100%

B-93 [THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX C

AUDITED FINANCIAL STATEMENTS OF THE STORM WATER UTILITY FUND FOR THE FISCAL YEAR ENDED JUNE 30, 2014

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ReportofIndependentAuditor

The Honorable Members of the City Council City of Virginia Beach, Virginia

ReportontheFinancialStatements We have audited the accompanying financial statements of the Storm Water Enterprise Fund of the City of Virginia Beach, Virginia (the “Fund”), as of and for the year ended June 30, 2014, and the related notes to the financial statements, as listed in the table of contents.

Management’sResponsibilityfortheFinancialStatements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’sResponsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the Specifications for Audits of Counties, Cities and Towns, issued by the Auditor of Public Accounts of the Commonwealth of Virginia. Those standards and specifications require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Storm Water Enterprise Fund of the City of Virginia Beach, Virginia, as of June 30, 2014, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.

C-1

EmphasisofMatter Other Information As discussed in Note 1, the financial statements present only the Storm Water Enterprise Fund of the City of Virginia Beach, Virginia and do not purport to, and do not present fairly the financial position of the City Virginia Beach, Virginia, as of June 30, 2014, the changes in its financial position, or, where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

OtherMatters Required Supplementary Information Management has omitted Management’s Discussion and Analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 21, 2014, on our consideration of the City of Virginia Beach, Virginia’s, which included the Storm Water Enterprise Fund of the City of Virginia Beach, Virginia, internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City of Virginia Beach, Virginia’s internal control over financial reporting and compliance.

Virginia Beach, Virginia December 5, 2014

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CITY OF VIRGINIA BEACH, VIRGINIA STORM WATER ENTERPRISE FUND STATEMENT OF NET POSITION JUNE 30, 2014

ASSETS Current Assets: Cash and Investments $ 15,781,707 Accounts Receivable - Net 6,004,886 Total Current Assets $ 21,786,593

Non-current Assets: Cash and Investments - Restricted $ 28,481,826 Capital Assets: Land 131,395,838 Utility System 199,844,845 Machinery and Equipment 10,930,440 Construction in Progress 3,931,211 Less: Accumulated Depreciation (54,333,614) Total Capital Assets $ 291,768,720 Total Non-current Assets $ 320,250,546 Total Assets $ 342,037,139

LIABILITIES Current Liabilities: Vouchers and Accounts Payable $ 546,419 Accrued Interest Payable 337,388 Construction Contracts Payable 1,784,384 Current Portion of Long-term Liabilities 1,622,550 Total Current Liabilities $ 4,290,741

Long-Term Liabilities (less current portion): Double Barrel and Revenue Bonds and Notes $ 23,380,000 Premium on Refunding Bonds 247,979 Accrued Compensated Leave 339,435 Total Long-Term Liabilities (less current portion) $ 23,967,414 Total Liabilities $ 28,258,155

NET POSITION Net Investment in Capital Assets $ 267,077,678 Restricted for Capital Projects 24,657,185 Restricted for Future Debt Service 2,040,008 Restricted for Operations 20,004,113 Total Net Position $ 313,778,984

The accompanying notes are an integral part of the financial statements.

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CITY OF VIRGINIA BEACH, VIRGINIA STORM WATER ENTERPRISE FUND STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION FOR THE YEAR ENDED JUNE 30, 2014

OPERATING REVENUES Charges for Services $ 37,029,104 Miscellaneous 33,167 Total Operating Revenues $ 37,062,271

OPERATING EXPENSES Personal Services $ 6,990,362 Fringe Benefits 2,487,288 Contractual Services 128,647 Internal Services 1,091,259 Other Charges 2,915,028 Land Structure Maintenance 1,754,139 Depreciation 4,110,897 Total Operating Expenses $ 19,477,620

OPERATING INCOME $ 17,584,651

NONOPERATING REVENUES (EXPENSES) Interest Income $ 88,253 From Federal Government 267,597 Gain From Sale of Assets 23,631 Interest and Fiscal Agent Fees (17,408) Total Nonoperating Revenues (Expenses) $ 362,073

INCOME BEFORE TRANSFERS $ 17,946,724

Transfers In 29,019

CHANGE IN NET POSITION $ 17,975,743

TOTAL NET POSITION - BEGINNING 295,803,241

TOTAL NET POSITION - ENDING $ 313,778,984

The accompanying notes are an integral part of the financial statements.

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CITY OF VIRGINIA BEACH, VIRGINIA STORM WATER ENTERPRISE FUND STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2014

CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from Customers and Users $ 36,372,820 Other Operating Cash Receipts 33,167 Cash Payments To Suppliers of Goods and Services (5,481,053) Cash Payments To Employees for Services (9,522,845) Net Cash Provided By Operating Activities $ 21,402,089

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Receipts from Other Funds $ 29,019

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Interest Paid on Long-term Debt $ (1,030,743) Acquisition and Construction of Capital Assets (16,908,259) Proceeds from Sale of Salvage 23,631 From Federal Government 267,597 Principal Paid on Capital Debt (1,232,016) Net Cash (Used) By Capital and Related Financing Activities $ (18,879,790)

CASH FLOWS FROM INVESTING ACTIVITIES: Interest and Dividends Received $ 88,253

Net Increase in Cash and Temporary Investments 2,639,571

Cash and Temporary Investments, July 1 41,623,962

Cash and Temporary Investments, June 30 $ 44,263,533

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Operating Income $ 17,584,651 Adjustments to Reconcile Operating Income to Net Cash Provided (Used) By Operating Activities: Depreciation 4,110,897 (Increase) Decrease in Accounts Receivable (656,284) Increase (Decrease) in Vouchers and Accounts Payable 408,020 Increase (Decrease) in Accrued Compensated Leave (45,195) Total Adjustments $ 3,817,438 Net Cash Provided By Operating Activities $ 21,402,089

The accompanying notes are an integral part of the financial statements.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Storm Water Enterprise Fund (the Fund) financial statements reflect the activity of the Department of Public Works Storm Water Division which owns and operates a storm water system serving the City of Virginia Beach, Virginia. These statements are a presentation of the Fund and not a presentation of the City as a primary government. Although separate financial statements have been presented for the Fund, they are also included in the City's Comprehensive Annual Financial Report ("CAFR") as an Enterprise Fund. The CAFR may be downloaded from the website http://www.vbgov.com/government/departments/finance/Pages/Financial-Reports.aspx

The following is a summary of the significant accounting policies for the Storm Water Enterprise Fund (the Fund) of the City of Virginia Beach:

A. Fund Financial Statements

The accounts of the City are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each Fund are accounted for with a separate set of self-balancing accounts which comprise its assets, liabilities, fund equity, revenues, expenditures or expenses, as appropriate. The Storm Water Enterprise Fund is reported as an Enterprise Fund.

Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where periodic determination of revenues earned, expenses incurred, and/or net income is deemed appropriate for capital maintenance, public policy, management control, accountability, or other purposes.

B. Basis of Accounting

Other Post Employment Benefits Plan financial statements are prepared using the accrual basis of accounting. The City’s retiree’s contributions are recognized in the period in which the contributions are due. Employer contributions are recognized when due and the City has made a formal commitment to provide the contributions. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan.

Unbilled Storm Water Fund accounts receivable for services provided through June 30 are included in the financial statements.

The principal operating revenues of the Storm Water Enterprise Fund are charges to customers for maintenance of the storm water management system. Storm Water utility fees are established by City Council. Operating expenses for the Fund include the personnel, contractual services, land structures and improvements, other charges, internal service charges and depreciation. All other revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. C-6

CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

C. Capital Assets

Capital assets include property, plant, equipment and the utility system and are recorded on the Statement of Net Position for the Fund. The Fund defines capital assets as assets with an initial, individual cost of more than $5,000.

The utility system in the Storm Water Enterprise Fund has been recorded at cost since July 1, 1993 and contributed capital asset additions have been recorded at their estimated fair market value in the year contributed as determined by the City's engineers.

Depreciation of exhaustible capital assets used by the Storm Water Enterprise Fund is recorded as an expense against operations and accumulated depreciation is reported on the Fund’s Statement of Net Position. Depreciation has been provided over the estimated useful lives using the straight line method of depreciation.

Depreciation on the utility system, based on costs described above, has been charged to operations and was computed as follows:

Utility System Storm Water …………………………………….5-50 years Buildings ………………………………………………………..40 years Machinery and Equipment………………………………………5-10 years Furniture and Fixtures …………………………………………..5-10 years

Interest incurred during the construction phase of capital assets of the Fund is included as part of the capitalized value of the assets constructed.

D. Accrued Compensated Leave

E. Use of Estimates

The preparation of the Fund’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

F. Miscellaneous

1. Cash and Investments

Cash invested at June 30 is included in the various cash accounts reflected in the financial statements. Investments are stated at amortized cost or at their fair value (Note 5). Interest earnings on investments are allocated to the appropriate funds based upon the average monthly cash balance of each fund. Qualified investments in State Treasurer’s LGIP, AIM and SNAP are reported at amortized cost. All others are reported at fair value (Note 5).

2. Other Charges

This category mainly consists of City of Virginia Beach General Fund charges (e.g., data processing, buildings and grounds maintenance, indirect costs) to the Fund.

3. Statement of Cash Flows

For purposes of the statements of cash flows, all highly liquid debt instruments and certificates of deposit, with a maturity of three months or less, are grouped into cash and temporary investments. The Fund participates in a centralized cash and investment pool and therefore, separate information on cash equivalents (i.e., investments with maturities of three months or less upon acquisition) for the fund is not applicable.

G. Net Position

The difference between assets and liabilities in the Storm Water Enterprise Fund Statement of Net Position must be labeled as net position. GAAP further require that net position be subdivided into three categories: net investment in capital assets, restricted net position, and unrestricted net position.

The Fund applies restricted resources first when expenses are incurred for purposes for which either restricted or unrestricted net position are available.

H. Long-Term Obligations

In the Storm Water Enterprise Fund, long-term debt and other long-term obligations are reported as liabilities in the Fund statement of net position. Bond premiums are deferred and amortized over the life of the bonds. Bonds issuance costs and Underwriters discount fees are expensed in the year incurred.

I. Restricted Assets - Cash and Investments

Certain proceeds of the Storm Water Enterprise Fund revenue bond issuance have been set aside in separate bank accounts as a reserve for future debt service payments. In addition, cash earmarked for system capital improvement construction is also included.

J. Restricted Net Position

Bond resolutions restrict the net position of the Storm Water Enterprise for operations. Additional net position restrictions have been established for capital construction and debt service.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

2. RECEIVABLES

Receivables for the Fund at June 30, 2014 consist of the following:

Accounts $ 6,022,736 Less: Allowance for Uncollectibles (17,850) Net Receivables $ 6,004,886

3. CAPITAL ASSETS

In accordance with the Fund’s accounting policies, Construction in Progress will not be transferred into the various capital asset accounts until substantially completed. Construction in Progress for the Fund is comprised of the following at June 30, 2014: Balance Balance July 1, 2013 Increases Decreases June 30, 2014 Capital Assets Not Being Depreciated: Land and Improvements $ 131,201,523 $ 194,315 $ - $ 131,395,838 Construction in Progress 5,306,202 16,091,419 17,466,410 3,931,211 Total Capital Assets Not Being Depreciated$ 136,507,725 $ 16,285,734 $ 17,466,410 $ 135,327,049

Other Capital Assets: Utility System $ 182,638,918 $ 17,205,927 $ - $ 199,844,845 Machinery and Equipment 9,586,488 1,635,464 291,512 10,930,440

Total Other Capital Assets at Historical Cost$ 192,225,406 $ 18,841,391 $ 291,512 $ 210,775,285

Total Capital Assets Being Depreciated, Net $ 141,711,177 $ 14,730,494 $ - $ 156,441,671 Storm Water Capital Assets, Net $ 278,218,902 $ 31,016,228 $ 17,466,410 $ 291,768,720

Construction in Progress

In accordance with the City’s accounting policies, these projects will not be transferred from Construction in Progress into the various capital asset accounts until substantially completed. Construction in Progress for the Fund is comprised of the following at June 30, 2014:

Expended through Outstanding Unobligated June 30, 2014 Commitments Balance Storm Water Projects $ 3,931,211 $ 14,294,992 $ 49,558,003

Interest on the construction debt incurred during the period of construction has been capitalized as part of the Utility System and is being amortized over the estimated useful life of the asset. During Fiscal Year ending June 30, 2014 interest was capitalized totaling $971,318. C-9

CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

4. LONG-TERM DEBT

A. A Summary of Changes In Long-Term Liabilities

Less/add Deferred Amounts: For Issuance Premiums 314,106 - 33,063 281,043 33,064 Total Bonds Payable $ 25,956,122 -$ $ 1,265,079 $ 24,691,043 $ 1,063,064

Accrued Compensation Leave 944,118 497,994 543,191 898,921 559,486 Storm Water Long-Term Debt $ 26,900,240 497,994$ $ 1,808,270 $ 25,589,964 $ 1,622,550

B. Bonds, Notes and Loans Payable

True Storm Outstanding Bond Issue/Purpose Dated Issue Amount Interest Wate r % Balance Revenue Bonds: 2010A Storm Water Revenue 11/16/2010 20,000,000 3.170505 100 $ 18,410,000 2010B Storm Water Refunding 11/16/2010 7,380,000 2.607102 100 6,000,000 Total Revenue Bonds $ 24,410,000

• Storm Water Enterprise Fund incurs 100% of debt service cost.

Defeased Debt - In prior years, the City defeased certain general obligation, public improvement, and public utility bonds by placing funds in irrevocable escrow accounts to provide for future debt service payments on the defeased debt. Accordingly, the escrow account assets and liabilities for the defeased debt are not included in the City's financial statements. At June 30, 2014, the outstanding balance of the defeased debt, including current year defeased debt, is $181.6 million, and is considered in-substance defeased.

C. A Summary of Annual Requirements to Amortize All Bonds

Annual Debt Service requirements to maturity for revenue bonds and notes are as follows:

Year Ending June 30 Principal Interest 2015 $ 1,030,000 $ 1,001,864 2016 1,055,000 981,014 2017 1,075,000 958,276 2018 1,095,000 932,506 2019 1,125,000 903,268 2020-2024 6,175,000 3,902,125 2025-2029 4,860,000 2,700,270 2030-2034 5,420,000 1,463,860 2035-2036 2,575,000 143,412 $ 24,410,000 $ 12,986,595

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

4. LONG-TERM DEBT (continued)

D. Storm Water Enterprise Revenue Bonds

Storm Water Revenue Bonds are obligations of the City, payable solely from pledged revenues of the System (Storm Water Enterprise Fund), subject to the prior application thereof to the payment of Operating Expenses. The City will fix, charge, collect and revise its fees, rates and other charges for the use of and for the services furnished by the system so as to produce revenues sufficient to meet its cash requirements each fiscal year.

E. Accrued Compensated Leave

The accrued compensated leave for the Fund is as follows at June 30, 2014:

Annual $ 703,953 Compensatory 41,828 Sick 153,140 Total $ 898,921

F. Authorized But Unissued Bonds

Purpose June 30, 2014

G. Revenue Covenants

Management believes the City is in compliance with all significant financial covenants contained in the various bond indentures, including those found in the Agreement of Trust dated January 1, 2000.

H. Compliance

Management believes the City has no violations of finance related legal and contractual provisions.

5. DEPOSITS AND INVESTMENTS

A. Pooled Cash

The City maintains a cash and investment pool for all funds. The Storm Water Enterprise Fund has a share of the pool, the amount being disclosed in the Fund’s statement of net position as cash and investments.

B. Deposits

Custodial credit risk – All cash of the City is maintained in accounts collateralized in accordance with the Virginia Security for Public Deposits Act, Section 2.2-4400 et. seq. of the Code of Virginia or covered by Federal depository insurance. C-11

CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

5. DEPOSITS AND INVESTMENTS (continued)

B. Deposits (continued)

Interest Rate Risk:

Credit Risk:

The City’s rated debt investments as of June 30, 2014 were rated by Standard & Poor’s and Moody’s and/or an equivalent national rating organization and the ratings are using the respective rating scale from both agencies rated AAA.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

5. DEPOSITS AND INVESTMENTS (continued)

Credit Risk: (continued)

Concentration of Credit Risk: Concentration of credit risk represents the risk of investments in any one issue that represents five percent or more of investments. The City’s investment policy limits the amount it can invest in commercial paper and bankers acceptance instruments. By policy, investments in commercial paper are limited to 35% of the total available for investment, and not more than 5% of the total available for investment can be invested in any one issuing corporation. Bankers’ acceptance instruments shall not exceed 50% of the total investment portfolio’s book value on the date of acquisition.

All City Funds participate in a centralized cash and investment pool. Interest earnings on investments are allocated to the appropriate funds based upon the average monthly cash balance of each fund.

6. COMMITMENTS AND CONTINGENCIES

A. Litigation

B. City Manager Employment Contract

On December 6, 2011, City Council adopted an ordinance extending the contract of employment for the City Manager for the period December 1, 2011, through November 30, 2013. On August 27, 2013 City Council approved the extension of the City Manager’s contract through November 30, 2015.In the event the City Manager's employment is terminated by the City Council and certain conditions are met, the City Council must continue to compensate the former City Manager for a period of twelve months.

7. INTERFUND BALANCES AND TRANSACTIONS, FUND RESULTS AND RECONCILIATIONS

Interfund Transfers

Interfund transfers for the year ended June 30, 2014 were made up of the following:

Enterprise Fund Transfers To: of the City Storm Water Fund $ 29,019 Total $ 29,019 Purpose:

Transfers From Nonmajor Governmental Fund:

$ 14,019 Storm Water Fund: Tourism Investment payment for support of Storm Water utility operations.

$ 15,000 Storm Water Fund: Town Center Special Service District support of Storm Water utility operations.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

8. RISK MANAGEMENT

Primary Government Self-Insurance Program

All funds of the City participate in the program and make payments to the Risk Management Fund based on normal underwriting criteria and each agency’s loss experience. The City uses an actuary to aid in the determination of self-insurance liabilities.

9. RETIREMENT

Virginia Retirement System

Plan Description

Name of Plan: Virginia Retirement System (VRS) Identification of Plan: Agent and Cost-Sharing, Multiple Employer Pension Plan Administering Entity: Virginia Retirement System (System)

VRS VRS HYBRID PLAN 1 PLAN 2 RETIREMENT PLAN About VRS Plan 1 About VRS Plan 2 About the Hybrid Retirement Plan VRS Plan 1 is a defined benefit plan. VRS Plan 2 is a defined benefit plan. The Hybrid Retirement Plan combines The retirement benefit is based on a The retirement benefit is based on a the features of a defined benefit plan member’s age, creditable service and member’s age, creditable service and and a defined contribution plan. Most average final compensation at average final compensation at members hired on or after January 1, retirement using a formula. Employees retirement using a formula. Employees 2014 are in this plan, as well as VRS are eligible for VRS Plan 1 if their are eligible for VRS Plan 2 if their Plan 1 and VRS Plan 2 members who membership date is before July 1, membership date is on or after July 1, were eligible and opted into the plan 2010, and they were vested as of 2010, or their membership date is during a special election window. (See January 1, 2013. before July 1, 2010, and they were not “Eligible Members”) vested as of January 1, 2013.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

• The defined benefit is based on a member’s age, creditable service and average final compensation at retirement using a formula.

• The benefit from the defined contribution component of the plan depends on the member and employer contributions made to the plan and the investment performance of those contributions.

Eligible Members Eligible Members Eligible Members Employees are in VRS Plan 1 if their Employees are in VRS Plan 2 if their Employees are in the Hybrid membership date is before July 1, membership date is on or after July Retirement Plan if their membership 2010, and they were vested as of 1, 2010, or their membership date is date is on or after January 1, 2014. January 1, 2013. before July 1, 2010, and they were This includes: not vested as of January 1, 2013. • State employees* • School division employees Hybrid Opt-In Election Hybrid Opt-In Election • Political subdivision employees* VRS non-hazardous duty covered VRS Plan 2 members were allowed • Judges appointed or elected to an Plan 1 members were allowed to to make an irrevocable decision to original term on or after January 1, make an irrevocable decision to opt opt into the Hybrid Retirement Plan 2014 into the Hybrid Retirement Plan during a special election window • Members in VRS Plan 1 or VRS during a special election window held January 1 through April 30, Plan 2 who elected to opt into the held January 1 through April 30, 2014. plan during the election window 2014. held January 1-April 30, 2014; the The Hybrid Retirement Plan’s plan’s effective date for opt-in The Hybrid Retirement Plan’s effective date for eligible VRS Plan 2 members was July 1, 2014 effective date for eligible VRS Plan 1 members who opted in was July 1, members who opted in was July 1, 2014. *Non-Eligible Members 2014. Some employees are not eligible to If eligible deferred members returned participate in the Hybrid Retirement If eligible deferred members returned to work during the election window, Plan. They include: to work during the election window, they were also eligible to opt into the • Members of the State Police they were also eligible to opt into the Hybrid Retirement Plan. Officers’ Retirement System Hybrid Retirement Plan. (SPORS) Members who were eligible for an • Members of the Virginia Law Members who were eligible for an optional retirement plan (ORP) and Officers’ Retirement System optional retirement plan (ORP) and have prior service under VRS Plan 2 (VaLORS) had prior service under VRS Plan 1 were not eligible to elect the Hybrid • Political subdivision employees were not eligible to elect the Hybrid Retirement Plan and remain as VRS who are covered by enhanced Retirement Plan and remain as VRS Plan 2 or ORP. benefits for hazardous duty Plan 1 or ORP. employees

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

Those employees eligible for an optional retirement plan (ORP) must elect the ORP plan or the Hybrid Retirement Plan. If these members have prior service under VRS Plan 1 or VRS Plan 2, they are not eligible to elect the Hybrid Retirement Plan and must select VRS Plan 1 or VRS Plan 2 (as applicable) or ORP. Retirement Contributions Retirement Contributions Retirement Contributions Members contribute up to 5% of Same as VRS Plan 1. A member’s retirement benefit is their compensation each month to funded through mandatory and their member contribution account voluntary contributions made by the through a pre-tax salary reduction. member and the employer to both Some school divisions and political the defined benefit and the defined subdivisions elected to phase in the contribution components of the plan. required 5% member contribution; Mandatory contributions are based all employees will be paying the full on a percentage of the employee’s 5% by July 1, 2016. Member creditable compensation and are contributions are tax-deferred until required from both the member and they are withdrawn as part of a the employer. Additionally, retirement benefit or as a refund. The members may choose to make employer makes a separate voluntary contributions to the actuarially determined contribution defined contribution component of to VRS for all covered employees. the plan, and the employer is VRS invests both member and required to match those voluntary employer contributions to provide contributions according to specified funding for the future benefit percentages. payment. Creditable Service Creditable Service Creditable Service Creditable service includes active Same as VRS Plan 1. Defined Benefit Component: service. Members earn creditable Under the defined benefit service for each month they are component of the plan, creditable employed in a covered position. It service includes active service. also may include credit for prior Members earn creditable service for service the member has purchased or each month they are employed in a additional creditable service the covered position. It also may include member was granted. A member’s credit for prior service the member total creditable service is one of the has purchased or additional factors used to determine their creditable service the member was eligibility for retirement and to granted. A member’s total creditable calculate their retirement benefit. It service is one of the factors used to also may count toward eligibility for determine their eligibility for the health insurance credit in retirement and to calculate their retirement, if the employer offers the retirement benefit. It also may count health insurance credit. toward eligibility for the health insurance credit in retirement, if the employer offers the health insurance credit. Defined Contributions Component: Under the defined contribution component, creditable service is C-16

CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

used to determine vesting for the employer contribution portion of the plan.

Vesting Vesting Vesting Vesting is the minimum length of Same as VRS Plan 1. Defined Benefit Component: service a member needs to qualify Defined benefit vesting is the for a future retirement benefit. minimum length of service a Members become vested when they member needs to qualify for a future have at least five years (60 months) retirement benefit. Members are of creditable service. Vesting means vested under the defined benefit members are eligible to qualify for component of the Hybrid Retirement retirement if they meet the age and Plan when they reach five years (60 service requirements for their plan. months) of creditable service. VRS Members also must be vested to Plan 1 or VRS Plan 2 members with receive a full refund of their member at least five years (60 months) of contribution account balance if they creditable service who opted into the leave employment and request a Hybrid Retirement Plan remain refund. vested in the defined benefit component. Members are always 100% vested in the contributions that they make. Defined Contributions Component: Defined contribution vesting refers to the minimum length of service a member needs to be eligible to withdraw the employer contributions from the defined contribution component of the plan.

Members are always 100% vested in the contributions that they make.

Distribution is not required by law until age 70½.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

Calculating the Benefit Calculating the Benefit Calculating the Benefit The Basic Benefit is calculated based See definition under VRS Plan 1. Defined Benefit Component: on a formula using the member’s See definition under VRS Plan 1 average final compensation, a retirement multiplier and total Defined Contribution Component: service credit at retirement. It is one The benefit is based on contributions of the benefit payout options made by the member and any available to a member at retirement. matching contributions made by the employer, plus net investment An early retirement reduction factor earnings on those contributions. is applied to the Basic Benefit if the member retires with a reduced retirement benefit or selects a benefit payout option other than the Basic Benefit. Average Final Compensation Average Final Compensation Average Final Compensation A member’s average final A member’s average final Same as VRS Plan 2. It is used in the compensation is the average of the compensation is the average of their retirement formula for the defined 36 consecutive months of highest 60 consecutive months of highest benefit component of the plan. compensation as a covered compensation as a covered employee. employee. Service Retirement Multiplier Service Retirement Multiplier Service Retirement Multiplier The retirement multiplier is a factor Same as Plan1 for service earned, The retirement multiplier is 1.0%. used in the formula to determine a purchased or granted prior to January final retirement benefit. The 1, 2013. For non-hazardous duty For members that opted into the retirement multiplier for non- members the retirement multiplier is Hybrid Retirement Plan from VRS hazardous duty members is 1.7%. 1.65% for creditable service earned, Plan 1 or VRS Plan 2, the applicable The retirement multiplier for sheriffs purchased or granted on or after multipliers for those plans will be and regional jail superintendents is January 1, 2013. used to calculate the retirement 1.85%. The retirement multiplier of benefit for service credited in those eligible political subdivision plans. hazardous duty employees other than sheriffs and regional jail superintendents is 1.7% or 1.85% as elected by the employer. Normal Retirement Age Normal Retirement Age Normal Retirement Age Age 65. Normal Social Security retirement Defined Benefit Component: age. Same as VRS Plan 2.

Defined Contribution Component: Members are eligible to receive distributions upon leaving employment, subject to restrictions. Earliest Unreduced Retirement Earliest Unreduced Retirement Earliest Unreduced Retirement Eligibility Eligibility Eligibility Members who are not in hazardous Members who are not in hazardous Defined Benefit Component: duty positions are eligible for an duty positions are eligible for an Members are eligible for an unreduced unreduced retirement benefit at age 65 unreduced retirement benefit when retirement benefit when they reach with at least five years (60 months) of they reach normal Social Security normal Social Security retirement age creditable service or at age 50 with at retirement age and have at least five and have at least five years (60 least 30 years of creditable service. years (60 months) of creditable service months) of creditable service or when or when their age and service equal 90. their age and service equal 90.

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CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

Hazardous duty members are eligible Hazardous duty members are eligible Defined Contribution Component: for an unreduced retirement benefit at for an unreduced retirement benefit at Members are eligible to receive age 60 with at least five years of age 60 with at least five years of distributions upon leaving creditable service or age 50 with at creditable service or age 50 with at employment, subject to restrictions. least 25 years of creditable service. least 25 years of creditable service.

Defined Contribution Component: Members are eligible to receive distributions upon leaving employment, subject to restrictions.

Cost-of-Living Adjustment Cost-of-Living Adjustment Cost-of-Living Adjustment (COLA) in Retirement (COLA) in Retirement (COLA) in Retirement The Cost-of-Living Adjustment The Cost-of-Living Adjustment Defined Benefit Component: (COLA) matches the first 3% (COLA) matches the first 2% Same as VRS Plan 2. increase in the Consumer Price Index increase in the CPI-U and half of any for all Urban Consumers (CPI-U) additional increase (up to 2%), for a Defined Contribution Component: and half of any additional increase maximum COLA of 3%. Not applicable. (up to 4%) up to a maximum COLA of 5%.

Exceptions to COLA Effective Dates: Exceptions to COLA Effective Exceptions to COLA Effective The COLA is effective July 1 Dates: Dates: following one full calendar year Same as VRS Plan 1 Same as VRS Plan 1 and VRS Plan (January 1 to December 31) under 2. any of the following circumstances:

• The member is within five years of qualifying for an unreduced C-19

CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

retirement benefit as of January 1, 2013. • The member retires on disability. • The member retires directly from short-term or long-term disability under the Virginia Sickness and Disability Program (VSDP). • The member Is involuntarily separated from employment for causes other than job performance or misconduct and is eligible to retire under the Workforce Transition Act or the Transitional Benefits Program. • The member dies in service and the member’s survivor or beneficiary is eligible for a monthly death-in- service benefit. The COLA will go into effect on July 1 following one full calendar year (January 1 to December 31) from the date the monthly benefit begins.

Hybrid members (including VRS Plan 1 and VRS Plan 2 opt-ins) covered under VSDP or VLDP are subject to a one-year waiting period before becoming eligible for non- work related disability benefits.

CITY OF VIRGINIA BEACH, VIRGINIA NOTES TO FINANCIAL STATEMENTS STORM WATER ENTERPRISE FUND JUNE 30, 2014

VRS refunded service as creditable Defined Contribution Component: service in their plan. Prior creditable Not applicable. service counts toward vesting, eligibility for retirement and the health insurance credit. Only active members are eligible to purchase prior service. When buying service, members must purchase their most recent period of service first. Members also may be eligible to purchase periods of leave without pay.

Additional detail related to the retirement plan can be found in the City’s CAFR.

10. OTHER POSTEMPLOYMENT BENEFITS

Plan Description. The City’s Other Postemployment Benefit Plans is each a single-employer, defined benefit plan, administered by the City in accordance with State and City statutes. Section 15.2-1500 of the Virginia State Code provides that every locality shall provide for the governmental functions of the locality, including employment of the officers and other employees. In connection with this employment, the City has established certain plans to provide post-employment benefits other than pensions as defined in Section 15.2-1545 of the Virginia Code to retirees and their spouses and eligible dependents. Employees who retire with at least 25 years of service with the City as well those who retire on a work-related disability compensable under the Workers’ Compensation Act before age 65 are eligible for access to health insurance coverage. This benefit is payable until the retiree becomes eligible for Medicare.

Separate financial statements can be obtained from VML/VACO Finance, 1108 East Main Street, Suite 801, Richmond, VA 23219.

In accordance with Article 8, Chapter 15, Subtitled II of Title 15.2 of the Virginia Code, the City has elected to establish a trust for the purpose of accumulating and investing assets to fund Other Postemployment Benefits. The City in accordance with this election has joined the Virginia Pooled OPEB Trust Fund which invests funds contributed by each participating employer. It does not administer the retiree health benefits of each participating employer. Deposits to this trust are irrevocable and are held solely for the payment of OPEB benefits for the City.

Additional detail related to other postemployment benefits plan can be found in the City’s CAFR.

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APPENDIX D

INFORMATION REGARDING THE DEPOSITORY TRUST COMPANY AND ITS BOOK-ENTRY SYSTEM

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INFORMATION REGARDING THE DEPOSITORY TRUST COMPANY AND ITS BOOK-ENTRY SYSTEM

The description which follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Series 2015 Bonds, payments of principal of and premium, if any and interest on the Series 2015 Bonds to The Depository Trust Company, New York, New York (“DTC”), its nominee, Participants or Beneficial Owners (each as hereinafter defined), confirmation and transfer of beneficial ownership interests in the Series 2015 Bonds and other bond-related transactions by and between DTC, Participants and Beneficial Owners is based solely on information furnished by DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (the “Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of the Series 2015 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2015 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (the “Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2015 Bonds are to be accomplished by entries made on the books of Direct or Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2015 Bonds, except in the event that use of the book-entry system for the Series 2015 Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of the Series 2015 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2015 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

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Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Series 2015 Bonds are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2015 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City or the Registrar as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2015 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Series 2015 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or the Registrar, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Direct or Indirect Participant and not of DTC, the City or the Registrar, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Series 2015 Bonds at any time by giving reasonable notice to the City or the Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates will be printed and delivered.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof.

The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, either a successor securities depository will be selected by the City or Bond certificates will be printed, executed and delivered.

In the event of insolvency of DTC, if DTC has insufficient securities in its custody (e.g., due to theft or loss) to satisfy the claims of its Direct Participants with respect to deposited securities and is unable by application of (i) cash deposits and securities Pledged to DTC to protect DTC against losses and liabilities, (ii) the proceeds of insurance maintained by DTC and/or its Direct Participants or Indirect Participants, or (iii) other resources, to obtain securities necessary to eliminate the insufficiency, no assurances can be given that Direct Participants will be able to obtain all of their deposited securities.

NEITHER THE CITY NOR THE REGISTRAR HAS ANY RESPONSIBILITY OR OBLIGATION TO THE DIRECT OR INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (A) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DIRECT OR INDIRECT PARTICIPANT; (B) THE PAYMENT BY ANY DIRECT OR INDIRECT PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE SERIES 2015 BONDS; (C) THE DELIVERY OR TIMELINESS OF DELIVERY BY ANY DIRECT OR INDIRECT PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE RESOLUTION TO BE GIVEN TO BONDHOLDERS; OR (D) ANY OTHER ACTION TAKEN BY DTC, OR ITS NOMINEE, CEDE & CO., AS BONDHOLDER, INCLUDING THE EFFECTIVENESS OF ANY ACTION TAKEN PURSUANT TO AN OMNIBUS PROXY.

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The City may enter into amendments to the agreement with DTC or successor agreements with a successor securities depository, relating to the book-entry system to be maintained with respect to the Series 2015 Bonds without the consent of Beneficial Owners or Bondholders.

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APPENDIX E

SUMMARY OF AGREEMENT OF TRUST

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SUMMARY OF AGREEMENT OF TRUST

The following is a summary of certain provisions contained in the Agreement of Trust and does not purport to be a complete statement of all of the provisions of the Agreement of Trust. Reference is made to the Agreement of Trust in its entirety for complete information on its terms and the terms of the Series 2015 Bonds, the security provisions and the application of Pledged Revenues. See also the sections entitled “Description of the Series 2015 Bonds” and “Security for and Sources of Payment of the Series 2015 Bonds” contained in the Official Statement.

Definitions

Unless defined elsewhere in this Official Statement, the following terms as used in the Agreement of Trust shall have the following meanings:

“2015 Project” shall mean improvements to and expansions of the System financed with the proceeds of the Series 2015 Bonds.

“Account” shall mean any of the various Accounts created within a Fund under the Agreement of Trust.

“Annual Operating Budget” shall mean the budget by that name referred to in the Agreement of Trust.

“Authorized Representative of the City” shall mean such person or persons as may be designated to act on behalf of the City by a certificate executed by the City Manager or the Director of Finance and on file with the City Clerk and the Trustee.

“Authorized Representative of Public Works” shall mean such person or persons as may be designated to act on behalf of the Department of Public Works of the City by a certificate executed by the Director of such Department and on file with the City Clerk and the Trustee.

“Bond Anticipation Notes” shall mean any notes issued in anticipation of the issuance of Bonds.

“Bond Counsel” shall mean an attorney or firm of attorneys nationally recognized on the subject of municipal bonds.

“Bond Fund” shall mean the Bond Fund established in the Agreement of Trust.

“Bond Year” shall mean a twelve month period beginning on the day following a Principal Payment Date and ending on the following Principal Payment Date.

“Bondholders” or “holders” of Bonds shall mean the registered owners of Bonds.

“Bonds” shall mean any bonds, notes or other obligations issued from time to time pursuant to the Agreement of Trust (including, without limitation, the Series 2015 Bonds and the City’s Storm Water Utility Revenue Bonds, Series 2010A-1 (Tax-Exempt), City’s Storm Water Utility Revenue Bonds, Series 2010A-2 (Taxable-Build America Bonds), and City’s Storm Water Utility Revenue Bonds, Series 2010B (Tax-Exempt)), but shall not include Parity Double Barrel Bonds, Prior Bonds, Subordinate Double Barrel Bonds or Subordinate Debt.

“Business Day” shall mean a day on which banking business is transacted, but not including a Saturday, Sunday or legal holiday, or any day on which banking institutions are authorized by law to close in the Richmond, Virginia.

“Capital Improvement Account” shall mean the Capital Improvement Account within the Revenue Fund established in the Agreement of Trust.

“Code” shall mean the Internal Revenue Code of 1986, as amended, including applicable regulations, rulings and revenue procedures promulgated or applicable thereunder.

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“Commonwealth” shall mean the Commonwealth of Virginia.

“Construction Fund” shall mean the Construction Fund established in the Agreement of Trust.

“Consulting Engineer” shall mean (a) an Independent Consulting Engineer or (b) the City Engineer or the bureau chief of storm water engineering of the Department of Public Works of the City, or the corresponding officer of any successor department, who is (1) an engineer experienced in the field of storm water engineering and (2) licensed and registered as a professional engineer in the Commonwealth.

“Cost” or “Cost of a Project” shall mean the Cost of a Project as set forth in the Agreement of Trust.

“Council” shall mean the City Council as the governing body of the City.

“Debt Service Reserve Fund” shall mean the Debt Service Reserve Fund established in the Agreement of Trust.

“Debt Service Reserve Requirement” shall mean an amount, required to be maintained in the Debt Service Reserve Fund, which shall be equal to the least of (a) the maximum principal and interest due on the Bonds in the current or any future Fiscal Year, (b) 10% of the original stated principal amount of the Bonds (or 10% of the issue price of the Bonds if required by the Code) or (c) 125% of the average annual principal and interest due on the Bonds in the current and each future Fiscal Year; provided, however, if measuring (a), (b) and (c) separately for each Outstanding Series of Bonds would require a lower aggregate amount to be on deposit in order for the Debt Service Reserve Fund to remain a reasonably required reserve or replacement fund under the Code, then such lower aggregate amount shall be the Debt Service Reserve Requirement.

“Defeased Obligations” shall mean obligations of any state or territory of the United States or any political subdivision thereof which obligations are rated in the highest rating category by the Rating Agencies and which meet the following requirements: (a) the obligations are not subject to redemption or the fiduciary holding such obligations has been given irrevocable instructions to call such obligations for redemption and the issuer has covenanted not to redeem such obligations other than as set forth in such instructions, (b) the obligations are secured by cash or Government Obligations, Government Certificates or other Defeased Obligations (which are not subject to redemption other than at the option of the holder thereof) that may be applied only to principal, premium and interest payments of such obligations, (c) the principal of and interest on the Government Obligations, Government Certificates or other Defeased Obligations (plus any cash held in escrow) are sufficient to meet the liabilities of the obligations, (d) the Government Obligations, Government Certificates or other Defeased Obligations serving as security for such obligations are held by a bank or trust company acting as escrow agent, and (e) the Government Obligations, Government Certificates or Defeased Obligations are not available to satisfy any other claims, including those against the bank or trust company acting as escrow agent.

“Event of Default” shall mean any of the events enumerated in the Agreement of Trust.

“Fiscal Year” shall mean the twelve-month period beginning on July 1 of one year and ending on June 30 of the following year, or such other fiscal year of twelve months as may be selected by the City.

“Fitch” shall mean Fitch IBCA, Inc., New York, New York, or its successors.

“Fund” shall mean the Revenue Fund, Bond Fund, Parity Double Barrel Bond Fund, Debt Service Reserve Fund, Subordinate Debt Fund or any other fund created under the Agreement of Trust.

“Government Certificates” shall mean certificates representing proportionate ownership of Government Obligations, which Government Obligations are held by a bank or trust company organized under the laws of the United States of America or any of its states in the capacity of custodian of such certificates.

“Government Obligations” shall mean (a) bonds, notes and other direct obligations of the United States of America, (b) securities unconditionally guaranteed as to the timely payment of principal, if applicable, and interest by the United States of America or (c) bonds, notes and other obligations of any agency of the United States of

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America unconditionally guaranteed as to the timely payment of principal and interest by the United States of America.

“Independent Consulting Engineer” shall mean an independent engineer experienced in the field of storm water engineering and licensed and registered as a professional engineer in the Commonwealth.

“Interest Account” shall mean the Interest Account in the Bond Fund established in the Agreement of Trust.

“Interest Payment Date” shall mean each date on which interest on any Series of Bonds is due.

“Letter of Representations” shall mean the Blanket Letter of Representations dated June 17, 1996, from the City to the Securities Depository and any amendments thereto or successor agreements between the City and any successor Securities Depository, relating to a book-entry system to be maintained by the Securities Depository with respect to the Series 2015 Bonds. Notwithstanding any provision of the Agreement of Trust, the Trustee may enter into any such amendment or successor agreement without the consent of Bondholders.

“Maximum Annual Additional Parity Debt Service” shall mean the maximum amount required to be deposited in the Parity Double Barrel Bond Fund on account of principal of (whether at maturity or by mandatory sinking fund redemption) and interest on Parity Double Barrel Bonds in the then current or any future Fiscal Year. For purposes of calculating Maximum Annual Additional Parity Debt Service, the assumptions set forth in sections (a) through (e) of the definition of Maximum Annual Debt Service are to be used to calculate the principal and interest coming due in any Fiscal Year. There are no longer any Parity Double Barrel Bonds outstanding; therefore, “Maximum Annual Additional Parity Debt Service” is zero.

“Maximum Annual Debt Service” shall mean the maximum amount payable on account of principal of (whether at maturity or by mandatory sinking fund redemption) and interest on the Bonds in the then current or any future Fiscal Year. For purposes of calculating Maximum Annual Debt Service, the following assumptions are to be used to calculate the principal and interest coming due in any Fiscal Year:

(a) in determining the principal amount due in each Fiscal Year, payment shall be assumed to be made in accordance with any amortization schedule established for such debt (unless a different subsection of this definition applies for purposes of determining principal maturities or amortization), including any scheduled redemption of Bonds on the basis of accreted value and, for such purpose, the redemption payment shall be deemed a principal payment and, further, payment shall be assumed to be made at the time deposits are required to be made to the Bond Fund;

(b) if any Outstanding Bonds or any Bonds proposed to be issued would constitute Tender Indebtedness, then Maximum Annual Debt Service on the options or obligations of the holders of such Bonds to tender the same for purchase or payment prior to their stated maturity or maturities shall be treated as a principal maturity occurring on the first date on which owners of such Bonds may or are required to tender such Bonds, except that any such option or obligation to tender Bonds shall be ignored and not treated as a principal maturity if (1) such Bonds are rated in one of the two highest long-term rating categories (without regard to any rating refinement or gradation by numerical modifier or otherwise) by a Rating Agency or such Bonds are rated in the highest short-term, note or commercial paper rating categories by a Rating Agency, and (2) any obligation the City may have, other than its obligation on such Bonds, to reimburse any extender of a credit or liquidity facility or a bond insurance policy, or similar arrangement, shall either be subordinated to the obligation of the City on the Bonds or shall have been incurred under and shall have met the tests and conditions for the issuance of Bonds set forth in this Agreement;

(c) if any Outstanding Bonds constitute Variable Rate Indebtedness, the interest rate on such Bonds shall be assumed to be 110% of the greater of (1) the daily average interest rate on such Bonds during the 12 months ending with the month preceding the date of calculation, or such shorter period that such Bonds shall have been Outstanding, or (2) the rate of interest on such Bonds on the date of calculation;

(d) if any Bonds proposed to be issued would constitute Variable Rate Indebtedness, then such Bonds shall be assumed to bear interest at the rate quoted in The Bond Buyer 25 Revenue Bond Index as published in The

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Bond Buyer, for the last week of the month preceding the date of sale of such Bonds, or if that index is no longer published, a similar index selected by the City that is generally accepted in the municipal bond industry, or if the City fails to select a replacement index, an interest rate equal to 80% of the yield for outstanding United States Treasury Bonds having an equivalent maturity as the Bonds proposed to be issued, or if there are no such Treasury Bonds having equivalent maturities, 80% of the lowest prevailing prime rate of any of the five largest commercial banks in the United States of America ranked by assets; and

(e) if moneys, Government Obligations or Government Certificates have been irrevocably deposited with a bank or trust company acting as escrow agent to be used to pay principal and/or interest on specified Bonds, then the principal and/or interest to be paid from such moneys or obligations or from the earnings thereon shall be disregarded and not included in the calculation of Maximum Annual Debt Service.

Notwithstanding anything in the Agreement of Trust to the contrary, for purposes of the definition of Maximum Annual Debt Service, Bonds shall not include Bond Anticipation Notes or notes issued in anticipation of revenues of the System.

“Moody’s” shall mean Moody’s Investors Service, New York, New York, or its successors.

“Net Proceeds” shall mean the gross proceeds from any insurance recovery or recovery in any condemnation proceeding remaining after payment of attorneys’ fees, fees and all other documented expenses incurred in collection of such gross proceeds.

“Operating Expenses” shall mean all current expenses directly or indirectly attributable to the ownership or operation of the System, including reasonable and necessary usual expenses of administration, operation, maintenance and repair, costs for billing and collecting the rates, fees and other charges for the use of or the services furnished by the System, insurance and surety bond premiums, legal, engineering, auditing and financial advisory expenses, expenses and compensation of the Trustee and deposits into a self-insurance program as described in the Agreement of Trust. Operating Expenses shall not include any allowance for depreciation, deposits or transfers to the Bond Fund, the Parity Double Barrel Fund, the Debt Service Reserve Fund, the Subordinate Debt Fund or the Capital Improvement Account or expenditures for capital improvements to and extensions of the System.

“Opinion of Counsel” shall mean an opinion of any attorney or firm of attorneys acceptable to the Trustee, who may be counsel for the City but shall not be a full-time employee of either the City or the Trustee.

“Outstanding” or “Outstanding Bonds” shall mean, at any date, the aggregate of all Bonds authorized, issued, authenticated and delivered under the Agreement of Trust, except:

(a) Bonds canceled or surrendered to the Registrar for cancellation;

(b) Bonds deemed to have been paid as provided in Section 1001;

(c) Bonds in lieu of or in substitution for which other Bonds shall have been authenticated and delivered pursuant to this Agreement unless proof satisfactory to the Registrar is presented that any such Bond is held by a bona fide holder; and

(d) Bonds, the principal of which have become due, and moneys sufficient for their payment have been deposited with the Trustee as provided in the Agreement of Trust.

In determining whether holders of a requisite aggregate principal amount of the Outstanding Bonds have concurred in any request, demand, authorization, direction, notice, consent or waiver under the Agreement of Trust, words referring to or connoting “principal of” or “principal amount of” Outstanding Bonds shall be deemed also to be references to, to connote and to include the accreted value of Bonds of any Series as of the immediately preceding interest compounding date for such Bonds. Bonds that are owned by the City shall be disregarded and deemed not to be Outstanding for the purpose of any such determination.

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“Parity Double Barrel Bond Fund” shall mean the Parity Double Barrel Bond Fund established pursuant to the Agreement of Trust. There are no Parity Double Barrel Bonds outstanding; therefore, no Parity Double Barrel Bond Fund is held.

“Parity Double Barrel Bonds” shall mean any bonds, notes or other obligations issued by the City which have pledged to their payment (a) Pledged Revenues on a parity with the Outstanding Bonds and (b) the full faith, credit and taxing power of the City. There are no Parity Double Barrel Bonds currently outstanding.

“Parity Double Barrel Term Bonds” shall mean any Parity Double Barrel Bonds required to be redeemed in part prior to maturity according to a sinking fund schedule. There are no Parity Double Barrel Term Bonds currently outstanding.

“Parity Obligations” shall mean the Bonds and the Parity Double Barrel Bonds.

“Pledged Revenues” shall mean (i) System Revenues and (ii) any other money from other sources pledged by the City to the payment of its obligations hereunder.

“Principal Account” shall mean the Principal Account in the Bond Fund established in the Agreement of Trust.

“Principal Payment Date” shall mean each date on which principal of any Series of Bonds matures or is subject to mandatory sinking fund requirements.

“Prior Bonds” shall mean the City’s currently outstanding General Obligation Public Improvement Refunding Bonds, Series of 1993, and General Obligation Public Improvement Refunding Bonds, Series of 2008A. There are no such Prior Bonds currently outstanding.

“Project” shall mean (a) the acquisition, construction or equipping of storm water facilities which are to become part of the System, including any improvements, extensions, additions, replacements, equipment and appurtenances to or for the benefit of the System, or (b) any storm water capacity or service (which service is required to be capitalized or which the City properly elects to capitalize) which is to be acquired by the City and which capacity or service is to become part of the System.

“Public Finance Act” shall mean the Public Finance Act of 1991, Sections 15.2-2600 et seq. of the Virginia Code or any successor provision of law.

“Qualified Independent Consultant” shall mean an independent professional consultant having the skill and experience necessary to provide the particular certificate, report or approval required by the provision of the Agreement of Trust or any Supplemental Agreement in which such requirement appears, including an Independent Consulting Engineer and an independent certified public accountant.

“Rating Agency” or “Rating Agencies” shall mean Fitch, Moody’s or Standard & Poor’s, or any of them, and their successors and assigns. The City may appoint any nationally recognized securities rating agency in addition to or as a replacement for Fitch, Moody’s or Standard & Poor’s.

“Rebate Amount Certificate” shall have the meaning set forth in the Agreement of Trust.

“Registrar” shall mean U.S. Bank National Association or any successors serving as such under the Agreement of Trust.

“Residual Account” shall mean the Residual Account established in the Agreement of Trust.

“Revenue Fund” shall mean the Revenue Fund established in the Agreement of Trust.

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“Securities Depository” shall mean The Depository Trust Company, a corporation organized and existing under the laws of the State of New York, and any other securities depository for the Bonds appointed pursuant to the Agreement of Trust, and their successors.

“Series” or “Series of Bonds” shall mean a separate series of Bonds issued under the Agreement of Trust and a Supplemental Agreement.

“Standard & Poor’s” shall mean Standard & Poor’s Rating Group, a Division of McGraw-Hill, Inc., New York, New York, or its successors.

“Subordinate Debt” shall mean any bonds, notes or other obligations issued in connection with the System that have pledged to their payment Pledged Revenues as a junior lien pledge after the pledge of Pledged Revenues to Parity Obligations. Subordinate Debt may also include, at the option of the City (i) Subordinate Double Barrel Bonds, (ii) Prior Bonds and (iii) debt service reserve funds, if any, securing such obligations.

“Subordinate Double Barrel Bonds” shall mean any bonds, notes or other obligations issued by the City, including Prior Bonds, which have pledged to their payment (a) Pledged Revenues as a junior lien pledge after the pledge of such Pledged Revenues to the Bonds and (b) the full faith, credit and taxing power of the City. There are no Subordinate Double Barrel Bonds currently outstanding.

“Supplemental Agreement” shall mean any Supplemental Agreement supplementing or modifying the provisions of the Agreement of Trust entered into by the City and the Trustee pursuant to the Agreement of Trust.

“System” shall mean all plants, systems, facilities, equipment or property owned, in whole or in part, acquired, operated or maintained by or on behalf of the City from time to time, together with all future extensions, improvements, enlargements and additions thereto, and all replacements thereof, used in connection with the collection or disposal of storm water.

“System Revenues” shall mean (i) all moneys received as fees, rates, charges, income and money properly allocable to the System in accordance with generally accepted accounting principles or resulting from the City’s ownership or operation of the System, (ii) the proceeds of any insurance covering business interruption loss relating to the System and (iii) interest on any money or securities related to the System held by or on behalf of the City.

“Tender Indebtedness” shall mean any indebtedness a feature of which is an option or obligation on the part of the holders of such indebtedness to tender all or a portion of such indebtedness to a fiduciary for mandatory purchase or redemption prior to the stated maturity date of such indebtedness, which may include Variable Rate indebtedness with such a feature.

“Term Bonds” shall mean any Bonds stated to mature on a specified date and required to be redeemed in part prior to maturity according to a sinking fund schedule.

“Trustee” shall mean First Union National Bank, Richmond, Virginia, or its successors serving as such under the Agreement of Trust. As of the date of issuance of the Series 2015 Bonds, U.S. Bank National Association is acting as successor Trustee under the Agreement of Trust.

“Utility Transfers” shall mean annual transfers from the Residual Account to the City’s general fund, as may be approved by the City Council. Utility Transfers are to reimburse the City for administrative expenses incurred by the City in operating the System.

“Variable Rate Indebtedness” shall mean any indebtedness the interest rate on which is not established at the time of incurrence at a fixed or constant rate.

“Virginia Code” shall mean the Code of Virginia of 1950, as amended.

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General; Application of Proceeds of Bonds

The Agreement of Trust authorizes the issuance of the Bonds by the City, establishes the form and details of the Bonds and makes provision for their execution, authentication, delivery, registration and exchange.

The Bonds and the payment of principal, premium, if any, and interest required to be made on them are not obligations of the Trustee, and the Trustee has no responsibility or liability to make such payments, except that the Trustee is required under the Agreement of Trust and the Bonds to make payments from Pledged Revenues and certain funds established under the Agreement of Trust.

The Agreement of Trust provides that the proceeds from the purchase of the Bonds be deposited with the City and used to pay the Costs of a Project, including the 2015 Project, to make a deposit to the Interest Account in the Bond Fund in the amount equal to accrued interest on a Series of Bonds, and to pay certain costs of issuance of such Series of Bonds. The City will disburse moneys from the Construction Fund from time to time upon the Director of Finance’s receipt of a written requisition in the form prescribed under the Agreement of Trust.

Payment of Bonds and Other Obligations

The Registrar shall promptly pay when due the principal of and interest on the Bonds at the places, on the dates and in the manner provided in the Agreement of Trust and in the Bonds and all other amounts required under the Agreement of Trust, but only to the extent that moneys are on deposit in the Bond Fund or the Construction Fund or other moneys are available under the Agreement of Trust.

Issuance of Bonds

The Agreement of Trust permits the City to issue Bonds (a) to pay the Cost of a Project, including the Cost of the 2015 Project, (b) to pay the costs of planning or investigating the feasibility of a Project, (c) to refund any bonds secured by or payable from Pledged Revenues, including any Bonds, or (d) a combination of such purposes. Each Series of Bonds and Parity Double Barrel Bonds will be secured by Pledged Revenues. Before the issuance and authentication of any Series of Bonds certain conditions specified in the Agreement of Trust must be met, including certain assurances of the sufficiency of Pledged Revenues to pay Operating Expenses of the System, Maximum Annual Debt Service and Maximum Annual Additional Parity Debt Service.

Among the required conditions set forth in the Agreement of Trust permitting the issuance of Bonds are:

(a) in the case of Bonds issued to pay the Cost of a Project, the following:

(1) A written statement of the Consulting Engineer setting forth the Consulting Engineer’s (A) estimate of the Cost of such Project (including all financing and related costs) and the date on which such Project will be completed and (B) opinion that the proceeds of such Bonds, together with any other moneys available for such purpose, will be sufficient to pay the Cost of such Project.

(2) Evidence that upon issuance of such Bonds the amount to be held in the Debt Service Reserve Fund will be adjusted as necessary to account for any resulting change in the Debt Service Reserve Requirement; and

(3) A certificate of a Qualified Independent Consultant stating that based on the City’s financial records for the prior Fiscal Year the City is able to meet the following two independent requirements:

(A) Pledged Revenues were sufficient to equal the sum of (i) Operating Expenses in such prior Fiscal Year, (ii) 115% of Maximum Annual Debt Service, and (iii) 100% of Maximum Annual Additional Parity Debt Service, immediately after the issuance of such Bonds; provided, however:

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(aa) if the City has approved an increase in its rates, fees and other charges and such rates, fees and other charges went into effect after the beginning of the prior Fiscal Year or are scheduled to go into effect within two years after the issuance of such Bonds, the Qualified Independent Consultant may assume that such rates, fees and other charges were in effect for the entire term of the prior Fiscal Year; and

(bb) the Qualified Independent Consultant may assume that the customer base at the end of the prior Fiscal Year was the customer base for the entire term of the Prior Fiscal Year.

(B) System Revenues were sufficient to meet the requirement in the Agreement of Trust for such prior Fiscal Year.

There are no Parity Double Barrel Bonds currently outstanding; therefore, “Maximum Annual Additional Parity Debt Service” is currently zero.

(b) in the case of Bonds issued to refund any bonds, as authorized by the Agreement of Trust, the following:

(1) Evidence that the City has made provision as required by the Agreement of Trust for the payment or redemption of all bonds to be refunded;

(2) A written determination by the Trustee, which may be given in reliance on a certificate of an independent verification agent or an independent public accountant, that the proceeds (excluding accrued interest) of such Bonds, together with any other moneys deposited with the Trustee for such purpose and the investment income to be earned on moneys held for the payment or redemption of the bonds to be refunded, will be sufficient to pay either (A) the principal of and the premium, if any, on the Indebtedness to be refunded and the interest which will accrue on such bonds to the respective redemption or maturity dates or (B) the principal and interest on the refunding Bonds to a date certain, at which time such proceeds, moneys and earnings will be sufficient to pay the principal of and the premium, if any, on the bonds to be refunded and the interest which will accrue on such bonds to the respective redemption or maturity dates; and

(3) Either (A) a written determination by the Trustee or a Qualified Independent Consultant that after the issuance of such Bonds and the provision for payment or redemption of all bonds to be refunded, the annual debt service requirements for each Fiscal Year in which there will be Outstanding Bonds of any Series not to be refunded will be not more than what the annual debt service requirements for such Fiscal Year would have been on all Bonds Outstanding immediately prior to the issuance of such Bonds, including the bonds to be refunded, and that the final maturity of any Series of Bonds being refunded has not been extended or (B) a certificate as described in subsection (a)(3) above.

Subordinate Debt

The City may at any time issue Subordinate Debt and pledge Pledged Revenues thereto so long as rates, fees and charges are in effect or scheduled to go into effect to meet the rate covenant set forth in the Agreement of Trust immediately after the issuance of such Subordinate Debt.

Revenue Covenant

The Agreement of Trust contains a rate covenant as described in the section entitled “Security for and Sources of Payment of the Series 2015 Bonds – Revenue Covenant” in the Official Statement.

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Establishment of Funds and Accounts

The Agreement of Trust establishes the following Funds and Accounts to be held as indicated:

(a) City of Virginia Beach Storm Water System Construction Fund, to be held by the City;

(b) City of Virginia Beach Storm Water System Revenue Fund, in which there are established a Revenue Account, a Capital Improvement Account and a Residual Account, to be held by the City;

(c) City of Virginia Beach Storm Water System Bond Fund, in which there are established an Interest Account and a Principal Account, to be held by, or at the direction of, the City;

(d) City of Virginia Beach Storm Water System Parity Double Barrel Bond Fund, in which there are established an Interest Account and a Principal Account, to be held by, or at the direction of, the City;

(e) City of Virginia Beach Storm Water System Debt Service Reserve Fund, to be held by the Trustee; and

(f) City of Virginia Beach Storm Water System Subordinate Debt Fund, to be held by, or at the direction of, the City.

Construction Fund. The Construction Fund will be applied to the payment of the Cost of a Project, including the costs of issuing Bonds. The Director of Finance shall make payments from the Construction Fund upon receipt of requisitions signed by an Authorized Representative of Public Works, providing certain required information with respect to the use of the amounts being requisitioned. Any balance remaining in the Construction Fund after completion of the Project in excess of the amount to be reserved for the payment of unpaid items of the Cost of a Project shall be transferred (1) to the Debt Service Reserve Fund if the amount on deposit therein is less than the Debt Service Reserve Requirement, (2) then to the Interest Account in the Bond Fund if the amount on deposit therein is less than the amount required to comply with the Agreement of Trust, (3) then to the Principal Account in the Bond Fund if the amount on deposit therein is less than the amount required to comply with the Agreement of Trust, and (4) then otherwise to the Capital Improvement Account.

Revenue Fund. The City shall collect and deposit Pledged Revenues in the Revenue Account in the Revenue Fund as soon as practicable but in no event less than semi-annually. Moneys in the Revenue Fund shall be used only in the manner and priority set forth below.

The City shall pay Operating Expenses as they become due from moneys on deposit in the Revenue Account in accordance with the Annual Operating Budget. After retaining in the Revenue Account an amount equal to the estimated amount of Operating Expenses for the next succeeding two months, as provided in the Annual Operating Budget, the City shall transfer from the Revenue Account moneys in the following order of priority:

(a) to the Bond Fund, an amount sufficient to make the following deposits:

(1) first, to the subaccount established for each Series of Bonds in the Interest Account, such amount, if any, as may be required to make the total amount on deposit therein equal to the amount of interest that will become due on the respective Series of Bonds on the Interest Payment Dates occurring within the applicable Bond Year, taking into account transfers from other funds and accounts created under the Agreement of Trust; and

(2) then, to the subaccount established for each Series of Bonds in the Principal Account, such amount, if any, as may be required to make the total amount on deposit therein equal to the amount of principal of the respective Series of Bonds maturing or Term Bonds required to be redeemed pursuant to any sinking fund requirement on the next Principal Payment Date;

(b) to the Parity Double Barrel Bond Fund, an amount not less than is necessary to make the following deposits:

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(1) first, to the subaccount established for each Series of Bonds in the Interest Account in the Parity Double Barrel Bond Fund, such amount, if any, as may be required to make the total amount on deposit therein equal to the amount of interest which will become due on each issue of Parity Double Barrel Bonds within the current Fiscal Year;

(2) then, to the subaccount established for each Series of Bonds in the Principal Account in the Parity Double Barrel Bond Fund, such amount, if any, as may be required to make the total amount on deposit therein equal to the amount of principal of each issue of Parity Double Barrel Bonds maturing or Parity Double Barrel Term Bonds required to be redeemed pursuant to any sinking fund requirement within the current Fiscal Year;

(c) to the Trustee for deposit in the Debt Service Reserve Fund, such amount, if any, necessary to increase the amount on deposit in the Debt Service Reserve Fund to the amount of the Debt Service Reserve Requirement, including amounts necessary to reimburse the provider of any credit facility for draws on such facility;

(d) to the Subordinate Debt Fund such amount, if any, of principal of and interest on Subordinate Debt coming due in the next succeeding month; provided, however, that if any Subordinate Debt is payable other than on a monthly basis, the City may provide for monthly deposits to the Subordinate Debt Fund to amortize such amounts;

(e) to the Capital Improvement Account the annual amount budgeted for deposit into the Capital Improvement Account (or such lesser amount if the entire amount is not available in the Revenue Account, in which event the balance shall be transferred from the Residual Account); and

(h) to the Residual Account any amount remaining in the Revenue Account.

Notwithstanding anything in the Agreement of Trust to the contrary, at any time the City is required to make transfers pursuant to subsections (a) and (b) above, and there are insufficient moneys in the Revenue Account to make all required transfers pursuant to such subsections, the City shall make the transfers ratably from moneys available in the Revenue Account.

Further, in the event the Trustee is required to send notice of a draw from the Debt Service Reserve Fund pursuant to the Agreement of Trust, the City shall immediately transfer control of the funds and accounts described in subsections (a) and (b) above to the Trustee who, thereafter, shall hold and administer such funds and accounts for the remaining term of the Agreement of Trust. In addition, if the Trustee is not then serving as Registrar, the Registrar shall immediately transfer and deliver all books and records in its possession to the Trustee, and the Trustee shall serve as Registrar for the remaining term of the Agreement of Trust.

Bond Fund. The City shall pay to the Registrar when due the principal of and interest on the Bonds from the Principal Account and the Interest Account, respectively.

The Registrar shall provide for redemption of any Term Bonds in accordance with the schedules set forth in the Supplemental Agreement for such Bonds; provided, however, that on or before the 70th day next preceding any such sinking fund payment date, the City may:

(a) deliver to the Registrar for cancellation Term Bonds required to be redeemed on such sinking fund payment date in any aggregate principal amount desired; or

(b) instruct the Registrar to apply a credit against the City’s next sinking fund redemption obligation for any such Term Bonds that previously have been redeemed (other than through the operation of the sinking fund) and canceled but not theretofore applied as a credit against any sinking fund redemption obligation.

Upon the occurrence of any of the events described in subsections (a) or (b) above, the Registrar shall credit against the City’s sinking fund redemption obligation on the next sinking fund payment date the amount of such Term Bonds so delivered or previously redeemed. Any principal amount of such Term Bonds in excess of the principal amount required to be redeemed on such sinking fund payment date shall be similarly credited in such

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order as may be determined by the City Manager or Director of Finance against future payments from the Revenue Fund to the Principal Account within the Bond Fund and shall similarly reduce the principal amount of the Term Bonds of the applicable Series to be redeemed on the next sinking fund payment date. Within seven days of receipt of such Term Bonds or instructions to apply as a credit, any amounts remaining in the Principal Account in excess of the amount required to fulfill the remaining required sinking fund redemption obligation on the next sinking fund payment date shall either (1) be used to redeem Bonds or (2) be transferred to the City for deposit to the Revenue Fund.

In the event the balance in the Principal Account or the Interest Account is insufficient for the purposes thereof, the City shall deposit in such Accounts such amounts as may be necessary therefor from available moneys in the Revenue Account and then from the Residual Account. In the event the balance in the Principal or the Interest Account is still insufficient for the purposes thereof, the City shall notify the Trustee of such deficiency, and the Trustee shall transfer such amount as may be necessary therefor from the Debt Service Reserve Fund.

Parity Double Barrel Bond Fund. The City shall pay when due the principal of and interest on any Parity Double Barrel Bonds to such person designated for such purpose by an Authorized Representative of the City.

Debt Service Reserve Fund. The Trustee shall use moneys in the Debt Service Reserve Fund to make transfers to the Registrar for deposit in the Bond Fund to the extent necessary to pay when due the principal of (whether at maturity or by mandatory sinking fund redemption) and interest on the Bonds if the amounts on deposit therein are insufficient therefor.

In the event the amount on deposit in the Debt Service Reserve Fund is less than the Debt Service Reserve Requirement, the Trustee shall notify the City to transfer moneys to the Trustee for deposit in the Debt Service Reserve Fund to restore the Debt Service Reserve Requirement from available moneys in the Bond Fund. In the event the amount on deposit in the Debt Service Reserve Fund is less than the Debt Service Reserve Requirement after such transfer from the Bond Fund, the City shall transfer to the Trustee from available moneys in the Revenue Account and then from the Residual Account such amount as may be necessary to restore the Debt Service Reserve Fund to the amount of the Debt Service Reserve Requirement, or such lesser amount as may be available. The City shall make up any deficiency in the Debt Service Reserve Fund resulting from a transfer of funds to the Bond Fund by transferring to the Trustee for deposit in such Fund on the 25th day of the month such transfer and each month thereafter an amount not less than one-sixth of such amount until such Fund is restored to the Debt Service Reserve Requirement.

In the event the amount on deposit in the Debt Service Reserve Fund exceeds the Debt Service Reserve Requirement, the Trustee (a) shall, prior to the completion of a Project, transfer such excess to the City for deposit in the Construction Fund, and (b) thereafter transfer such excess to the City to be deposited in the Bond Fund in the interest Account or the Principal Account to the extent amounts in such accounts are less than the amounts required to be paid on the next interest payment date and principal payment date, respectively, and otherwise transfer any remaining excess to the Revenue Fund.

In lieu of or in addition to cash or investments, at any time the City may cause to be deposited to the credit of the Debt Service Reserve Fund any form of credit facility, in the amount of all or a portion of the Debt Service Reserve Requirement, irrevocably payable to the Trustee as beneficiary for the holders of the Bonds, provided that the Trustee has received evidence satisfactory to it that (a) the provider of the credit facility has a credit rating in one of the two highest credit rating categories by two Rating Agencies, (b) the obligation of the City to pay the fees of and to reimburse the provider of the credit facility is subordinate to its obligation to pay debt service on the Bonds, (c) the term of the credit facility is at least 24 months, (d) the only condition to a drawing under the credit facility is insufficient amounts in the applicable Funds and Accounts with respect to the Bonds when needed to pay debt service on the Bonds or the expiration of the credit facility and (e) the provider of the credit facility shall notify the City and the Trustee at least 24 months prior to expiration of the credit facility. If (1) the City receives such expiration notice and the provider of such credit facility does not extend its expiration date, (2) the City receives notice of the termination of the credit facility, (3) the provider of such credit facility no longer has a credit rating in one of the two highest credit rating categories by two Rating Agencies or (4) the City desires to provide a substitute credit facility or cash, the City shall (A) provide a substitute credit facility that meets the requirements set forth in the foregoing sentences, (B) deposit the Debt Service Reserve Requirement to the Debt Service Reserve Fund (i) in

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equal monthly installments over the next succeeding 12 months, in the case of receipt of an expiration notice, (ii) prior to the termination date in the case of receipt of a termination notice, or (iii) immediately in the case of such reduction in credit rating or (C) instruct the Trustee to draw on such credit facility in the amount of the Debt Service Reserve Requirement (i) 12 months prior to expiration of the credit facility in the case of receipt of an expiration notice, (ii) prior to the termination date in the case of receipt of a termination notice, or immediately in the case of such reduction in credit rating and deposit such drawing to the Debt Service Reserve Fund.

If a disbursement is made pursuant to any credit facility, the City shall either (a) reinstate the maximum limits of such credit facility or (b) deposit to the credit of the Debt Service Reserve Fund moneys in the amount of the disbursement made under such credit facility from available moneys in the Revenue Account and then from available moneys in the Residual Account. To the extent such moneys are still insufficient, then the City shall transfer to the Trustee from any legally available moneys the amount of such deficiency as soon as practicable and in any event within one year by depositing one-twelfth of the required amount each month.

Amounts, if any, released from the Debt Service Reserve Fund upon deposit to the credit of such Fund of a credit facility pursuant to the preceding paragraph shall, upon designation by an Authorized Representative of the City, accompanied by an Opinion of Bond Counsel that such use will not adversely affect the exclusion from gross income of interest on the Bonds, be transferred to the City for deposit to (a) to each Principal Account with respect to the Bonds and used to pay principal of or to redeem the Bonds or (b) to the Construction Fund, and used for payment of the Cost of a Project with respect to any Bonds.

Subordinate Debt Fund. The City shall pay when due any obligations related to Subordinate Debt from the Subordinate Debt Fund.

Capital Improvement Account. The City may use moneys in the Capital Improvement Account for any lawful purpose of the System, including without limitation transfers to the Bond Fund to pay principal of and premium, if any, and interest on Bonds.

Residual Account. The City shall use moneys in the Residual Account as needed in the following priority:

(a) To pay Operating Expenses for which the balance in the Revenue Account, as certified by an Authorized Representative of Public Works, may be insufficient;

(b) To make transfers to the Bond Fund to the extent and in the manner provided in the Agreement of Trust;

(c) To make transfers to the Trustee for deposit in the Debt Service Reserve Fund to make up a deficiency in the Debt Service Reserve Requirement to the extent and in the manner provided in the Agreement of Trust;

(d) To make transfers to the Capital Improvement Account as provided in the Agreement of Trust;

(e) To pay Utility Transfers as approved by the Council; and

(f) For any lawful purpose of the System.

Pledge of Pledged Revenues and Certain Funds and Accounts

Pledged Revenues and moneys in the Revenue Account are pledged equally and ratably to the payment of principal of and interest on all Parity Obligations, subject only to the right of the City to make application thereof to other purposes as provided in the Agreement of Trust. Moneys in the Construction Fund, the Bond Fund and the Debt Service Reserve Fund are pledged (except as provided in the next sentence hereof) equally and ratably to the payment of the principal of and interest on all Bonds, subject only to the right of the City to make application thereof, or to direct the Trustee to make application thereof, to other purposes as provided in the Agreement of Trust. The lien and trust created in the Agreement of Trust are for the benefit of the Bondholders and for their

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additional security until all the Bonds have been paid. Moneys in the Parity Double Barrel Bond Fund, the Subordinate Debt Fund, the Capital Improvement Account and the Residual Account are not pledged to the Bonds.

Investment of Moneys

Any moneys held in the Funds and Accounts which are on deposit with any bank shall be invested and reinvested by or at the written direction of the City Treasurer, after consultation with the Director of Finance, in Investment Obligations, subject to the limitations stated in the Agreement of Trust. “Investment Obligations” shall mean any of the following so long as they are authorized for investment of public funds under the Investment of Public Funds Act (Chapter 45, Title 2.2 of the Virginia Code) or any subsequent provisions of law applicable to such investments:

(a) Government Obligations;

(b) Government Certificates;

(d) bonds, notes and other evidences of indebtedness of the Commonwealth and securities unconditionally guaranteed as to the timely payment of principal and interest by the Commonwealth, so long as such obligations are rated by one or more of the Rating Agencies with ratings equal to or higher than the ratings on the Bonds;

(e) commercial paper with a maturity of 270 days or less, which complies with the requirements of Section 2.2-4502 of the Virginia Code or any successor provision of law, so long as such commercial paper is rated by the Rating Agencies with ratings equal to or higher than P-1 by Moody’s and A-1 by Standard & Poor’s;

(f) bankers acceptances which comply with the requirements of Section 2.2-4504 of the Virginia Code or any successor provision of law;

(g) savings accounts, time deposits, certificates of deposit and other interest bearing accounts of any (1) national bank located within the Commonwealth or (2) state-chartered bank, provided that such funds are secured in the manner required by the Virginia Security for Public Deposits Act or any successor provision of law and that no deposits made under this subsection shall be made for a period in excess of five years;

(h) savings accounts and certificates of deposit of (1) savings institutions which are under supervision of the Commonwealth and (2) Federal institutions located within the Commonwealth organized under the laws of the United States of America and under Federal supervision, but only to the extent that such accounts and certificates are fully insured by the Federal Deposit Insurance Corporation or any other Federal insurance agency, unless such deposits in excess of the amount insured shall be fully collateralized (A) by eligible collateral as defined in Section 2.2-4401 of the Virginia Code or any successor provision of law, (B) by Government National Mortgage Association Pass-through Certificates, (C) by Federal National Mortgage Association Guaranteed Pass-through Certificates, (D) by Federal Home Loan Mortgage Corporation Participation Certificates, or (E) as provided by the Virginia Security for Public Deposits Act or any successor provision of law, provided that no deposits made under this subsection shall be made for a period in excess of five years; and

(i) units representing beneficial interests in investment pools created pursuant to the Government Non- Arbitrage Investment Act (Chapter 47, Title 2.2 of the Virginia Code) or any successor provision of law.

Any moneys held in the Bond Fund and the Debt Service Reserve Fund shall be separately invested and reinvested by the City or the Trustee at the direction of the City Treasurer, as applicable, in investments described in Subsections (a), (b), (d), (g), (h) and (i) of this section, so long as they are authorized for investment of public sinking funds by Section 2.2-4500 of the Virginia Code or any successor provisions of law applicable to such investments.

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Any investments described in subsections (a) and (b) of this Section may be purchased pursuant to an overnight, term or open repurchase agreement in accordance with the provisions of the Agreement of Trust.

Investments in a money market or other fund, investments of which fund are exclusively in obligations or securities described in subsections (a), (b) and (d) of this Section, shall be considered investments in obligations described in subsections (a), (b) and (d) of this Section.

Moneys held in the following Funds and Accounts shall be invested in obligations described in this Section of the following maturities:

(1) Construction Fund – not later than the dates on which such moneys will be needed to pay the Cost of a Project;

(2) Revenue Account within the Revenue Fund - not later than the last dates on which such moneys will be needed to be transferred to any other Fund or Account (or if investment obligations are transferred, not later than maturities for investment obligations for the applicable Fund or Account);

(3) Bond Fund, Parity Double Barrel Bond Fund and Subordinate Debt Fund - not later than the dates on which such moneys will be needed to pay principal of or interest on Bonds, Parity Double Barrel Bonds and Subordinate Debt, respectively;

(4) Debt Service Reserve Fund - not later than the earlier of five years from the date of acquisition of the investment or the final maturity of the Bonds;

(5) Residual Account within the Revenue Fund - not later than the date of acquisition of the investment or the final maturity of the Bonds.

Unless otherwise provided in a Supplemental Agreement, earnings on Investment Obligations shall accrue to the Fund or Account in which such Investment Obligations are on deposit, or, at the written direction of the City Treasurer, shall be transferred to and deposited in the Revenue Fund.

In computing the amount in any Fund or Account, except for the Debt Service Reserve Fund, obligations purchased as an investment of money therein maturing or subject to redemption at the option of the holder thereof having an average aggregate weighted term to maturity of (a) greater than five years shall be valued at the amortized cost or the market value thereof, whichever is lower, and (b) of five years or less shall be valued at the amortized cost thereof. Investments in the Debt Service Reserve Fund shall be valued at cost.

Particular Covenants

Covenants with Credit Banks, Insurers, etc. The City may make such covenants and agreements in a Supplemental Agreement as it may determine to be appropriate with any insurer, credit bank or other financial institution that shall agree to insure or to provide credit or liquidity support that shall enhance the security or the value of any Bonds. Such covenants and agreements may be set forth in the applicable Supplemental Agreement and shall be binding on the City and all the Bondholders the same as if such covenants were set forth in full in the Agreement of Trust.

Operation and Maintenance. The City shall establish and enforce reasonable rules and regulations governing the use of the System, maintain and operate the System in an efficient and economical manner, maintain the same in good repair and sound operating condition and make all necessary repairs, replacements and renewals.

Encumbrance of System. The City shall not create or suffer to be created any lien or charge upon the System or any part thereof or any lien or charge upon Pledged Revenues and other moneys pledged in the Agreement of Trust ranking equally with or prior to the lien and charge of the Bonds.

Insurance. The City shall continuously maintain insurance with recognized responsible commercial insurance companies against such risks as are customary for public bodies owning and operating similar systems,

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including (a) insurance against loss or damage to the System, (2) public liability insurance against liability for bodily injury, including death resulting therefrom, and from damage to property, including loss of use thereof, arising out of the ownership or operation of the System and (3) workers’ compensation insurance with respect to the System. In lieu of insurance written by commercial insurance companies, the City may maintain a program of self insurance or participate in group risk financing programs, including sponsored insurance programs, risk pools, risk retention groups, purchasing groups and captive insurance companies, and in state or Federal insurance programs; provided, however, that the City shall obtain and maintain on file a favorable written opinion of a Qualified Independent Consultant that such alternative is reasonably acceptable under all the circumstances.

Damage, Destruction, Condemnation and Loss of Title. If all or any part of the System is destroyed or damaged by fire or other casualty, condemned or lost by failure of title, the City shall restore promptly the property damaged or destroyed to substantially the same condition as before such damage, destruction, condemnation or loss of title with such alterations and additions as the City may determine and which will not impair the capacity or character of the System for the purpose for which it is then being used or is intended to be used; provided, however, that the City may, in the alternative, prepay in whole or in part all Bonds then Outstanding with the Net Proceeds and any other funds that may be available for such purpose and provided, further, that such prepayment is in accordance with the terms of the Agreement of Trust and pursuant to the appropriate optional extraordinary redemption provisions for each Series of Bonds then Outstanding. The City may apply so much as may be necessary of the Net Proceeds received on account of any such damage, destruction, condemnation or loss of title to payment of the cost of such restoration, either on completion or as the work progresses. If such Net Proceeds are not sufficient to pay in full the cost of such restoration, the City shall pay so much of the cost as may be in excess of such Net Proceeds from any legally available funds. Any balance of such Net Proceeds remaining after payment of the cost of such restoration shall be deposited in the Revenue Fund.

Records and Accounts Inspections and Reports. (a) The City shall keep proper books of records and accounts, separate from any of its other records and accounts, showing complete and correct entries of all transactions relating to the System, and the Trustee shall have the right at all reasonable times to inspect the System and all records, accounts and data relating thereto. The City shall also cause a certified audit to be made at the end of each Fiscal Year.

(b) The City shall cause the Consulting Engineer at least once every five years to inspect the System and make a written report thereof.

Arbitrage Rebate. The City is required to calculate and pay any rebate obligation owing to the United States of America with respect to the Series 2015 Bonds as and when due.

Limitations on Use of Proceeds. The City covenants with the holders of the Series 2015 Bonds as follows:

(a) The City shall not take or omit to take any action or approve the Trustee’s taking any action or making any investment or use of the proceeds of any Series 2015 Bonds (including failure to spend the same with due diligence) the taking or omission of which would cause the Series 2015 Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code, including participating in any issue of obligations that would cause the Series 2015 Bonds to be part of an Issue” of obligations that are arbitrage bonds, within the meaning of Treasury Regulations Section 1.148-10 or successor regulation, or otherwise cause interest on the Series 2015 Bonds to be includable in the gross income of the registered owners under existing law. Without limiting the generality of the foregoing, the City shall comply with any provision of law that may require the City at any time to rebate to the United States of America any part of the earnings derived from the investment of gross proceeds of the Series 2015 Bonds;

(b) Barring unforeseen circumstances, the City shall not approve the use of the proceeds from the sale of any Series 2015 Bonds otherwise than in accordance with the City’s “non-arbitrage” certificate delivered immediately prior to the issuance of the Series 2015 Bonds;

(c) The City shall not permit the proceeds of the Series 2015 Bonds to be used in any manner that would result in either (1) 5% or more of such proceeds or facilities being financed with such proceeds being considered as having been used in any trade or business carried on by any person other than a governmental unit as provided in

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Section 141(b) of the Code, (2) 5% or more of such proceeds or the facilities being financed with such proceeds being used with respect to any “output facility” (other than a facility for the furnishing of water) within the meaning of Section 141(b)(4) of the Code, or (3) 5% or more of such proceeds or the facilities being financed with such proceeds being considered as having been used directly or indirectly to make or finance loans to any person other than a governmental unit, as provided in Section 141(c) of the Code; and

(d) The City shall not take any other action that would adversely affect, and shall take all action within its power necessary to maintain, the exclusion of interest on all Series 2015 Bonds from gross income for Federal income taxation purposes; provided, however, that if the City receives an opinion of Bond Counsel that compliance with any such covenant is not required to prevent the interest on the Series 2015 Bonds from being includable in the gross income of the registered owners thereof under existing law, the City need not comply with such restriction.

Events of Default and Remedies on Default

Each of the following events shall be an “Event of Default” upon the conditions and subject to the limitations provided in the Agreement of Trust: (a) default by the City in the due and punctual payment of the principal of or premium, if any, on any Bond (whether at maturity, call for redemption or otherwise); (b) default by the City in the due and punctual payment of the interest on any Bond; (c) subject to certain remedial provisions, failure of the City to observe or perform any other covenants, conditions or agreements under the Agreement of Trust or in the Bonds; (d) failure promptly to repair, replace or reconstruct any substantial part of the System the destruction or damage of which has impaired the efficient operation of or substantially adversely affected Pledged Revenues; and (e) failure of the City generally to pay its debts as they become due and certain events of bankruptcy, assignment, dissolution, liquidation or reorganization by or against the City.

Certain of the City’s obligations other than the obligation to make all payments on the Bonds may be suspended if by reason of force majeure, as defined in the Agreement of Trust, the City is unable to carry out such obligations.

If the Trustee is required to draw moneys from the Debt Service Reserve Fund to pay principal of or interest on the Bonds and the City fails to begin replenishing the Debt Service Reserve Fund within 60 days in accordance with the replenishment requirements of the Agreement of Trust or fails to make any subsequent deposit required by the Agreement of Trust, then the Trustee shall send a notice to the Bondholders and the City notifying them of such draw. In such event, the City shall immediately surrender possession of the funds and accounts, including all moneys therein, being held by the City to the Trustee for the remaining term of the Agreement of Trust.

Upon the occurrence and continuation of an Event of Default, the Trustee may (and if requested by the holders of not less than 25% in aggregate principal amount of Outstanding Bonds and if indemnified in accordance with prevailing industry standards shall) proceed to protect and enforce their rights by mandamus or other suit, action or proceeding at law or in equity, including an action for specific performance of any covenant or agreement contained in the Agreement of Trust.

Supplemental Agreements

The City and the Trustee may, without the consent of, or notice to, any of the Bondholders, enter into Supplemental Agreements as shall not be inconsistent with the intent of the terms and provisions of the Agreement of Trust for any one or more of the following purposes:

(a) To cure any ambiguity, formal defect or omission in the Agreement of Trust;

(b) To grant to or confer upon the Bondholders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred on the Bondholders;

(c) To add to the covenants and agreements of the City in the Agreement of Trust other covenants and agreements to be observed by the City;

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(d) To modify, amend or supplement the Agreement of Trust in such manner as required to permit the City to comply with the provisions of the Code relating to the rebate to the United States of America of earnings derived from the investment of the proceeds of Bonds, provided that such modification, amendment or supplement does not materially adversely affect the holders of all Outstanding Bonds;

(e) To modify, amend or supplement the Agreement of Trust in such manner as may be required by a Rating Agency to maintain its rating on the Bonds, provided that such modification, amendment or supplement does not materially adversely affect the holders of all Outstanding Bonds;

(f) To modify, amend or supplement the Agreement of Trust to implement any covenants or agreements in connection with an insurer, credit bank or other financial institution that shall agree to insure or to provide credit or other liquidity support to enhance the security or the value of any Bonds, as provided in the Agreement of Trust;

(g) To authorize the issuance of and to secure one or more Series of Bonds as provided in the Agreement of Trust; and

(h) To modify, amend or supplement the Agreement of Trust in any manner that the Trustee concludes is not materially adverse to the holders of all Outstanding Bonds.

In addition, subject to the terms and provisions contained in the Agreement of Trust, the holders of not less than a majority in aggregate principal amount of Outstanding Bonds shall have the right from time to time, notwithstanding anything in the Agreement of Trust to the contrary, to consent to the execution by the City and the Trustee of such other agreements or agreements supplemental thereto as shall be deemed necessary or desirable by the City for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Agreement of Trust and any Supplemental Agreements; provided, however, that nothing in the Agreement of Trust shall permit, or be construed as permitting, (a) an extension of the maturity of the principal of or the interest on any Bond, (b) a privilege or priority of any Bond or Bonds over any other Bond or Bonds, (c) a reduction in the aggregate principal amount of Bonds required for consent to such Supplemental Agreements, (d) a reduction in the principal amount of or premium, if any, on any Bond or the rate of interest thereon, or (e) an extension of time or a reduction in amount of any payment required by any sinking fund that may be applicable to any Bond, without the consent of the holders of all of the Outstanding Bonds.

If at any time the City shall request the Trustee to enter into any such Supplemental Agreement, the Trustee shall cause notice of the proposed execution of such Supplemental Agreement to be sent by registered or certified mail to the registered owner of each Bond at his address as it appears on the registration books. Such notice shall briefly set forth the nature of the proposed Supplemental Agreement and shall state that a copy thereof is on file at the corporate trust office of the Trustee for inspection by all Bondholders. If, within 90 days or such longer period as shall be prescribed by the City following the giving of such notice, the holders of not less than a majority in aggregate principal amount of Outstanding Bonds, or in the case of (a) through (e) in the preceding paragraph, the holders of all Outstanding Bonds, shall have consented to and approved the execution thereof as herein provided, no holder of any Bond shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety thereof, or to enjoin or restrain the Trustee or the City from executing such Supplemental Agreement or from taking any action pursuant to the provisions thereof. Upon the execution of any such Supplemental Agreement as in this Section permitted and provided, the Agreement of Trust shall be and be deemed to be modified and amended in accordance therewith.

Notwithstanding anything in the Agreement of Trust to the contrary, the City and the Trustee may enter into any Supplemental Agreement upon receipt of the consent of the holders of all Outstanding Bonds.

Discharge of Agreement of Trust

If (a) all Bonds shall have become due and payable in accordance with their terms or otherwise as provided in the Agreement of Trust or have been duly called for redemption or irrevocable instructions to call the Bonds or to pay them at maturity have been given by the City to the Registrar, and (b) the Trustee holds cash, noncallable Government Obligations or, if permitted by the laws of the Commonwealth, noncallable Government Certificates or noncallable Defeased Obligations, the principal of and the interest on which at maturity will be sufficient (1) to

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redeem in accordance with the relevant Section of the Agreement of Trust all Bonds that have been called for redemption, or for which irrevocable instructions for call for redemption have been given, on the date set for such redemption, (2) to pay at maturity all Bonds not irrevocably called for redemption, (3) to pay interest accruing on all Bonds prior to their redemption or payment at maturity, (4) to make all required rebate payments to the United States of America and any other payment required by the terms of any Supplemental Agreement, and (5) to pay the Trustee’s fees and expenses and any other fees and expenses for which the City is responsible under the Agreement of Trust, then covenants, liens and pledges entered into, created or imposed pursuant to the Agreement of Trust shall be fully discharged.

Bonds for the payment or redemption of which cash, noncallable Government Obligations or, if permitted by the laws of the Commonwealth, noncallable Government Certificates or noncallable Defeased Obligations, the principal of and premium, if any, and interest on which will be sufficient therefor shall have been deposited with the Trustee (whether upon or prior to the date of their maturity or their redemption date) shall be deemed to be paid and no longer entitled to the benefits of the Agreement of Trust and shall be deemed to be no longer Outstanding; provided, however, that if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been duly given or irrevocable arrangements satisfactory to the Trustee shall have been made for the giving thereof.

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APPENDIX F

FORM OF BOND COUNSEL OPINION

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Set forth below is the proposed form of opinion of Kaufman & Canoles, a Professional Corporation, Bond Counsel. It is preliminary and subject to change prior to delivery of the Series 2015 Bonds.

January 28, 2015

City of Virginia Beach, Virginia 2401 Courthouse Drive Virginia Beach, Virginia 23456

City of Virginia Beach, Virginia $23,500,000 Storm Water Utility Revenue Bonds, Series 2015

Ladies and Gentlemen:

We have examined the applicable law and certified copies of proceedings and documents relating to the issuance and sale by the City of Virginia Beach, Virginia (the “City”), of its $23,500,000 Storm Water Utility Revenue Bonds, Series 2015 (the “Bonds”). The Bonds recite that they are issued under and are equally and ratably secured with other Parity Obligations by and as defined in an Agreement of Trust dated as of January 1, 2000, between the City and U.S. Bank National Association (as successor to First Union National Bank), as trustee (the “Trustee”), as previously supplemented and amended (the “Master Agreement of Trust”), and as further supplemented by a Third Supplemental Agreement of Trust dated as of January 1, 2015 (the “Third Supplemental Agreement” and, collectively with the Master Agreement of Trust, the “Agreement of Trust”). All capitalized terms used but not defined herein have the same meaning as defined in the Agreement of Trust.

Without undertaking to verify the same by independent investigation, we have relied on certifications by representatives of the City as to certain facts relevant to both our opinion and requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The City has covenanted to comply with the current provisions of the Code regarding, among other matters, the use, expenditure and investment of the proceeds of the Bonds and the timely payment to the United States of any arbitrage rebate amounts with respect to the Bonds, all as set forth in the proceedings and documents relating to the issuance of the Bonds (the “Covenants”). In rendering the following opinions, we have assumed the genuineness of all signatures, the authenticity of all documents tendered to us as originals and the conformity to original documents of all documents submitted to us as certified copies.

Based on the foregoing, we are of the opinion that:

1. The Bonds have been authorized and issued in accordance with the Constitution and statutes of the Commonwealth of Virginia, including the Public Finance Act of 1991, and constitute valid and binding limited obligations of the City payable solely from the Pledged Revenues and certain other funds established under the Agreement of Trust to secure payment of the Bonds and all Parity Obligations incurred pursuant to the Agreement of Trust. The Bonds and the interest thereon do not constitute a pledge of the faith and credit of the Commonwealth of Virginia or of any political subdivision thereof, including the City.

2. The Agreement of Trust has been duly authorized, executed and delivered by the City, constitutes a valid and binding agreement of the City, pledges to the Trustee the Pledged Revenues and certain other funds established under the Agreement of Trust, and is enforceable against the City in accordance with its terms.

3. The Third Supplemental Agreement is authorized and permitted by the Agreement of Trust and complies with its terms, has been duly authorized, executed and delivered by the City, constitutes a valid and binding agreement of the City, and is enforceable against the City in accordance with its terms.

4. The rights of the holders of the Bonds and the enforceability of such rights, including the enforcement by the Trustee of the obligations of the City under the Agreement of Trust and the Third Supplemental Agreement, F-1 may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The enforceability of any indemnity provision in the Agreement of Trust or the Third Supplemental Agreement may be limited by principles of public policy.

5. Under current law, interest, including accrued original issue discount (“OID”), on the Bonds (a) is not included in gross income for Federal income tax purposes, and (b) is not an item of tax preference for purposes of the Federal alternative minimum income tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for purposes of computing the alternative minimum tax imposed on certain corporations. The opinion set forth in the preceding sentence is subject to the condition that there is compliance subsequent to the issuance of the Bonds with all requirements of the Code that must be satisfied in order that interest thereon not be included in gross income for Federal income tax purposes. Failure by the City to comply with the Covenants, among other things, could cause interest, including accrued OID, on the Bonds to be included in gross income for Federal income tax purposes retroactively to the date of issuance of the Bonds. In the case of the Bonds maturing in the years 2034, 2036 and 2039 (the “OID Bonds”), the difference between (i) the stated principal amount of each maturity of the OID Bonds and (ii) the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of such maturities of OID Bonds is sold will constitute OID; OID will accrue for Federal income tax purposes on a constant yield-to-maturity method; and a holder’s basis in such a Bond will be increased by the amount of OID treated for Federal income tax purposes as having accrued on the Bonds while the holder holds the Bonds. We express no opinion regarding other Federal tax consequences of the ownership of or receipt or accrual of interest on the Bonds.

6. Under current law, interest, including accrued OID, on the Bonds is exempt from income taxation by the Commonwealth of Virginia.

Our services as bond counsel to the City have been limited to delivering the foregoing opinion based on our review of such proceedings and documents as we deem necessary to approve the validity of the Bonds and the tax- exempt status of the interest thereon. We express no opinion herein as to the financial resources of the City, its ability to provide for payment of the Bonds or the accuracy or completeness of any information, including the City’s Preliminary Official Statement dated January 7, 2015, and its Official Statement dated January 14, 2015, that may have been relied upon by anyone in making the decision to purchase Bonds.

The opinions expressed herein are for your benefit and the benefit of your successors and assigns and may not, without our prior written consent, be distributed to or relied upon by any other person. Our opinions are expressed as of the date hereof, and we do not assume any obligation to update or supplement our opinions to reflect any fact or circumstance subsequently arising or any change in law subsequently occurring. Our opinions expressed herein are limited to the matters expressly stated, and no opinion is implied or may be inferred beyond such matters.

Very truly yours,

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APPENDIX G

FORM OF CONTINUING DISCLOSURE AGREEMENT

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CONTINUING DISCLOSURE AGREEMENT

This CONTINUING DISCLOSURE AGREEMENT dated as of January 28, 2015 (the “Disclosure Agreement”), is executed and delivered by the City of Virginia Beach, Virginia (the “City”), in connection with the issuance by the City of its $23,500,000 Storm Water Utility Revenue Bonds, Series 2015 (the “Bonds”). The City hereby covenants and agrees as follows:

Section 1. Purpose. This Disclosure Agreement is being executed and delivered by the City for the benefit of the holders of the Bonds and in order to assist the original purchasers of the Bonds in complying with the provisions of Section (b)(5)(i) of Rule 15c2-12, as amended (the “Rule”), promulgated by the Securities and Exchange Commission (the “SEC”) by providing certain annual financial information and event notices required by the Rule (collectively, the “Continuing Disclosure”).

Section 2. Annual Disclosure.

(a) The City shall provide annually certain financial information and operating data in accordance with the provisions of Section (b)(5)(i) of the Rule as follows:

(i) audited financial statements of the City’s storm water enterprise fund, prepared in accordance with generally accepted accounting principles; and

(ii) operating data with respect to the City’s storm water disposal system of the type described in the City’s Official Statement dated January 14, 2015, under the captions “Storm Water Utility Fees,” and “Calculation of Revenue Covenant.”

If the financial statements filed pursuant to Section 2(a)(i) are not audited, the City shall file such statements as audited when available.

(b) The City shall file annually with the Municipal Securities Rulemaking Board (the “MSRB”) the financial information and operating data described in subsection (a) above (collectively, the “Annual Disclosure”) within 180 days after the end of the City’s fiscal year, commencing with the City’s fiscal year ending June 30, 2015.

(c) Any Annual Disclosure may be included by specific reference to other documents previously provided to the MSRB or filed with the SEC; provided, however, that any final official statement incorporated by reference must be available from the MSRB.

(d) The City shall file with the MSRB in a timely manner notice specifying any failure of the City to provide the Annual Disclosure by the date specified.

Section 3. Event Disclosure. The City shall file with the MSRB in a timely manner not in excess of ten (10) business days after the occurrence of the event, notice of the occurrence of any of the following events with respect to the Bonds:

(a) principal and interest payment delinquencies;

(b) non-payment related defaults, if material;

(d) unscheduled draws on any credit enhancement reflecting financial difficulties;

(e) substitution of credit or liquidity providers, or their failure to perform;

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(f) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;

(g) modifications to rights of Bondholders, if material;

(h) bond calls, if material, and tender offers;

(i) defeasance of all or any portion of the Bonds;

(j) release, substitution, or sale of property securing repayment of the Bonds, if material;

(k) rating changes;

(l) bankruptcy, insolvency, receivership or similar event of the City;

(m) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and

(n) appointment of a successor or additional trustee or the change of name of a trustee, if material.

Section 4. Termination. The obligations of the City hereunder will terminate upon the redemption, defeasance (within the meaning of the Rule) or payment in full of all the Bonds.

Section 5. Amendment. The City may modify its obligations hereunder without the consent of Bondholders, provided that this Disclosure Agreement as so modified complies with the Rule as it exists at the time of modification. The City shall within a reasonable time thereafter file with the MSRB a description of such modification(s).

Section 6. Defaults.

(a) If the City fails to comply with any covenant or obligation regarding Continuing Disclosure specified in this Disclosure Agreement, any holder (within the meaning of the Rule) or beneficial holder of Bonds then outstanding may, by notice to the City, proceed to protect and enforce its rights and the rights of the holders by an action for specific performance of the City’s covenant to provide the Continuing Disclosure.

(b) Notwithstanding anything herein to the contrary, any failure of the City to comply with any obligation regarding Continuing Disclosure specified in this Disclosure Agreement (i) shall not be deemed to constitute an event of default under the Bonds or the resolution providing for the issuance of the Bonds and (ii) shall not give rise to any right or remedy other than that described in Section 6(a) above.

Section 7. Additional Disclosure. The City may from time to time disclose certain information and data in addition to the Continuing Disclosure. Notwithstanding anything herein to the contrary, the City shall not incur any obligation to continue to provide, or to update, such additional information or data.

Section 8. Counterparts. This Disclosure Agreement may be executed in several counterparts each of which shall be an original and all of which shall constitute but one and the same instrument.

Section 9. Governing Law. This Disclosure Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Virginia.

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CITY OF VIRGINIA BEACH, VIRGINIA

By:______City Manager, City of Virginia Beach, Virginia

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CITY OF VIRGINIA BEACH, VIRGINIA • Storm Water Utility Revenue Bonds, Series 2015