Finance and Audit Committee Meeting   1/6/2025

Great, thank you and thanks everyone.

Welcome to this meeting of the Finance Committee of the Virginia Passenger Rail Authority.

This meeting will now come to order.

Mr. Delandro?

Ms. Drake?

Here.

Ms. Moses-Ned?

Here.

And is Ms. Robinson on?

Okay, thank you.

Thank you very much.

Next, I request a motion to approve our minutes from back in May of our committee meeting.

Thank you.

Maricel, could you take a roll call vote on approving the minutes?

Yes, can you tell me who made the motion?

I'm sorry.

Motion was Mr. Watkins.

Oh, okay.

Can he second?

I don't believe he can.

Okay.

And I wasn't on the committee for the May meeting.

Is that an issue?

I did read.

No ma'am, you're on the committee now.

I'm on now.

Thank you.

And Ms. Dorsch?

Aye.

Ms. Moses-Ned?

Aye.

Thank you.

Thank you very much.

Yes, thanks, Ms. Dorsch.

As required in the investment policy that the board has approved for the passenger rail authority, each year our investment manager gives you all a briefing of

where things stand and as much as anything, it's a chance for you as board members to ask them any questions you may have.

And before introducing the team from meter, I just remember we're kind of underneath the state's umbrella with

our investment policy.

So just to give y'all a little bit of assurance that we aren't out there doing anything too far removed from what the state as a whole is doing.

So with that, I'd like to introduce Elaine Stanek.

She's with meter and then also Gabe Phillips.

They're the two fine folks that have been working with us.

And I'll say too that it has been a welcome change from where we were, I think about a year ago is when we were going out for procurement to look for a more

Engaged Investment Manager, and we have had that.

We've had our quarterly meetings.

So we've, I think Shannon could say we've both been very pleased with where we are.

All right.

Well, thank you for that very warm introduction.

Yes, we certainly, that I would say is one of the differentiators for us is that we are very much more so an engaged investment advisor with many of our clients.

And I am happy to share with the group that meter does advise on over $155 billion of public fund assets.

throughout the country and we serve over 400 clients of which we also are very pleased to be able to help the Virginia Passenger Rail Authority and it's been a delight to work with Steve and Shannon.

So with that being said, if we could just flip to the next page here.

Yeah, so thanks, Eileen.

Like she said, we'll get started here.

Our first page, taking a look really at a high-level overview where the market's at, also where the market may be headed here in the future.

Eileen will show a little more detail in the following pages and then get into actual updates on the portfolio.

As you can see here, we have the acronym, our FIGE model outlook and commentary.

So as you go down the list, you can see what makes up the FIGE model that our team puts together here for us.

But starting at the top, again, just a high-level overview here.

So in terms of the Fed funds rate, so that overnight rate set by the Federal Open Market Committee, so taking a look at that right now,

They're doing their best to navigate.

As you can see, they're a soft landing for the economy.

So in terms of what that means moving forward, the futures market as well as the recent dot plot pricing in right around 50 basis points of cuts for this calendar year.

Typically, that would look like two quarter point cuts then that would actually play out in practice.

And of course, this comes just if we take a quick step back

after the initial pivot in direction that came in September that started us off now on this course of cutting interest rates from the high watermark that they were at for well over a year coming into last fall.

Those expectations for 50 basis points of cuts this year may be a little less than where we were at in September.

So something that Eileen will touch on here in more detail, but again, slowing down a little bit there and expectations, maybe some language around some pausing this year as we look for how the actual course can play out for rates throughout 25.

We know, of course, one of the, you know,

halves of the Fed's dual mandate is inflation, aka stable prices.

And so, of course, that was a big factor in what got us to this level of, you know, high interest rates.

Expectations there are to see that come down to about two and a half percent this year, not quite the two percent target that the Fed would like to see, but headed in the right direction.

Growth, you can see there

Stellar growth in the third quarter of 2024, however, expectations are for that to slow as we look out across 2025, all in all to see right around 2.1% in that year over year rate number there.

Employment, so the labor market being the other half of the Fed's dual mandate here,

really has been pretty resilient and expectations are to see that really only increase slightly from where we're at now as we look through 2025.

So that being one of the main things that's allowed the Fed to have this sense of patience as they navigate this soft landing attempt at a soft landing.

And then lastly, you'll see a little bit more on this as we progress, but taking a look at where yields are at today.

just high level.

We're well off the high watermark that we saw in yields in October of 2023, but as you'll see, we're still well above what we've seen in an average over the last 20 years.

Therefore, definitely still prudent to continue to lock in and really think long-term in our planning as cash flows allow us to do so.

Yeah, flip to the next page, please.

What we're presenting here is really showing that differentiation between what the market expects will happen with the overnight rate versus what the Fed has communicated.

And again, as Gabe had said, from the Fed's perspective, this is reflecting the guidance that they provided at their December meeting.

So we do know that the Fed does provide updated guidance four times a year.

So this information from that perspective is very timely.

So the orange line is what the Fed is guiding the market towards, and the blue line is the Fed Funds Futures, which is the market's expectations.

And so we can see while there's some variation perhaps in timing of it, the trend is still the same in that lower rates are expected throughout this year.

And again, this is where we are focusing on just that overnight rate.

And as Gabe had said, the Fed is communicating another

50 basis points, 0.50% drop in that overnight rate here over the course of the next 12 months.

We know that that will impact specifically those overnight rates like the LGIP rate and of course the longer term rates are more driven based off of the outlook for inflation and economic growth.

So if we could just flip to the next page there.

This is showing the, comparing the two-year Treasury yield to that overnight Fed Funds rate.

Again, taking that longer-term view.

And as we can see over the past, oh geez, 20 years, that two-year Treasury rate has yielded less than 2%.

Today, as we see with the blue line, it's standing around a 4.30% and the overnight rates that are 463.

Again, as the Fed lowers rates here throughout this year, that overnight rate will continue to drop.

You'll also notice in the kind of what we just focused on that 2023 and 2024 timeframe, we've had significant what we would call volatility in interest rates.

So the market has, of course, been very

uncertain one would say particularly coming into the election during election season, coming into a Fed pivoting and now starting to cut rates, coming into a softening labor market, and then of course now looking at really what will the new administration's paths take and how will that impact the economy and inflation.

So clearly, from our perspective, when we think in terms of, you know, what we have done with the working again, hand in hand with Stephen Shannon, with the funds that are available to invest for the portfolio, we've been whether having to, you know, I would say kind of dodge some of this volatility that has occurred and pick our points of when we actually then were able to lock in funds.

So if we could flip to the next page, please.

This is where we're showing the snapshot of the current portfolio.

So this is as of the end of November.

The LGIP was stood at 178 million.

We know that's down significantly from where it was at the beginning of the year due to, of course, the capital expenditure related funds going out the door.

The securities portion is at

stands at $261.6 million.

We started out the year at 103.7 million.

And so back in February of last year, 150 million was moved over into the investment portfolio.

And again, as we worked with finance team and they did a fantastic job on

Refining, I would say their cash flow planning, we were able to then proceed with investing the new funds as well as the maturities to lock things in longer term to get ahead of what we believed was going to be a lower interest rate environment, which is actually where we are at today here.

So when we look at the weighted yield on the portfolio, it stands at 4.6%.

Our weighted average maturity is 2.19 years.

Asset allocation, we're taking advantage of the investment opportunities that are permissible, again, under the policy, and that do align with what, for the most part, with what the state can do.

But the key is really the maturity distribution, which is on the bottom portion of this slide.

And this is where we have targeted our maturities

to align again with that cash flow planning that the finance department has completed.

And so, in essence, it has resulted in funds allocated across the next five fiscal years.

And we've included on here the yield to maturity on each of the buckets of those investments that mature within those years.

So this is where we can clearly see the results of having locked in those rates, because today when we look at that two-year treasury, which of course would put us in that fiscal year 26, 27, those rates are lower than the rates we have locked in, and the same holds true for fiscal 28 and 29.

So if we could flip to the next page, which is our last page, one way that we also gauge the effect

of the investment portfolio is to be able to capture how much interest income the investments will generate based on what is in the portfolio today.

So this is the securities only.

This does not include the LGIP balance.

And so we are able to look at the securities based on when they will pay their periodic interest payments.

We make no assumptions on reinvestments.

So this is just if nothing was invested further going from today and as we can see the interest income projected for fiscal year 25 is just under 10 million, drops a little bit in 26 just because again we're not reflecting any reinvestment, dropping a bit in 27, 28 and then of course 29 when we have less secure or the balance of the portfolio would mature at that point.

So our objective, of course, as we are reinvesting, is to cash flow permitting.

That is the key, and that's where the communication that we have, as Steve had alluded to, is always very important, where we determine, you know, to what extent can we lock funds in.

And the objective is, of course, to build on these interest income numbers to the extent that we can.

So with that, that wraps up what I have here today.

Anyone has any questions?

I don't have a question.

I just wanted to add that, you know, and maybe Elaine, you said this.

So if you did, I apologize, but

The reason you see the income going down, don't want anybody to leave here being concerned that the income is going down.

That's, once again, we are not in the business to make investment income.

We're in the business to build capital projects and run passenger service.

So we should take the money that we've been fortunate to collect in advance and be spending it on our capital projects.

So that's why you see this decrease.

The other point I wanted to add was,

The LGIP balance went down.

And this, I think most of y'all know this, but there are some new members.

You know, we purchased the Manassas line and the Cambria, you know, set up the Cambria station down in Christiansburg for that service.

And that was a $300 million outflow.

Thank you so much, Steve, especially as a first comment, which I think we need to remind ourselves of every time we discuss this.

Very important.

Now, if there's nothing else to cover right now, are we ready to move into closed session?

Okay, great.

So moved.

Moved.

Patty, is this where you want me to read the paragraph?

Yes, I would appreciate that very much, Mr. Wright.

I move that the Board convene in a closed session pursuant to Virginia Code 2.2-3711 for the discussion of public contracts relating to VPRA's Transforming Rail in Virginia projects involving the expenditure of public funds.

Thank you.

Could I get a second for that motion to go to closed session?

Second.

Thank you.

I'm sorry, Ms. Dorsch?

Aye.

Mr. Delandro?

Aye.

Ms. Drake?

Aye.

Ms. Moses-Ned?

Aye.

Thank you.

So I'm going to drop off and then

Okay, great.

We'll now move into closed session.

Okay.

So we're ready now, Patty?

Yes.

Yes, okay.

We're now going to take a roll call vote and I ask each member indicate their agreement with the following.

To the best of my knowledge during the closed meeting, the only matters heard, discussed, or considered were those matters lawfully exempted from open meeting requirements under the Virginia Freedom of Information Act and only those public business matters as were identified in the motion

Ms. Dorsch?

Aye.

Ms. Moses-Ned?

Aye.

Thank you very much.

And now we will hear from our CFO Steve Pittard on our 2026 capital budget.

Right.

Thank you, Ms. Dorsch.

Jonathan, do you have the slide deck up?

All right, there you go.

So moving forward to the next slide.

So each year, you know, we're required to, well, one for good budgeting practice, we have a budget each year, but each year we are required by our enabling legislation to submit by February 1st,

to the Commonwealth Transportation Board as they are a significant funding contributor to our efforts.

Then the Commonwealth Transportation Board has until May 30th to approve the budget or it's deemed approved at that point.

And we have always in the past, you know, it's a little early in the process for us to have a budget complete.

So we've always committed to the Commonwealth Transportation Board that any significant adjustments that occur

from that February 1st date forward, that we will come back and brief them and give them another chance to consider those changes to the budget.

The other item I'll point out here is we also do include, you know, we send, it's, you know, the CTB is basically approving our capital budget.

We also include a operating plan with that budget.

And at this point, it's very early in the process for us to have

really precise operating budget for the coming year.

So we do include a preliminary estimate.

We will be refining that estimate before our May 22 board meeting, where you as the VPRA board would consider this budget for final adoption for FY26.

Moving along.

So as we've reached out numerous times, we have a continuous financial planning process here at the Passenger Rail Authority.

And early on, we were able to establish that it would be a balanced planning process or a balanced budget process.

So you see what this schedule is really showing is we have sources of $7.74 billion and I guess, let me rephrase that, from August

to January, the changes is what this is reflecting.

But you see that basically our sources equal our uses and the management reserve, which is what we've talked about.

We have a policy on the management reserve as far as the board, there's a good reason for one, we're operating passenger trains, which those costs aren't all fixed, somewhat variable, the ticket revenues are variable.

So it's good to have a manager reserve for that process

It's also good we have a large capital program and you can't know everything that's going to occur with all those capital projects, so it's good to have a reserve balance.

This slide does reflect what's changed since August when we did the amended budget for FY25 and the amended financial plan at that point.

and what you see is two positives.

So you see the source is going up by $13 million and you see the use is going down by 35, which are both in a positive direction.

And we'll talk more in the coming slides about the sources and the changes in the uses also.

Next slide.

So this is essentially a slide that rolls forward the sources and also

the management reserve from that August date to today.

And I'm just going to focus mostly on the increases in the sources.

So what you see, if you take that line on the top two charts, the increases in sources for a quarter one and quarter two, you get back to that $13 million you saw in the overall financial planning slide.

What we have

Changes we've had that we're proposing to you now, you've seen the quarter one when we did the management reserve update back in October.

For FY25, for the quarter two, what you're seeing here is we've received a crucially award for the Staples Mill Station improvements, and we also received an earmark for planning for the Ettrick Station.

So you see an addition of those revenues.

And then also the miscellaneous charge change here is the ticket revenue forecast.

There's a little bit of change there.

And also our investment income actuals came in a little better than we had budgeted for last year.

And then

Although before I move forward, the changes and uses on this slide, we'll talk about those in the next slide, which match up to the changes and uses that we saw in the financial planning slide.

Moving forward.

And this is really a summary of all of, so to our core budget of projects, this is a summary of all those changes to those projects.

And I'm gonna talk in detail on the next two slides.

But really here, I just wanna point out

That total increase decrease of $35 million and decrease once again ties back to the summary financial planning slide that I started in the beginning of this presentation.

Next slide.

So this is going into the details of those changes.

So the first change we have here is the Cambria platform project down in Christiansburg.

As we've done our design and engineering, there is a fairly steep grade to get into that property off of the main access road.

As a result, it's going to require a retaining wall and some sort of grading that essentially the estimate of our parking lot there is about $6 million more than what we originally thought.

and a lot of it, and Mike can chime in if I'm saying this wrong, but a lot of it is the retaining wall that was not anticipated.

The next section here is the other capital projects.

Those are those, as I spoke on the sources of funding, those federal awards we got, these are adding those projects to our actual expenditure budgets.

You see the negative seven million dollars there on the platform improvement state of good repair.

That, essentially, we have had about a twenty million dollar budget because we've known when we had the purchase from CSX, we've known we had these three stations and we knew they needed some improvements, especially in the ADA area.

We went out and tried to get federal awards to assist with those costs, which we've got.

we've received.

And so now we're taking 7 million out of that larger, well, I guess it was $21 million budget and applying it to the Staples Mill, you know, Chrissy award that we received $6 million, six and a half million, and we're matching it with six and a half from there, from that $20 million.

So net impact, you know, a lot of words there.

Net impact is we're really not adding budget here of our funds, we're adding the federal dollars.

and then the last section here on our Capital and Operating Grants.

If you remember, a lot of these are VRE projects and it's a lot of pass-through funding that we receive primarily from the Commonwealth Transportation Board.

And VRE, you know, with our efforts on the I-95 corridor, VRE had their own efforts and plans and they've had to adjust those efforts and plans.

As a result, there's been some changes on some of their projects, some shifting of funding that they've coordinated through VDOT and this, you know, that $1 million is the net impact that they received an additional million dollars and it's passed through funding, but we do need to add it to the budget to be able to pay it to VRE.

And then the last item here is, this is track access fees that we pay

to Norfolk Southern for access for the Roanoke service, for the two trains on the Roanoke service.

And this is just updating that as cost to match to the agreement.

And now moving on to the next slide.

So, and this has changed, if you recall the summary slide, there was also the operations plan change and the net impact here

and this covers through the 2031 timeframe.

That's why you see such a large $1.6 billion number in total.

So there's a net $51 million decrease in that timeframe from last year to this year's current plan.

And a lot of it was actuals for FY24 actually came in under budget

because there were new expenditure allocation process through the states for passenger rail coalition and Amtrak working together.

So our 24 expenditures came in significantly under.

Hopefully that new process carries forward and our costs will be down going forward.

VRE access payments.

As you know, VRE has had a lot of new service with

When we did the I-95 quarter purchase with CSX, we got our service, our Amtrak service, but we also got a lot of new service for VRE.

And they're adjusting when that new service will start.

We've carried it in the plan starting, I believe, in 26.

And now some of those trains, we're not going to start trains that we don't need, so we're adjusting our plan.

The other item I'll mention here is our operations administrative costs.

You see FY24 actuals came in under budget a significant amount, $14 million.

That's due to, in FY24, we set forth a plan to implement a full cost allocation.

We had budgeted without having a full cost allocation plan.

But we actually were able to get that done and do early implementation.

So that's why you see that increase.

And moving along to my final slide on the budget.

So this is just a quick timeline.

We will be asking here, the full board on this January 16th meeting to agree to send our recommended budget to the CTB by the February 1st deadline.

We'll also, at the January 16th board meeting, ask the full board to approve the recommended management reserve for the quarter two of fiscal year 25.

And I want to reiterate any adjustments that we make from this February 1st budget.

We've committed, well one, we're obviously keeping you as a board briefed

and we'll have one-on-one briefings if needed in addition to finance committee meeting between now and May 22nd.

But also we've always committed with the CTV to go back to them if there's any amendments or any adjustments to the budget to keep them informed.

So with that I think there is a resolution, well first if there's any questions I'll be glad to entertain those.

I ask for a motion to recommend the proposed Visca 2026 budget for consideration to the full VPRA board.

Mary South.

Yes, ma'am.

Yes, ma'am.

Ms. Dorsch?

Aye.

Mr. Drake?

Aye.

Ms. Moses-Ned?

Aye.

Okay, does any board member have any further, or committee member have any further business or

DJ and company have any final closing remarks?

Okay, well then good.

If there's no further business, the committee now stands adjourned.

Thank you.

Thank you all.