The Basics of Municipal Credit Analysis Bond Ratings 101

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The Basics of Municipal Credit Analysis Bond
Ratings 101

• FGFOA
• May 22, 2007
• Kelly McGary, Senior Director

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OutlineBond Rating BasicsPublic Finance Rating
ProcessPublic Finance Rating CriteriaDetermining
the Rating
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Bond Rating Basics

• WHAT Investment grade AAABBB-
• WHO Local Gov, School District, Hospitals
• WHY Third party information to investors
• WHEN Bond deal or general credit health analysis
• HOW Meetings, documents, analysis, committee

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Public Finance Rating Process

• Focus on governmental and quasi-governmental
  entities
• Review entitys historical, financial, legal
  documentation
• Meet with leadership and visit the local economy
• In-house analysis with constant interchange
  between analyst and entity
• Committee presentation and vote on credit rating
• Contact issuer / financial advisor and provide
  committee feedback
• Release rating over financial newswires

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Public Finance Rating Criteria

• Debt capital
• Finances
• Economic factors
• Administration/Management

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Debt Capital

• Direct debt
• Overlapping debt
• Debt per capita
• Debt as of market value
• Amortization rates
• Sources Uses for the CIP

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Finances - Balance Sheet

• Cash trends
• Short-term note borrowings
• Fund balance reservations and designations
• rainy day fund
• capital reserve
• Large swings in receivables
• Bond proceeds

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Finances - Income Statement

• Revenues
• local taxes
• property tax trends and burden
• assessed valuation growth and breakdown
  (commercial/residential)
• state support
• other revenues and their vulnerability

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Finances - Income Statement (cont.)

• Expenditures
• salaries and wages trends
• pay-as-you-go expenditures
• Fund Balance
• fluctuations and draw-downs (for one-time costs?)
• as of expenditures

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Finances - Budget

• Impacts of labor contracts
• Changes in legislation
• State budget exposure
• Population forecasts
• Statutory/ordinance restrictions on budget
  increases
• FLEXIBILITY! FLEXIBILITY! FLEXIBILITY!

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Economy

• Population/enrollment trends
• growth can be a credit strength or risk
• Diversification
• Wealth indicators
• Unemployment rates
• Employment composition
• Largest taxpayers/employers

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Management Factors

• Budgeting and forecasting
• Capital planning
• Financial policies and targets
• Financial reporting and monitoring
• Investment policy
• Debt affordability reviews and policies
• Political structure and climate
• Taxpayer and labor environment

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Determining the Rating

• ID trends in all areas
• ID one time occurrences (positive or negative)
• Understand the entitys operating constraints
• legal and practical
• Financial and taxing flexibility
• Management of resources

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The Long-Term Aspect of the Rating

• Rating full and timely payment over the life of
  the bonds
• Regular surveillance
• Open communication if anything newsworthy
  occurs, its better to hear it straight from the
  issuer
• Rating upgrades and downgrades changes on
  Rating Outlooks / Watches

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