U'S' States Credit Scorecard

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U.S. States Credit Scorecard

• Nicole Johnson
• Senior Vice President
• State Ratings

NAST New Orleans December 5, 2006
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State Ratings are Very High

• Average State rating is Aa2
• Moodys Ratings of public finance bonds have
  average rating of A1
• Corporate ratings average is A3

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Moodys Public Finance Ratings
Long -Term Ratings
Aaa
Highest quality
High quality
Aa1/Aa2/Aa3
Investment Grade
A1/A2/A3
Upper Medium quality
Baa1/Baa2/Baa3
Medium quality
Ba1/Ba2Ba3 B1/B2/B3
Speculative elements
Below Investment Grade
Caa1/Caa2/Caa3
Danger of/in default
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Credit Strengths of U.S. States

• There are several factors that help to explain
  the lower risk profile of states and tax-backed
  essential service bond issuers
• States cannot file for bankruptcy
• Large and diverse tax bases
• Ability to raise taxes or cut spending
• Full faith and credit general obligation pledge
• Related government support

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G.O. Rating Factors
Debt Factors
Economy
The Rating
Financial Performance
Management
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Scorecard Purpose

• Provide a guide/analytical discipline to buttress
  consistency.
• Further build on State Rating Methodology
  published November 2004.
• Provide clear relative rankings of the states in
  the most important quantifiable areas.
• Open architecture preserves flexibility to change
  variables as new data becomes available or
  methodology evolves.

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Not a rating predictor model

• Ratings are forward looking
• Ratings take into account important factors that
  are not easily quantifiable.
• Results correlate closely, in most cases, with
  relative rating categories

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How is the Scorecard Used?

• Scorecard is used internally for analytical
  guidance and transparency
• Scorecard was published August 2006
• Increase transparency
• Provide data and analytics for Moodys MFRA
  product

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Scorecard Format

• Scoring is stepwise

1 Credit Score
4 Categories
13 Variables
4 Variables
Finance
30
4 Variables
20
Economics
A V E R A G E S
Credit Score
20
3 Variables
Debt
30
2 Variables
Management
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Finance Variables

• Five Year Average Fund Ratio
• Five Year Tax Revenue Growth
• Five Year Expenditure Growth
• Borrowing for Operations (Yes/No)
• 1. Short-term cash flow borrowing - last two
  years
• 2. Long-term borrowing for operating budget
  most recent fiscal year
• 3. Long-term borrowing for operating budget any
  of three prior fiscal years

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Debt Variables

• Ten-Year Growth in Net Tax-Supported Debt as of
  State Personal Income
• Net Tax-Supported Debt to State Tax Revenues
• State Pension Funding Ratio

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Economic Variables

• Ten-Year Growth in State Per-Capita Income as
  of US Average (BEA)
• Five-Year State Employment Growth (BLS)
• Five-Year Domestic Net Migration as of US Total
  (Census)
• State Poverty Rate (Census)

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Governance Framework Variables

• 1. Institutional Financial Flexibility (Yes/No)
• a. Inflexible spending mandates and/or revenue
  limits
• b. Initiatives and referenda
• c. Super-majority requirements
• d. Timely budget adoption

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Governance Framework Variables (cont.)

• 2. Fiscal Best Practices (Yes/No)
• a. Consensus revenue forecasting
• b. Multi-year financial planning
• c. Executive branch mid-year spending reduction
  powers
• d. Debt affordability
• e. Timely audited financial reporting last two
  fiscal years

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Scorecard Limitations

• Ranking approach possibly distorts relative
  performance
• - distance between states in ranking may not
  reflect true distance in performance
• Retrospective data is historic and does not
  capture current trends
• Key data variables do not fully capture
  complexity of state finances and credit
• Analyst input regarding qualitative factors
  augments these limitations