New S&P Criteria May Change 40% of Local Ratings

A new Standard & Poor’s ratings methodology is expected to lead to changed ratings for 40% of the local governments it rates -- many of them for the better.

S&P will begin the year-long process of applying the new criteria to more than 4,000 ratings by reviewing its 48 largest rated municipalities by mid-December, it announced Thursday.

That would be municipalities with more than 1 million people: nine cities and 39 counties.

S&P expects that the revised methodology will lead to upgrades for 30% of credits, downgrades for 10%, with the remainder of ratings unchanged, assuming a continued gradual economic recovery for the nation.

S&P has been working since January 2012 on the new methodology for local general obligation bond and issuer credit ratings, which is intended to improve transparency, make it more in-depth and detailed, and more forward looking, said S&P managing director Jeff Previdi.

Whereas the old local government GO set of criteria was 5 to 6 pages, the new one is 35-40 pages, Previdi said.

The new criteria assess seven factors.

S&P will give a 10% weight to the political and legal environment in which the local government works.

The agency will give its strongest weight, 30%, to the locality’s economy. This score assesses both the health of the taxed asset base as well as the likelihood of additional service demands.

S&P will allot a 20% weight to management quality.

The rating agency will give 10% weights each to three financial measures: budgetary flexibility, budgetary performance, and liquidity.

The budgetary flexibility score measures the degree that governments can find additional financial flexibility in times of stress. Budgetary performance measures the government’s fiscal balance in its general fund and total governmental funds. Liquidity measures the availability of cash and cash equivalents to service debt and other expenditures.

Finally, S&P will put a 10% weight on the relative size of a government’s debt and contingent liabilities.

After these criteria are considered and combined into a single score, certain overriding factors are considered. Some of them may put a cap on the maximum possible rating. Others adjust ratings up or down a notch.

The changes to the criteria since March 2012 have been minor, Previdi said. The revised criteria try harder to find pockets of stress. Some overriding factors have been added. The criteria have been made a little more forward-looking.

S&P will use the new criteria for GO debt from cities, counties, towns, villages, townships, and boroughs. It will not use the criteria for school districts, library districts, park districts, forest preserve districts or others.

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