S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Tax-Secured DebtAccepted Accounting Principles (GAAP), Standard &Poor’s assesses an entity’s financial reports. Emphasisis placed on the government’s primarygovernment/major funds (general, debt-service, andspecial-revenue funds), which under GASB Statement34 are now called fund financial statements and itsgovernment-wide statements, which provide a broadoverview that provides an all-encompassing view ofthe government’s finances.Further, Governmental Accounting StandardsBoard (GASB) interpretations of accounting rulingsare considered in evaluating the organization offunds, accruals, and other financial reporting methods.GAAP reporting is considered a creditstrength, and the ability to meet the GovernmentFinance Officers Association’s (GFOA) Certificateof Conformance reporting requirements also isviewed favorably. Enhancing public disclosure is agovernment’s Comprehensive Annual FinancialReport (CAFR), which includes significant financialdata and various statistical data to supplement theaccounting statements.Issuers are expected to supply adequate and timelyfinancial reports. Financial reports prepared byan independent certified public accountant are preferred.Lack of an audited financial report preparedaccording to GAAP could have a negative impacton an issuer’s rating, since questions about reportingwill be raised. If state agencies or other internalgovernment units prepare financial reports,Standard & Poor’s is interested in any deviationfrom GAAP standards and the independence of theauditors preparing the reports.Operating-account analysis includes an examinationof operating trends, focusing on the structureof revenue and expenditure items, primarily withinthe primary/major fund category including generalfund and debt-service funds. If other funds are taxsupported or include revenues related to generalgovernment purposes, they also have relevance indeveloping a complete understanding of financialperformance.Diverse revenue sources are preferable, as theycan help to strengthen financial performance andenhance stability. The use of fees not only createsnew revenue streams, but also places the burden formunicipal services on the users of the services.Special taxes, such as sales or excise taxes, allow forfurther revenue diversification. Although a balancedcomposition of revenues gives an issuer the flexibilityto meet all of its financial obligations, it does notnecessarily protect against the impact of a generaleconomic decline. For example, if a government’stax collections depend on several major revenuesources, the direct and indirect effects of an economicdownturn can be broad enough to affect revenueperformance. Revenue sources are examined over athree-to five-year period, with particular focus onunusual patterns in revenue performance that couldlead to significantly different financial performancein the future.Similarly, expenditure composition and stabilityare analyzed in the context of revenue patterns.Large expenditure items are identified and examinedto determine if continued expenditure growthcould endanger existing services or require additionalbudget actions to maintain balance. To theextent that certain spending items are extraordinaryor nonrecurring, the effect on long-term financialperformance is discounted; conversely mandatedexpenses can limit flexibility and decision-making.Discretionary spending, such as pay-as-you-go capital,is evidence of operating flexibility.The effect of any transfers among other governmentaland capital funds is considered in the reviewof financial performance. When inter-fund transferssupport the general fund and/or debt-service fund,Standard & Poor’s reviews the policy guidelinesand historical transfer practices. Volatility in transfersthat represents a deviation from past policycould be viewed as a sign of fiscal stress in both thetransferring and receiving funds.The balance-sheet examination focuses on liquidity,fund-balance position, and the composition ofassets and liabilities. In Standard & Poor’s considerationof appropriate fund-balance levels, severalvariables are important:■ The makeup and liquidity of the fund balance,particularly as related to the volatility and patternsof the revenue stream;■ The predictability of government spending;■ The availability of unencumbered reserves orcontingency funds; and■ The ability of public officials to sustain a strongfinancial position.The fund-balance position is a measure of anissuer’s financial flexibility to meet essential servicesduring periods of financial strain. Standard & Poor’sconsiders an adequate fund balance and policiesdetermining fund-balance goals to be credit strengths.A common ratio used to evaluate fund balance is theunreserved fund balance expressed as a percent ofoperating expenditures. This provides a measure ofhow much of the fund balance is not committed tospending and is available for contingencies.With the implementation of GASB Statement 34,Standard & Poor’s also evaluates issuers’ Statementof Net Assets, which measures all assets and liabilities(similar to a private sector business) and thestatement of activities, which presents how netassets have changed over the prior year. Over timeincreases or decreases in net assets provide an indicatorof how a government’s financial position is62 Standard & Poor’s Public Finance Criteria 2007