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

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

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Tax-Secured Debt■ Debt to market value, which measures overalldebt to all taxable property within the government’sjurisdiction;■ Debt per capita, which measures overall debt bypopulation;■ Debt as a percentage of personal income (whichis available on the state level but not on the locallevel); and■ Debt as a percentage of operating expenditures.Each of the first three debt burden ratios are alsomeasured net of self-supporting obligations for thepurpose of ascertaining the true debt obligationsupported by no other sources.In general, a debt burden is considered highwhen debt-service payments represent 15%-20%of the combined operating and debt-service fundexpenditures. This benchmark will vary with thestructure of government and the level of servicesthat an entity provides.Pension LiabilitiesPension liabilities remain a significant credit factorfor state and local governments. Standard & Poor’sviews pension obligations as long-term liabilitiesthat should be managed in a way that will notadversely affect the bond issuer’s ability to makedebt service payments. Although various debtinstruments may have a lien position that is seniorto pension obligations, benefit payments carry withthem a political reality that adds to any legal protections.While debt levels are usually more predictabledue to long-term capital plans and thelargely fixed-rate nature of the obligations, unfundedpension liabilities tend to be more volatile.It is important to consistently monitor the keyvariables of the issuer’s retirement systems.Accordingly, Standard & Poor’s reviews pensiontrends related to funding progress. This analysisincludes changes in assets and liabilities, fundedratios, unfunded actuarial accrued liabilities(UAAL) and the relationship of the UAAL to payroll.Pension asset valuations can change, as canactuarial liabilities. <strong>The</strong> higher contribution requirementsthat result from unfunded liabilities couldmake any preexisting fiscal stress more acute, especiallyif the increase was dramatic. <strong>The</strong>refore,Standard & Poor’s will evaluate the sponsor’s pensionfunding strategy, and the current and projectedcost implications on its financial profile. As part ofthis analysis, Standard & Poor’s will review thetrack record annual required contributions (ARC)and the percent of the ARC made. <strong>The</strong> historicaland forecast trends in pension funding are asimportant, if not more so, than the specific liabilitylevel at a single point in time.Other Post Employment Benefits LiabilitiesGASB Statement 45 will require the disclosure ofOther Post Employment Benefits (OPEB) in a mannersimilar to pensions starting in fiscal periodbeginning after December 15, 2006. Currently,OPEB expenditures are included in a government’sgeneral fund and detailed in an audit note, withfunding generally on a pay-go basis. Under the newstatement, the liabilities attributable to OPEB andthe annual required contribution for employerswould be actuarially determined and reported.GASB Statement 45 does not require funding of theliability. From a credit standpoint, OPEB liabilitiesand funding strategies will be evaluated in a similarway to pension obligations. This analysis willinclude a review of the historical and projected paygocosts for OPEB, the newly quantified un-fundedliabilities and current funded status, and the planfor managing ongoing annual required contributions.Also, the impact of projected annual OPEBcosts on the current and future budgets will beassessed. This review would also include the legaland practical flexibility a specific government has inmanaging these obligations from both the asset andliability perspectives.Management FactorsAn understanding of the organization of governmentis critical. <strong>The</strong> powers of a municipality establishthe entity’s ability to plan for changes in thepolitical, economic, and financial environment, andthe capacity to respond in a timely fashion. <strong>The</strong>entity’s degree of autonomy is affected by homerulepowers, as well as legal and political relationshipsbetween state and local levels of government.<strong>The</strong> range and growth potential of services providedby the entity are also examined in relation tothe capacity to provide such services. <strong>The</strong> ability ofofficials to implement timely and sound financialdecisions in response to economic and fiscaldemands can depend on the tenure of governmentofficials and frequency of elections. <strong>The</strong> backgroundand experience of key members of theadministration are important considerations if theyaffect policy continuity and the ability to reformulateplans.Financial management is a major factor in theevaluation of state and local government creditworthiness.Past performance against originalplans, depth of managerial experience, and riskprofiles of key leaders all have an impact on thebottom line.Financial Management AssessmentStandard & Poor’s analyzes the impact of financialmanagement polices and practices through the use64 Standard & Poor’s <strong>Public</strong> <strong>Finance</strong> <strong>Criteria</strong> <strong>2007</strong>

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