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

GO Debtthe Financial management Assessment (FMA). TheFMA attempts to provide a transparent assessmentof a government’s financial practices and to highlightaspects of management that are common tomost governments in a consistent manner. TheFMA is an analytic enhancement that improvesthe definition of our analysis of management practicesand policies, and expand our methods ofcommunicating analytic conclusions about policiesand procedures.A government’s ability to implement timely andsound financial and operational decisions inresponse to economic and fiscal demands is animportant component of credit quality. The FMAmakes certain aspects of our analysis of managementmore transparent, specifically those concernedwith policies and practices that are considered mostcritical to credit quality. FMAs are assigned only togeneral government tax-backed and annual appropriation-backedissues.The FMA encompasses seven areas most likely toaffect credit quality:■ Revenue and expenditure assumptions■ Budget amendments and updates■ Long-term financial planning■ Long-term capital planning■ Investment management policies■ Debt management policies■ Reserve and liquidity policiesThe overall FMA assessments are communicatedin our analyses using the following terminology:■ “Strong” indicates that practices are strong, wellembedded, and likely sustainable.■ “Good” indicates that practices are deemed currentlygood, but not comprehensive.■ “Standard” indicates that the finance departmentmaintains adequate policies in most, but not allkey areas.■ “Vulnerable” indicates that the government lackspolicies in many of the areas deemed most criticalto supporting credit qualityThe FMA focuses on a government’s policies andpractices. It is neither an evaluation of the competencyor aptitude of individual finance professionalsnor an evaluation of a finance department’s abilityto handle either ordinary occurrences or uniquechallenges. The purpose of the FMA is to highlightthe most transparent aspects of management thatare common to most governments in a consistentmanner. Even with this narrow definition, otherpossible practices could be considered, such asaccounting and disclosure practices, internal controls,and policies for knowledge retention and staffturnover. While each of these has the potential toaffect credit quality, factors considered in the FMAare those that Standard & Poor’s considers themost critical in determining credit quality.It is important to keep in mind that the FMA isone component of a rating; we will continue toevaluate all of the other factors—economic, financialcondition, debt and management. Given whatthe FMA measures, it is possible that an entity witha strong FMA may be better able to tolerate weaknessin the basic credit areas, or conversely, may bebetter able to take advantage of improving conditions.As a result, the practices that are captured bythe FMA could contribute to rating changes, orallow a community to better prevent a downgrade.State RatingsState credit ratingsStandard & Poor’s analysis of states includes all ofthe factors considered in any GO rating. State governmentshave sovereign powers and therefore possessunique administrative and financial flexibilitywhich translates to a higher credit profile for stateratings in many cases. Generally states have broadpowers to establish their own tax structures andexpenditure responsibilities. Tax structure, or theability of a state to benefit from the economic activitywithin its boundaries, is an important rating factor,as well as the degree of flexibility existing inthis structure, both legally and politically. Statesalso enjoy flexibility in setting and modifying taxrates, deductions, exemptions, and collection dates.These discretionary powers can immediately andfavorably influence a state’s fiscal condition.While states generally have broad service responsibilities,they also enjoy considerable discretion inestablishing or changing disbursement dates andfunding levels for state assistance. This affords ahigh level of control over budgets and cash flowwhich, given the absolute level of these disbursements,can positively impact fiscal standing. Thesesovereign characteristics can be limited, however.For some states, the voter initiative or referendumprocess is very active and its effects are importantfrom a credit standpoint. Where decisions aboutspecific tax/revenue levels and spending allocationsare placed in the hands of the electorate, states havereduced flexibility to respond to changing economicor financial situations.State/local relationshipsStates’ relationships with their localities continue toevolve and are part of the credit review process forboth levels of government. How services and programsare provided across governments and whatthe funding relationship has been over time areimportant considerations. Successful legal challengesto some states’ funding of primary and secondaryeducation have bolstered state aid towww.standardandpoors.com65