Standard & Poor's Proposes New Methodology for Rating Local Governments' General Obligation Debt

By Angela W. Adolph

Last week, Standard & Poor’s (“S&P”) proposed a new methodology for rating local governments’ general obligation debt. It would not apply to special purpose districts, such as school districts, or revenue bonds. The new methodology uses the same general factors currently used to rate local government debt, but provides increased transparency regarding how S&P’s ratings are derived.

Under the new methodology, ratings will be based on the assessment of the local government’s scores on the following criteria: institutional framework (10%), economy (30%), management (20%), budgetary flexibility (10%), budgetary performance (10%), liquidity (10%), and debt and contingent liability (10%). Scores under each of these criteria are brought together to give an indicative rating from 1 (strongest) to 5 (weakest). Then, certain positive or negative overriding factors are considered, including weak liquidity or management, high income levels, low real estate market value per capita, sustained high fund balances, lack of willingness to pay obligations, and large or chronic negative fund balances, to reach the final rating.

S&P estimates that, under the new methodology, 65% of its ratings would be unchanged, 32% would increase, and 3% would decrease. S&P requested comments on the new methodology through June 6th.