Continued Focus on Management and  Credit Analysis in the Current Economic Climate   Florida Government Finance Officers A...
Table of Contents <ul><li>12 Habits of Highly Successful Finance Officers  </li></ul><ul><ul><li>Management’s Impact on Mu...
12 Habits of Highly Successful Finance Officers Management’s Impact of Municipal Credit Ratings April 1, 2009 www.fitchrat...
Topics for Discussion <ul><li>Credit factors beyond/within a government’s control </li></ul><ul><li>12 positive management...
Factors Beyond Governments’ Control <ul><li>Location </li></ul><ul><ul><li>Positives: climate, natural resources, access t...
Factors Beyond Governments’ Control  (Cont’d) <ul><li>History </li></ul><ul><ul><li>Why do people live here? </li></ul></u...
Management as a Credit Factor <ul><li>Unlike some other credit factors, management practices are within a government’s con...
The 12 Habits of Highly Successful Finance Officers <ul><li>Fund balance reserve policy/Working Capital reserves Very Sign...
Fund Balance Policies Very Significant <ul><li>Operating reserves, revenue stabilization or rainy day fund. </li></ul><ul>...
Debt Affordability Policies Very Significant <ul><li>Indication of management’s focus on long-term financial health. </li>...
Superior Debt Disclosure Practices Very Significant <ul><li>Revenue bond covenants & coverage. </li></ul><ul><li>Details o...
Multiyear Financial Forecasting Significant <ul><li>Provide planning framework for managers and elected officials. </li></...
Interim Financial Reporting Significant <ul><li>Early warning system. </li></ul><ul><li>Means of communicating with manage...
Pay-As-You Go Capital Policies Significant <ul><li>Reduces fixed debt service costs. </li></ul><ul><li>Can improve financi...
Debt Amortization Policies Significant <ul><li>Life of debt should be less than or equal to useful life of assets financed...
Long-Range Capital Plan Influential <ul><li>Widely accepted; absence is notable. </li></ul><ul><li>Five years is the most ...
Contingency Planning Influential <ul><li>Identify risks inherent in adopted budget and take steps to offset them. </li></u...
Policies Regarding Use of One-Time Revenue Sources Influential <ul><li>Asset sales, debt restructuring, court settlements,...
Putting It All Together <ul><li>In Fitch’s experience, issuers using financial best practices have fared better. </li></ul...
Worst Practices -  Don’t Try These At Home <ul><li>Cash basis accounting </li></ul><ul><li>Qualified audit opinion for mat...
Part II. Credit Market Discussion April 1, 2009 www.fitchratings.com
Current Credit Concerns for Local Governments <ul><li>Broad-based, deep and potential prolonged recession, affecting most ...
Housing Market Metrics <ul><li>Price income ratio (PIR) – measures the ratio of median single-family home price to average...
Housing Market Data by MSA (p. 1 of 3) April 1, 2009 www.fitchratings.com
Housing Market Data by MSA (p. 2 of 3) April 1, 2009 www.fitchratings.com
Housing Market Data by MSA (p. 3 of 3) April 1, 2009 www.fitchratings.com
Mortgage Loan Delinquency Data April 1, 2009 www.fitchratings.com
 
April 1, 2009 www.fitchratings.com
So What? <ul><li>Tax base declines in many Florida counties – fiscal year 2008, 2009, expected for 2010 and uncertain for ...
Credit Market Disruptions <ul><li>Late 2007-2008: Downgrades of bond insurers and banks </li></ul><ul><li>Spring 2008: Auc...
Local Government Response to Economic Downturn <ul><li>Reduction in capital projects, particularly those funded on a pay-a...
Retaining Strong Credit Quality <ul><li>Budget realistically to conservatively </li></ul><ul><li>Formulate “what-if” scena...
Fitch Ratings www.fitchratings.com   London Eldon House 2 Eldon Street London EC2M 7UA UK +44 207 417 4222 Singapore 7 Tem...
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Kelly McGary

  1. 1. Continued Focus on Management and Credit Analysis in the Current Economic Climate Florida Government Finance Officers Association Kelly McGary, Senior Director May 31, 2009
  2. 2. Table of Contents <ul><li>12 Habits of Highly Successful Finance Officers </li></ul><ul><ul><li>Management’s Impact on Municipal Credit Ratings </li></ul></ul><ul><li>Credit Market Discussion </li></ul>April 1, 2009 www.fitchratings.com
  3. 3. 12 Habits of Highly Successful Finance Officers Management’s Impact of Municipal Credit Ratings April 1, 2009 www.fitchratings.com
  4. 4. Topics for Discussion <ul><li>Credit factors beyond/within a government’s control </li></ul><ul><li>12 positive management practices </li></ul><ul><li>‘ Worst’ management practices </li></ul>April 1, 2009 www.fitchratings.com
  5. 5. Factors Beyond Governments’ Control <ul><li>Location </li></ul><ul><ul><li>Positives: climate, natural resources, access to transportation, proximity to metropolitan employment centers. </li></ul></ul><ul><ul><li>Negatives: climate, natural resources, access to transportation, proximity to metropolitan employment centers. </li></ul></ul><ul><li>Economy </li></ul><ul><ul><li>Regional/national events. </li></ul></ul><ul><ul><li>Economic development efforts can have an impact, but usually over a long period of time. </li></ul></ul>April 1, 2009 www.fitchratings.com
  6. 6. Factors Beyond Governments’ Control (Cont’d) <ul><li>History </li></ul><ul><ul><li>Why do people live here? </li></ul></ul><ul><ul><li>Political climate of past administrations. </li></ul></ul><ul><li>Other Levels of Government </li></ul><ul><ul><li>State and federal mandates. </li></ul></ul><ul><ul><li>Changes in revenue sharing. </li></ul></ul>April 1, 2009 www.fitchratings.com
  7. 7. Management as a Credit Factor <ul><li>Unlike some other credit factors, management practices are within a government’s control. </li></ul><ul><li>Good financial management helps to offset other credit risks, while poor financial practices keep some ratings below their “natural” level. </li></ul><ul><li>Management practices are often a leading factor in a rating change - up or down. </li></ul><ul><li>Institutionalized policies should be evaluated by objective standards. </li></ul>April 1, 2009 www.fitchratings.com
  8. 8. The 12 Habits of Highly Successful Finance Officers <ul><li>Fund balance reserve policy/Working Capital reserves Very Significant </li></ul><ul><li>Debt affordability reviews and policies Very Significant </li></ul><ul><li>Superior debt disclosure practices Very Significant </li></ul><ul><li>Multi-year financial forecasting Significant </li></ul><ul><li>Interim financial reporting & monitoring Significant </li></ul><ul><li>Pay-as-you-go capital funding policies Significant </li></ul><ul><li>Rapid debt retirement policies Significant </li></ul><ul><li>5 year CIP integrating operating costs Influential </li></ul><ul><li>Contingency planning policies Influential </li></ul><ul><li>Policies regarding non-recurring revenue Influential </li></ul><ul><li>Financial reporting and budgeting awards Influential </li></ul>April 1, 2009 www.fitchratings.com
  9. 9. Fund Balance Policies Very Significant <ul><li>Operating reserves, revenue stabilization or rainy day fund. </li></ul><ul><li>Insulation against unanticipated revenue shortfalls or expenditure increases. </li></ul><ul><li>Working capital in cases of seasonal cash flow. </li></ul><ul><li>Sized according to issuers needs: revenue volatility, seasonality of receipts. </li></ul><ul><li>Fitch looks most positively on policies that are adopted into local law, specify method/level of funding and outline withdrawal and replenishment procedures. </li></ul>April 1, 2009 www.fitchratings.com
  10. 10. Debt Affordability Policies Very Significant <ul><li>Indication of management’s focus on long-term financial health. </li></ul><ul><li>Provides necessary inputs to derive realistic capital plan. </li></ul><ul><li>Compliance with state-imposed debt limit is a given. </li></ul><ul><li>Fitch looks for policies that address the debt burden on the tax base, the population, and the budget. </li></ul>April 1, 2009 www.fitchratings.com
  11. 11. Superior Debt Disclosure Practices Very Significant <ul><li>Revenue bond covenants & coverage. </li></ul><ul><li>Details on pledged tax or revenue stream trends. </li></ul><ul><li>Internet accessibility to financial statements, budgets, and capital improvement plans. </li></ul><ul><li>Operating fund cash flow. </li></ul><ul><li>VRDO’s, swaps & derivatives. </li></ul><ul><li>Statistics for enterprises on fees, customer trends, and service volume trends. </li></ul>April 1, 2009 www.fitchratings.com
  12. 12. Multiyear Financial Forecasting Significant <ul><li>Provide planning framework for managers and elected officials. </li></ul><ul><li>Anticipate future imbalances between revenues and spending. </li></ul><ul><li>3-5 years is the norm. </li></ul><ul><li>Specific enough to be the basis for discussion and decisions. </li></ul><ul><li>General enough to accommodate inevitable changes in fiscal/economic/political climate. </li></ul>April 1, 2009 www.fitchratings.com
  13. 13. Interim Financial Reporting Significant <ul><li>Early warning system. </li></ul><ul><li>Means of communicating with management and elected officials. </li></ul><ul><li>Format for analysis of variances from budget and prior year. </li></ul><ul><li>Details within major revenue and spending categories aid in variance analysis. </li></ul><ul><li>Clearly defined assumptions are important. </li></ul>April 1, 2009 www.fitchratings.com
  14. 14. Pay-As-You Go Capital Policies Significant <ul><li>Reduces fixed debt service costs. </li></ul><ul><li>Can improve financial flexibility. </li></ul><ul><ul><li>Operating funds earmarked for capital projects can be redirected if a budget shortfall occurs. </li></ul></ul><ul><li>GASB 34 may prompt more issuers to adopt pay-go policies to reduce debt. </li></ul>April 1, 2009 www.fitchratings.com
  15. 15. Debt Amortization Policies Significant <ul><li>Life of debt should be less than or equal to useful life of assets financed. </li></ul><ul><li>Rapid amortization reduces duration of fixed cost commitment and frees up capacity for future projects. </li></ul><ul><li>Fitch’s rules of thumb for G.O. debt amortization rate: </li></ul><ul><ul><li>>65% in 10 years considered rapid </li></ul></ul><ul><ul><li><40% in 10 years considered weak </li></ul></ul><ul><li>Best policies govern structure of debt and are linked to capital improvement program. </li></ul>April 1, 2009 www.fitchratings.com
  16. 16. Long-Range Capital Plan Influential <ul><li>Widely accepted; absence is notable. </li></ul><ul><li>Five years is the most common time frame - some longer. </li></ul><ul><li>Includes needed projects funded and sources of funding. </li></ul><ul><li>Best plans integrate operating budget impacts and are limited by debt affordability policies. </li></ul>April 1, 2009 www.fitchratings.com
  17. 17. Contingency Planning Influential <ul><li>Identify risks inherent in adopted budget and take steps to offset them. </li></ul><ul><ul><li>Economic assumptions </li></ul></ul><ul><ul><li>Internal/external approvals </li></ul></ul><ul><ul><li>Natural disasters </li></ul></ul><ul><ul><li>Voter initiatives on taxes/spending </li></ul></ul>April 1, 2009 www.fitchratings.com
  18. 18. Policies Regarding Use of One-Time Revenue Sources Influential <ul><li>Asset sales, debt restructuring, court settlements, tax collection windfalls. </li></ul><ul><li>Use of non-recurring revenues for ongoing expenditures can create budgetary stress. </li></ul><ul><li>From a credit perspective, one-time revenues should be matched with one-time or discretionary spending pressures. </li></ul>April 1, 2009 www.fitchratings.com
  19. 19. Putting It All Together <ul><li>In Fitch’s experience, issuers using financial best practices have fared better. </li></ul><ul><li>Policies that are adopted into local law or are otherwise institutionalized are best. </li></ul><ul><li>Policies can change, but once adopted, fiscal discipline tends to stay. </li></ul>April 1, 2009 www.fitchratings.com
  20. 20. Worst Practices - Don’t Try These At Home <ul><li>Cash basis accounting </li></ul><ul><li>Qualified audit opinion for material weakness </li></ul><ul><li>Deficit financing for 2 of last five years </li></ul><ul><li>Slow debt retirement (< 35% in 10 years) </li></ul><ul><li>Unfunded accrued pension liability (funding ratio < 60%) </li></ul><ul><li>TRANS/RANS growing significantly faster than annual spending </li></ul><ul><li>Debt restructuring that defers > 35% of current debt service </li></ul><ul><li>Over-reliance on non-recurring revenue > 15% </li></ul><ul><li>Aggressive investment policy for operating funds </li></ul><ul><li>Pension contribution deferral in the current budget year </li></ul><ul><li>Budgetary impasse beyond legal completion date </li></ul><ul><li>Lack of Capital Improvement Plan (CIP) </li></ul><ul><li>Excess interfund borrowing, with no capacity to repay in near future </li></ul>April 1, 2009 www.fitchratings.com
  21. 21. Part II. Credit Market Discussion April 1, 2009 www.fitchratings.com
  22. 22. Current Credit Concerns for Local Governments <ul><li>Broad-based, deep and potential prolonged recession, affecting most regions and economic sectors </li></ul><ul><ul><li>Housing market </li></ul></ul><ul><ul><li>Employment levels </li></ul></ul><ul><ul><li>Retail sales </li></ul></ul><ul><ul><li>Personal income (lagged) </li></ul></ul><ul><li>State aid reductions </li></ul><ul><li>Credit markets </li></ul><ul><ul><li>Debt composition (i.e. auction rate securities, variable rate demand obligations) </li></ul></ul><ul><ul><li>Need to issue/redeem short-term borrowing </li></ul></ul>April 1, 2009 www.fitchratings.com
  23. 23. Housing Market Metrics <ul><li>Price income ratio (PIR) – measures the ratio of median single-family home price to average household income </li></ul><ul><li>Price equalization factor – calculates the amount by which median single-family home price would have to fall to equal the average of the 1990s PIR </li></ul><ul><li>Home price forecasts – five-year forecast provided quarterly by University Financial Associates (UFA) for the 50 states, District of Columbia, and 100 MSAs </li></ul><ul><li>LoanPerformance – Mortgage Bankers Association data on mortgage delinquency and foreclosure trends for states, MSAs, counties, cities, and towns </li></ul><ul><ul><li>Provides detail on subprime ARMs and negative amortization mortgages (“Option ARMs”) </li></ul></ul>April 1, 2009 www.fitchratings.com
  24. 24. Housing Market Data by MSA (p. 1 of 3) April 1, 2009 www.fitchratings.com
  25. 25. Housing Market Data by MSA (p. 2 of 3) April 1, 2009 www.fitchratings.com
  26. 26. Housing Market Data by MSA (p. 3 of 3) April 1, 2009 www.fitchratings.com
  27. 27. Mortgage Loan Delinquency Data April 1, 2009 www.fitchratings.com
  28. 29. April 1, 2009 www.fitchratings.com
  29. 30. So What? <ul><li>Tax base declines in many Florida counties – fiscal year 2008, 2009, expected for 2010 and uncertain for future years. </li></ul><ul><li>Property tax collection rates </li></ul><ul><li>Save Our Homes often perceived as a hindrance during the boom but provided some taxing margin, or at least a time lag to prepare </li></ul><ul><li>Statutory authority to adjust the millage rate, affording the ability to offset AV declines with rate increases – politically challenging – </li></ul><ul><li>Economically sensitive revenue streams struggling </li></ul><ul><ul><li>Sales taxes </li></ul></ul><ul><ul><li>Tourist development taxes </li></ul></ul><ul><ul><li>Fuel taxes </li></ul></ul><ul><ul><li>Building and Permitting Fees </li></ul></ul>April 1, 2009 www.fitchratings.com
  30. 31. Credit Market Disruptions <ul><li>Late 2007-2008: Downgrades of bond insurers and banks </li></ul><ul><li>Spring 2008: Auction rate securities </li></ul><ul><ul><li>Failed auctions </li></ul></ul><ul><ul><li>Penalty rates </li></ul></ul><ul><ul><li>Conversions to VRDOs </li></ul></ul><ul><li>Fall 2008–Present: Variable rate demand obligations </li></ul><ul><ul><li>Failed remarketings and bank bonds </li></ul></ul><ul><ul><li>Maximum interest rates </li></ul></ul><ul><ul><li>Accelerated amortization </li></ul></ul><ul><ul><li>Swap termination triggers </li></ul></ul><ul><li>Ongoing: market access issues </li></ul><ul><ul><li>Premium rates for all but treasuries </li></ul></ul><ul><ul><li>Impaired ability to sell bonds (for new money or to redeem bond anticipation notes), cash flow notes </li></ul></ul><ul><ul><li>Availability of liquidity/LOC’s: Fitch’s 2009 rating outlook for U.S. financial institutions is Negative </li></ul></ul>April 1, 2009 www.fitchratings.com
  31. 32. Local Government Response to Economic Downturn <ul><li>Reduction in capital projects, particularly those funded on a pay-as-you-go basis </li></ul><ul><li>Increases in fine and fee revenue </li></ul><ul><li>Very few cases of tax increases, but base expansion considered </li></ul><ul><li>Hiring/wage freezes </li></ul><ul><li>Elimination of non-essential non-personnel spending </li></ul><ul><li>Use of accumulated reserves in excess of policy floor and other non-recurring funding sources </li></ul><ul><li>Reserve reductions to levels below policy floor </li></ul><ul><li>Furloughs, lay-offs, labor contract renegotiations, core service reductions </li></ul><ul><li>Asset sales </li></ul><ul><li>Increased cash flow borrowing, when available and economical </li></ul><ul><li>Vendor payment deferrals </li></ul><ul><li>Deferrals in pension and OPEB funding </li></ul>April 1, 2009 www.fitchratings.com
  32. 33. Retaining Strong Credit Quality <ul><li>Budget realistically to conservatively </li></ul><ul><li>Formulate “what-if” scenarios and identify contingencies </li></ul><ul><li>Monitor revenues and spending frequently </li></ul><ul><li>Continue long-range financial planning </li></ul><ul><li>Create a rationale for using non-recurring funds for operating expenditures </li></ul><ul><li>Stay within financial policies where possible </li></ul><ul><li>Maximize structural solutions </li></ul><ul><li>Develop a framework for use and replenishment of reserves </li></ul><ul><li>Keep rating agencies informed of significant changes in circumstances </li></ul>April 1, 2009 www.fitchratings.com
  33. 34. Fitch Ratings www.fitchratings.com London Eldon House 2 Eldon Street London EC2M 7UA UK +44 207 417 4222 Singapore 7 Temasek Blvd. Singapore 038987 +65 6336 6801 New York One State Street Plaza New York, NY 10004 +1 212 908 0500 +1 800 75 FITCH The Fitch Group Fitch Ratings Algorithmics Fitch Training

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