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Municipal Creditworthiness PUAD 702 Public Financial Management University of Baltimore Baltimore, Maryland 12 February 2008
Ratings Agencies <ul><li>Three major ratings agencies for government </li></ul><ul><ul><li>Moody's Investors Services </li...
Ratio Metrics <ul><li>Ratio metrics are simple ratios that creditors and debtors use to determine ability to repay </li></...
total debt / assessed value <ul><li>Total debt means all debt issued by jurisdiction </li></ul><ul><li>Assessed value is t...
total debt / population <ul><li>Total debt means all debt issued by jurisdiction </li></ul><ul><li>Population is the size ...
total debt / personal income <ul><li>Total debt means all debt issued by jurisdiction </li></ul><ul><li>Personal income me...
debt service / revenues <ul><li>Debt service means principal and interest payments within a fixed time period </li></ul><u...
operating expenses / revenues <ul><li>Operating expenses means all non-capital expenditures within a fixed time period </l...
Other Concerns <ul><li>Constitutional or charter prohibitions </li></ul><ul><li>Community values may show an inclination t...
Credit Enhancement <ul><li>Government agencies may have lower ratings </li></ul><ul><li>Insurance firm may have strong rat...
References <ul><li>Columbia Association Budget Committee (2007, February). Measuring the financial health of the Columbia ...
 
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Municipal Creditworthiness

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PUAD 702
Public Financial Management
University of Baltimore
Baltimore, Maryland
12 February 2008

Published in: Economy & Finance, Business
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Municipal Creditworthiness

  1. 1. Municipal Creditworthiness PUAD 702 Public Financial Management University of Baltimore Baltimore, Maryland 12 February 2008
  2. 2. Ratings Agencies <ul><li>Three major ratings agencies for government </li></ul><ul><ul><li>Moody's Investors Services </li></ul></ul><ul><ul><li>Fitch Ratings </li></ul></ul><ul><ul><li>Standard & Poor's </li></ul></ul><ul><li>Evaluate creditworthiness </li></ul><ul><li>Informally establish fiscal guidelines </li></ul><ul><li>Reduce transaction costs </li></ul><ul><li>Establish prices for borrowings </li></ul>
  3. 3. Ratio Metrics <ul><li>Ratio metrics are simple ratios that creditors and debtors use to determine ability to repay </li></ul><ul><li>Some are used by ratings agencies </li></ul><ul><ul><li>To establish credit worthiness </li></ul></ul><ul><li>Some are used internally by finance officers </li></ul><ul><ul><li>For internal analysis </li></ul></ul><ul><li>Some are imposed through bond covenant agreements </li></ul><ul><ul><li>Crossing a threshold could signal credit default </li></ul></ul>(Temel 2001, 176)
  4. 4. total debt / assessed value <ul><li>Total debt means all debt issued by jurisdiction </li></ul><ul><li>Assessed value is the sum value of all real estate within a jurisdiction </li></ul><ul><li>Determines the ability of a jurisdiction to assess taxes to fund principal and interest payments </li></ul><ul><li>Only valid if jurisdiction has power to assess property taxes </li></ul><ul><li>Unitless ratio, long term, comparable from year to year </li></ul>(Ratchford 1936)
  5. 5. total debt / population <ul><li>Total debt means all debt issued by jurisdiction </li></ul><ul><li>Population is the size of the population domiciled within a jurisdiction </li></ul><ul><li>Determines the ability of a jurisdiction to assess taxes to fund principal and interest payments </li></ul><ul><li>Only valid if jurisdiction has power to assess income taxes </li></ul><ul><li>Measured in dollars, long term, not comparable from year to year, unless inflation is taken into account </li></ul>(Michel 1977)
  6. 6. total debt / personal income <ul><li>Total debt means all debt issued by jurisdiction </li></ul><ul><li>Personal income means the total income of all persons domiciled within a jurisdiction </li></ul><ul><li>Determines the ability of a jurisdiction to assess taxes to fund principal and interest payments </li></ul><ul><li>Only valid if jurisdiction has power to assess income taxes </li></ul><ul><li>Unitless, long term, comparable from year to year </li></ul><ul><li>Equivalently, per capita debt / per capita income </li></ul>(Temel 2001, 176)
  7. 7. debt service / revenues <ul><li>Debt service means principal and interest payments within a fixed time period </li></ul><ul><li>Revenues means government revenues over same time period </li></ul><ul><li>Demonstrates the current ability of a jurisdiction to meet its immediate repayment obligations </li></ul><ul><li>Unitless, short term, comparable from year to year </li></ul><ul><li>May use components, e.g., </li></ul><ul><li>debt service / operating revenues </li></ul>(Temel 2001, 176)
  8. 8. operating expenses / revenues <ul><li>Operating expenses means all non-capital expenditures within a fixed time period </li></ul><ul><li>Revenues means government revenues over same time period </li></ul><ul><li>Demonstrates the current ability of a jurisdiction to meet its immediate current obligations </li></ul><ul><li>Unitless ratio, short term, comparable from year to year </li></ul>(Columbia Association Budget Committee 2007)
  9. 9. Other Concerns <ul><li>Constitutional or charter prohibitions </li></ul><ul><li>Community values may show an inclination to spend more or less out of current revenues that ratios suggest </li></ul><ul><li>Long term demographic trends, including aging population and high unemployment </li></ul><ul><li>Reliability of socioeconomic measurements </li></ul><ul><li>Overlapping debt with subjurisdictions (cities and counties) </li></ul>(Hildreth and Miller 2002)
  10. 10. Credit Enhancement <ul><li>Government agencies may have lower ratings </li></ul><ul><li>Insurance firm may have strong rating </li></ul><ul><li>Insurance firm can “rent out” strong rating by insuring a bond issuance </li></ul><ul><ul><li>Will repay principal and interest should issuer default </li></ul></ul><ul><ul><li>Issuance, though not issuer, receives credit rating of insurance firm </li></ul></ul><ul><ul><li>Reduces borrowing costs to issuer </li></ul></ul><ul><ul><li>Insurer may require moderate rating from issuer </li></ul></ul>(Miller and Hildreth 2007)
  11. 11. References <ul><li>Columbia Association Budget Committee (2007, February). Measuring the financial health of the Columbia Association. Committee report, Columbia Association, Inc., Columbia, Maryland. </li></ul><ul><li>Hildreth, B. W. and G. J. Miller (2002). Debt and the local economy: Problems in benchmarking local government debt affordability. Public Budgeting & Finance 22 (4), 99-113. </li></ul><ul><li>Michel, A. J. (1977, November). Municipal bond ratings: A discriminant analysis approach. The Journal of Financial and Quantitative Analysis 12 (4), 587-598. </li></ul><ul><li>Miller, G. J. and B. W. Hildreth (2007). Local debt management. In A. Shah (Ed.), Local Public Financial Management , Public Sector Governance and Accountability Series, Chapter 4, pp. 109-155. Washington, D.C.: The World Bank. </li></ul><ul><li>Ratchford, B. U. (1936, November). A formula for limiting state and local debts. The Quarterly Journal of Economics 51 (1), 71-89. </li></ul><ul><li>Temel, J. W. (2001). The Fundamentals of Municipal Bonds (Fifth ed.). New York: John Wiley and Sons. </li></ul>

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