How Policies Factor Into GO Credit Analysis

May 15th, 2008

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General Obligation Credit Analysis (Review)

TAX/ECONOMIC BASE

Composition/Role

Demographics

GOVERNANCE

Multi-year planning

Succession & Contingency Planning

Legal Environment

FINANCES

Operating Performance

Reserve Levels

Financial Flexibility

SECURITY:

GOULT

Debt Certificates

TAW

DEBT FACTORS:

Composition/Structure

Amount of Leveraging

Referendum History

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CREATION OF POLICIES

Important to remember polices need to suit individual features of district

Types which come up during the course of credit analysis include: Debt, Finance, and Investment Policies

Forms taken can be, in descending strength: formal, informal (simply lacking explicit endorsement), or as loose as “matter of practice”

There is no Moody’s requirement to have formalized and adopted policies in place to achieve specific rating categories, BUT…

There tends to be a strong correlation between articulating targets, guidelines and policies as you ascend the rating scale

Moody’s does not actively participate in the creation of any policies, but is available to discuss impact (if any) to credit rating

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WHY POLICIES ARE IMPORTANT FOR CREDIT ANALYSIS Governance (which includes factors both inside and

outside a district’s control) is one of the cornerstones of GO credit analysis & policies allows for peer comparison

In some cases establishes performance benchmarks

In others, provides insight into philosophical approach should unexpected or uncertain environments arise

In the case of formalized policies, demonstrates vision is shared by more than one individual and will endure despite personnel changes or during heavy board turnover

Unifies organizational focus, cutting across areas of responsibilities and reporting lines (less of an issue for schools)

Fosters a disciplined atmosphere, by focusing on already established guidelines

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Policies: Debt (Typical elements) Targeted & maximum debt burden beyond which district will not

bond (usually expressed as % of full value or statutory debt ceiling) Caps placed on amount of operating budget debt service

represents Limitations on duration or structure (i.e. level vs. ascending,

balloon maturities etc.) CIBS vs. CABS Circumstances when DSEB would be accessed Use of working cash bonds Items to bond for vs. cash finance

Creating a multi-year CIP which identifies both capital needs and funding sources

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POLICIES: Debt (Variable Rate) No rule of thumb governing % of overall debt per rating level,

but there are practical limits Statement which clearly articulates the purposes of and

circumstances under which variable rate debt would be issued Need to convey the district understands and plans for

contingencies against the inherent risk (interest rate, termination, counterparty, collateral posting etc.)

Responsibility and frequency of monitoring not only overall debt portfolio but the range of expected termination payments, and what resources might be available to apply to a termination payment if necessary

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Not Policies But Good Practices (Debt): Two way communication with overlapping/underlying

entities for district borrowing plans

For rapidly developing districts dialogue with cities/developers to predict future class sizes and possibility negotiating impact fees/contributions

Strategy for having public outreach for upcoming bond (or operating) referendums (promises, if any to voters)

Model impact of additional debt on projected debt levy tax rate / demonstrate underlying assumptions

Flexibility as conditions warrant (alternate revenues, use of trustee etc.)

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Policies: Finance Like debt ratios, no single amount for per rating

category (point of diminishing returns)

Policy which identifies both minimum and target levels are most valuable

Circumstances under which surpluses or actual fund balance can be used (does board and staff have same target in mind?)

Monitoring cash flow cycles vs. short term borrowing needs

Attitude towards Working Cash Fund

Investment policies: Goals, Permitted Investments, Responsibility

Goals for funds outside General Fund: Internal Service and Transportation

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Not Policies But Good Practices: Finance Like debt planning, having a multi-year financial plan

Triggers/Cycles for going to voters for operating referendums & are voters informed of what financial targets are?

Specific identification of budget priorities or flexibility should a referendum fail, or period of fiscal distress arise (i.e. program cuts, increases to class size )

Timely audited financial documents which are attested to by an outside firm, and the direct disclosure of any material events as soon as possible

If presenting on a cash basis , how are subsequent year’s property taxes treated (i.e. May/June disbursals)

Accessibility of information

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Summary Policies are only targets and do not speak to a district’s willingness,

ability, methods or plausibility to achieve established goals

Policies should be periodically reviewed to ensure continued suitability

Moody’s recognizes the need for flexibility. Changes can be credit positive, negative, or neutral

If charges are contemplated, and questions arise about impact on credit, think in terms of 5 fundamental factors

• A credit whose factors nicely fit its rating category can likely assume some modest weakening in certain area’s without impacting overall quality

• Likewise if a credit’s fundamental’s are below its peer group on many fronts, but there is a very strong compensating facet, and that is what is being weakened, a rating action is more likely

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Contacts

John Humphrey: 312-706-9962

Ted Damutz (Co-Head of Local Office / State Lead): 312-706-9953

Jeannie Iseman: 312-706-9958

Sarah Haradon: 312-706-9957