Moody’s Rating Process

Jennifer Bernhardt, Analyst June 2019

US Public Finance
Agenda
1. The Rating Process
2. Moody’s General Obligation Methodology
3. The Surveillance Process

Moody's Rating Process, June 2019 3

1 Rating Process
Moody's Rating Process, June 2019 5
 Moody’s General

2 Obligation
Methodology
Moody’s GO Methodology
Scope of the GO Methodology

» Applies to U.S. local governments issuing debt secured by a general

obligation pledge.
» Principal and interest are secured by the full faith and credit of the
issuer and/or are supported by the issuer’s unlimited or limited taxing
power.
» Includes cities, counties, school districts, some community colleges
and special districts.

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Purpose of the Scorecard

» Provide a starting point for a more thorough analysis.

» Enhance the transparency of our rating process.
» Include some qualitative metrics in addition to quantitative factors.
» Formally incorporate historical trend analysis.
» Capture key considerations that correspond to particular rating
categories.

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GO Scorecard Factors

Moody's Rating Process, June 2019 9

GO Scorecard Factors
Factor 1: Economy and Tax Base (30%)

» Full Value (10%) measures market value of taxable property.

» Full Value Per Capita (10%) measures resources per resident.
» Median Family Income (10%) measures socioeconomic characteristics of the
base.
» Other Considerations: Institutional presence; regional economic center;
economic concentration; unemployment levels; poverty levels; other.
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below
ECONOMY AND TAX BASE (30%)
Tax Base Size: > $12B $12B ≥ n > $1.4B ≥ n > $240M ≥ n > $120M ≥ n > ≤ $60M
Full Value (in $1.4B $240M $120M $60M
000s)

Full Value Per > $150,000 $150,000 ≥ n > $65,000 ≥ n > $35,000 ≥ n > $20,000 ≥ n > ≤ $10,000
Capita $65,000 $35,000 $20,000 $10,000
Socioeconomic > 150% of US 150% to 90% of 90% to 75% of 75% to 50% of 50% to 40% of ≤ 40% of US
Indices: MFI median US median US median US median US median median

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GO Scorecard Factors
Factor 2: Finances (30%)
» Fund Balance (10%) measures financial resources, relative to operating
revenue, both at a point in time and over time.
» 5-Year Dollar Change in Fund Balance as a % of Revenues (5%)
» Cash Balance (10%) measures liquidity, relative to operating revenue, both at
a point in time and over time.
» 5-Year Dollar Change in Cash Balance as of % of Revenues (5%)
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below
FINANCES (30%)
Fund Balance as % > 30.0% 30.0% ≥ n > 15.0% 15.0% ≥ n > 5.0% 5.0% ≥ n > 0.0% 0.0% ≥ n > -2.5% ≤ -2.5%
of Revenues > 25.0% for School 25.0% ≥ n > 10.0% 10.0% ≥ n > 2.5% 2.5% ≥ n > 0.0% for 0.0% ≥ n > -2.5% for ≤ -2.5% for SD
» Other Considerations: Revenue structure; contingent liabilities; other.
Districts for SD for SD SD SD
5-Year Dollar > 25.0% 25.0% ≥ n > 10.0% 10.0% ≥ n > 0.0% 0.0% ≥ n > -10.0% -10.0% ≥ n > -18.0% ≤ -18.0%
Change in Fund
Balance as % of
Revenues
Cash Balance as % > 25.0% 25.0% ≥ n > 10.0% 10.0% ≥ n > 5.0% 5.0% ≥ n > 0.0% 0.0% ≥ n > -2.5% ≤ -2.5%
of Revenues > 10.0% for School 10.0% ≥ n > 5.0% 5.0% ≥ n > 2.5% for 2.5% ≥ n > 0.0% for 0.0% ≥ n > -2.5% for ≤ -2.5% for SD
Districts for SD SD SD SD
5-Year Dollar > 25.0% 25.0% ≥ n > 10.0% 10.0% ≥ n > 0.0% 0.0% ≥ n > -10.0% -10.0% ≥ n > -18.0% ≤ -18.0%
Change in Cash
Balance as % of
Revenues

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GO Scorecard Factors
Factor 3: Management and Governance (20%)

» Institutional Framework (10%) measures the sector’s legal ability to match

revenues and expenditures.
» Operating History (10%) compares revenues and expenditures over time.
» Other Considerations: State oversight or support; unusually strong or weak
management or planning; other.

Very Strong Strong Moderate Weak Poor Very Poor

Aaa Aa A Baa Ba B & Below
MANAGEMENT AND GOVERNANCE (20%)
Institutional Very strong legal Strong legal Moderate legal Limited legal Poor legal ability Very poor or no
Framework ability to match ability to match ability to match ability to match to match legal ability to
resources with resources with resources with resources with resources with match resources
spending spending spending spending spending with spending
Operating > 1.05x 1.05x ≥ n > 1.02x ≥ n > 0.98x ≥ n > 0.95x ≥ n > ≤ 0.92x
History: 5-Year 1.02x 0.98x 0.95x 0.92x
Avg of Op Rev /
Op Expend

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GO Scorecard Factors
Factor 4: Debt and Pensions (20%)

» Debt (10%) measures long-term debt outstanding relative to tax base value
and operating revenue.
» Pensions (10%) measures Moody’s Adjusted Net Pension Liability (ANPL)
relative to tax base value and operating revenue.
» Other Considerations: Unusual security features; unusual risk posed by debt
and pension structure; fixed cost burden; overlapping debt and pension levels;
history of missed debt service payments; other.
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below
DEBT AND PENSIONS (20%)
Net Direct Debt / Full < 0.75% 0.75% ≤ n < 1.75% 1.75% ≤ n < 4.00% 4.00% ≤ n < 10.00% 10.00% ≤ n < > 15.00%
Value 15.00%
Net Direct Debt / < 0.33x 0.33x ≤ n < 0.67x 0.67x ≤ n < 3.00x 3.00x ≤ n < 5.00x 5.00x ≤ n < 7.00x > 7.00x
Operating Revenues
3-Year Average < 0.90% 0.90% ≤ n < 2.10% 2.10% ≤ n < 4.80% 4.80% ≤ n < 12.00% 12.00% ≤ n < > 18.00%
ANPL/ Full Value 18.00%
3-Year Average < 0.40x 0.40x ≤ n < 0.80x 0.80x ≤ n < 3.60x 3.60x ≤ n < 6.00x 6.00x ≤ n < 8.40x > 8.40x
ANPL/ Op Revenues

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Scorecard is only the beginning…
Limited to major rating drivers that are common to
most issuers
» Not a calculator – the scorecard outcome will not match the actual rating in
many cases.
» Not an exhaustive list of factors that we consider in every rating.
» May adjust up or down from scorecard-indicated outcome based on additional
factors.
– Factors that are not likely to apply to all issuers, but that can impact credit
strength.
» Final rating is determined by a Rating Committee after consideration of all
relevant facts.

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3 The Surveillance
Process
Moody's Framework for Monitoring US
Municipal Ratings
» Our surveillance framework is designed to assess whether an issuer’s
rating and outlook are appropriate given the most current and reliable
financial information available.
» Surveillance reviews are initiated when updated financial data is
available, macro-level developments unfold, or credit-related events
occur.
» The process is sequential in nature, where each level of review
involves an increased level of scrutiny and analyst involvement until
the rating is deemed appropriately positioned.

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Moody’s Rating Process: Surveillance

» Once assigned, we monitor ratings continually. Many governments do not issue debt regularly, so we
review their ratings outside of the sales calendar to ensure that they remain appropriately positioned.
» The surveillance process involves multiple screens. Most ratings are deemed appropriate through the
various filtering steps but some proceed to a rating committee for possible rating change.

Quantitative screens
(Threshold Filtering and Analyst Batch
Review)

Individual Review

Rating
Committee

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4 Questions?
Jennifer Bernhardt
[email protected]
+1.312.706.9983

moodys.com
 This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action
information and rating history.

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