Standard & Poor's Ratings Service on Thursday released long-anticipated changes to its criteria for assessing the credit quality of local governments, saying it expects the ratings for 30 percent of the 4,000 it evaluates to rise as a result.
The agency forecasts 60 percent of ratings to stay the same under what it calls "an intuitive framework that guides the fundamental assessment of credit risk."
The remaining 10 percent will likely fall under the new criteria, which will be more transparent than in the past and will also allow the agency to provide greater detail, S&P said.
Of seven factors it will use in its assessments, the economy will have the most weight, accounting for 30 percent of a government's credit score. Financial management, the decisions, policies and practices affecting both operations and debt, will have a weight of 20 percent.
S&P began the process of changing its criteria in January 2012 and took comments and public input after releasing a proposal in March 2012. Since then, the city of Detroit has filed for the largest municipal bankruptcy in U.S. history.
The filing had no direct effect on the criteria, but S&P made a "nuanced change" in its assessment of management characteristics, said Jeff Previdi, S&P managing director of U.S. public finance, by adding "a lever in the criteria that addressed the potential for high debt and contingent liability obligations."
Essentially, 10 percent of a city's rating will be based on its debt service, its debt as a percentage of its revenues and its pension liabilities.
"We don't necessarily feel that what took place in Detroit ... was a result of the debt," he said on a call with reporters. "I think the economic decline experienced by Detroit has affected their ability to pay the debt that they had."
"That being said, we wanted to ... be able to adjust for situations where a municipality might have taken on too much debt and contingent liabilities for their ability to pay," he added.
A city's budgetary flexibility, fiscal balance and liquidity will all have 10 percent weight each. So will its "institutional framework," which encompasses laws governing the municipality's operations and its interactions with the state.
Separately, the agency released a report grading each state on the fiscal environment it creates for local governments, on a scale from one to five.
Connecticut, Maryland, North Carolina and Tennessee received the highest marks for how they impact their local governments' finances. They do not have restrictions on revenue raising and they provide "strong system support" to cities, towns and counties, S&P said.
Other states received a mix of slightly lower grades, for either restricting local revenues, having less predictable budgets or being lax with transparency. None were given a four or five.
This week, the agency will release the ratings not expected to change. Next week, it will begin reviewing credits that it anticipates will have rating swings by three or more notches. That process will last until the middle of December. Once it is over, the agency will spend most of 2014 reviewing the ratings it expects to have smaller changes.
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