Counties have major interest in bond ratings

Rating agencies use a wealth of factors to determine whether local government bonds are a sound investment

By Todd McGee
Communications Director

Beauty may be in the eyes of the beholder, but a county’s bond rating is in the eyes of many. And there are many factors that determine a county’s credit worthiness, representatives from the three major bond rating agencies told the Board of Directors at its Feb. 6 meeting.

The presentation was part of President David Young’s State of the Counties initiative, a yearlong effort to provide a snapshot of the status of North Carolina counties in 2008. North Carolina Deputy Treasurer Vance Holloman, who is also director of the State and Local Government Finance Division, moderated the discussion. Jennifer Russo of Standard & Poor's, Zeynep Altinordu of Moody's Investors Services and Barbara Ruth Rosenberg of Fitch Ratings Ltd, served as panelists.

According to Holloman, the ratings are really done for the borrower, and not the county. “Ratings really reflect the risk the borrower is taking,” Holloman said. “The rating agencies are such a value to (the Local Government Commission). They are objective. They have no agenda in this.”

When assigning a credit rating, bond rating agencies naturally review a county’s financial makeup – size of the property tax base, property tax rate, average per capita income, unemployment rate – but they also examine many other factors.

Altinordu said agencies spend a considerable amount of time looking at the county workforce, going beyond the traditional ratings like unemployment or per capita wages. She said the agency also takes into account the composition of the employment base to see if a county is too heavily dependent on any one sector of the economy. They also look at commuting patterns of the workforce, seasonal unemployment rates, number of high school graduates who pursue secondary education at either a four-year university or a community college, and enrollment trends in schools.

Altinordu said the estimated population change seems to be faster for North Carolina than other states, but wealth levels are slower.

All three panelists said their agencies spend a considerable amount of time examining the county management to see how committed the leaders are in areas like workforce development, capital planning and, particularly for fast-growing counties, growth management. Each said that a local government’s ability to respond to budget concerns through mid-year amendments is also an important indicator of sound financial practices. Being proactive in dealing with unexpected issues gives creditors confidence that a government will respond to any future issues that could impact its ability to repay its debt.

“We tend to see stronger management in North Carolina,” Altinordu said.

Rosenberg specifically pointed out that a county’s debt policies and procedures are very important.

“This really can help strengthen your position,” she said.

Russo said that her firm created a Financial Management Assessment tool in June 2006. The FMA examines seven areas that S&P believes will most impact a local government’s credit worthiness: revenue and expenditure assumptions, budget amendments and updates, long-term financial planning, long-term capital planning, investment management policies, debt management policies, and reserve and liquidity policies.

“It is an analytic enhancement adopted by S&P to improve the definition of our analysis of management practices and policies, and expand our methods of communicating analytic conclusions about policies and procedures,” Russo said. “The FMA offers a more transparent assessment of a government's financial practices as an integral part of our General Obligation and appropriation credit rating process.”

Russo said that one purpose of the FMA is to try to simplify S&P’s ability to communicate to a local government where it stands. Instead of using a complicated ratings system with many nuances, the report is given to the local government with a one-word rating:

According to Russo, S&P has assigned 54 FMA scores to North Carolina counties, with 13 counties earning a “strong” rating and 12 earning a “good” score. Of the remaining 29, only one received a “vulnerable” rating, with the other being judged as “standard.”

Another key factor that debt rating agencies will consider is the overall debt load on the population. This takes into account debt service already being paid by other units of government that share a population. For North Carolina counties, that means the debt burden of cities within their borders is considered when assessing a county’s debt capacity and credit worthiness.

In the end, Holloman said that all the effort that goes into determining a county’s credit rating is worth it. With counties across North Carolina facing significant demands for school construction, jails, water and sewer facilities, and other capital needs, a strong credit rating could represent a significant savings to county citizens.

“Bonds are the most secure form of debt you can issue,” he said.

What is the Local Government Commission?

The Local Government Commission serves several functions, most notably to approve any proposed bond sales by local governments. The commission will examine the unit’s finances and its proposed method of paying back the bonds to ensure the bonds can be afforded. Deputy Treasurer Vance Holloman, director of the State and Local Government Finance Division, said the Commission does not look at why the bonds are being pursued (i.e. the policy decision), but rather if the unit of government can reasonably assume the additional debt service.

The presence of the LGC helps all North Carolina local governments because it provides security to investors that any bonds paid bought in North Carolina will be paid back. Holloman said that the LGC has the statutory authority to step in and assume financial management of a local government if that unit defaults on a bond repayment. Holloman said this authority includes the ability to raise property taxes, if needed.

The Local Government Commission was created during the midst of the Great Depression when many local governments in North Carolina were in dire financial straits. The LGC has nine members: the state treasurer, the secretary of state, the state auditor, the secretary of revenue, and five others by appointment. The state treasurer serves as chair and selects the secretary of the Commission, who heads the administrative staff serving the Commission.

Presenters and PowerPoint presentations
Vance Holloman, Director, Local Government Commission | PPT
Jennifer L. Rosso, Standard & Poor's | PPT
Zeynep Altinordu, Moody's Investors Services | PPT
Barbara Ruth Rosenberg, Fitch Ratings, Ltd. | PPT