Agenda - Council - 08/24/1982 - Laserfiche WebLink

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! i I ! i I I '1 I I '1 I I ! I I I I On an overall basis, we would consider the economic base and operating fund analysis as the most critical elements in our determination of municipal bond ratings. An examination of the operating fund tells us about revenue-expenditure imbalance, working capital position and whether the municipality may be heading for trouble. As indicated earlier, one major aspect of the rating process is the measurement of fiscal results over a period of time as well as planning and budgeting for the future. An examination of these elements together with other credit measuring tools will bring us to a total credit picture or profile as indicated by our municipal bond ratings. Outlined for your information in herein is our complete worksheet for general obligation bonds. As you can see, some of the major factors include not only revenues and expenditures covering the major operating funds but also balance sheet data. The existence of short-term debt, the accounting basis, unfunded liabilities, budget data, economic base and management factors. If management's financial policy does not translate itself into strong bo%tom line financial performance and a strong financial position (balance sheet), then questions may be raised as to either financJ~al controls and policy and/or the quality of management. There are situations where there is a mediocre economic base, but very strong financial performance. This is an indicatfon that management is able to maximize its economic base in terms of bottom line results, and it can be a positive factor in the rating decision. Although it should be made clear that S&P does not and cannot perform an audit function, S&P can and must take into account in its rating process the reporting and accounting standards being used by the credits under review. Our statement on this subject has been widely circulated since its initial publication in May, 1980. Also, although not part of the audit itself, a management letter would be extremely useful in that it may point out any weaknesses or deficiencies in financial and/or management controls. Many asked about trigger points leading to rating changes. In this regard I call to your attention a set of early warning guidelines that we use in our rating process and can also serve management as a tool; found as an exhibit at the end of the worksheet. Although financial trends are a major credit determinant, they do not by themselves determine credit quality. A vital ingredient in any enterprise remains management and an ever-present credit ingredient remains the quality of the management .team %hat comes to grips with adversities and manages to make the difficult decisions that often have to be made. This can result in the difference between a high grade credit and one that is less desirable. The reliability of information is an important element in our view of management. Management ought to keep in regular contact with the bond raters. What we probably disapprove of most is being surprised by a development %hat the full disclosure environment would indicate ought not to occur.