Moody’s Releases Revised Rating Methodology for Local  Government General Obligation Debt

Earlier this year, Moody’s Investors Service (Moody’s) released an  updated rating methodology explaining how Moody’s evaluates the  credit quality of local government general obligation debt. In general,  the revised methodology doubles (from 10% to 20%) the emphasis  Moody’s places on debt and imputed pension liability and reduces  (from 40% to 30%) the emphasis on economic factors. In conjunction  with the updated methodology, Moody’s introduced a “scorecard”  quantifying factors and subfactors it believes to be most important in  evaluating the credit of local governments. The following is a summary  of those factors and subfactors and their relative weights:

Economy/Tax Base (30%)

  • Tax Base Size (10%)
  • Full Value Per Capita (10%)
  • Wealth (Median Family Income) (10%)  

Finances (30%)

  • Fund Balance (% of Revenues) (10%)
  • Fund Balance Trend (Five-Year Change) (5%)
  • Cash Balance (% of Revenues) (10%)
  • Cash Balance (Five-Year Change) (5%)  

Management (20%)

  • Institutional Framework (10%)
  • Operating History (10%)  

Economy/Tax Base (30%)

  • Debt to Full Value (5%)
  • Debt to Revenue (5%)
  • Moody’s-Adjusted Net Pension Liability (Three-Year Average) to Full Value (5%)
  • Moody’s-Adjusted Net Pension Liability (Three-Year Average) to  Revenue (5%)

The new scorecard, plus a number of “below-the-line” adjustments  (more subjective and idiosyncratic factors likely not applicable to all  local governments), are and will be used as part of the Moody’s rating  process. Moody’s increased weight of the debt/pension-related factor  and subfactors has resulted in a vigorous debate between and among  Moody’s and market participants in Ohio. According to Moody’s,  statutory contributions to the various Ohio public employee pension  plans have been established below actuarially sound requirements  over an extended period of time. The increase in weight attached to  debt and pensions “recognizes the potential for large pension liabilities  to constrict a local government’s financial flexibility” through the risk  of increased required contributions in future years. In applying this  factor and subfactors, Moody’s generally allocates its calculation of the  unfunded liability of an applicable pension plan to a local government in proportion to that local government’s contributions to the plan.

Moody’s has indicated that the reduction in weight attached to  economic factors acknowledges that “some local governments  are either unwilling or unable to convert the strength of their local  economies into revenues. Tax caps, anti-tax sentiment, the natural  lag between economic activity and its conversion into government  revenues, often place obstacles between municipal governments and  the income generated by their local economies, as do a variety of other  factors.”

Contemporaneously with the release of the updated rating  methodology, Moody’s issued a press release announcing that it had  placed 256 local governments under review (132 for potential upgrade  and 124 for potential downgrade; all 19 Ohio local governments  identified were under review for potential downgrade) in conjunction  with its implementation of the updated rating methodology. Beyond  the 19 Ohio local governments identified as described above, Moody’s  continues to evaluate all Ohio local government credits it has rated  through its ongoing surveillance efforts. It is recommended that you  contact your public finance professionals (bond counsel, investment  bankers and/or municipal/financial advisors) should you have questions  concerning the effect, if any, these actions by Moody’s may have on an  existing Moody’s rating or current or future financing efforts.

The publication “US Local Government General Obligation Debt”, which  describes in detail the updated rating methodology, is available from  Moody’s.

Recent Decisions of Interest

Quo Warranto. A petition for writ of quo warranto to oust an assistant  mayor from the positions of acting police chief and de facto deputy  chief is denied because quo warranto does not apply to temporary  assignments and, thus, it does not apply to the position of acting chief. Calvaruso v. Brown, 2014-Ohio-1018 (Ohio Supreme Court).

Foreclosure Proceedings. A prosecutor may not charge a fee to recover  legal costs incurred in conducting delinquent real estate tax foreclosure  proceedings under Section 5721.14 or 5721.18 of the Ohio Revised  Code. 2014 Op. Att’y General No. 2014-020.

Public Records. For purposes of Section 149.43 of the Ohio Revised  Code, a county auditor makes a public record available for inspection  when access is provided to the public record online through the  county’s website. A county auditor may not charge and collect a fee  for making public records available for inspection on a county website.  2014 Op. Att’y General No. 2014-009.

Tax Levies for Ambulance Services. A county may use taxes levied for  providing ambulance and/or emergency medical service (such taxes  being levied under Section 5705.19(U) of the Ohio Revised Code) to pay  for costs of a countywide 9-1-1 system’s answering point, but the costs  paid with that tax revenue must be attributable to expenses incurred  by the 9-1-1 system’s answering point in making ambulance and/or  emergency medical service available throughout the county. 2014 Op.  Att’y General No. 2014-013. 

Legislation of Interest

Substitute House Bill No. 289 (Governor signed June 5, 2014;  effective immediately.) This Act terminates as of January 1, 2015  the authority of municipal corporations or of municipal corporations  and townships to create or substantially amend joint economic  development zones created under Revised Code Section 715.691  (“Alternative JEDZs”). For Alternative JEDZs created or substantially  amended between the effective date of the Act and December 31,  2014, the Act requires the development of an economic development  plan and a schedule for implementation of the plan and the  establishment of a review council to review and approve the plan. The  Act requires that at least 50% of any income tax generated from an  Alternative JEDZ created after the Act’s effective date be used for the  new or expanded services or facilities that are part of the plan.

This Act also renames all joint economic development zones previously  established under Revised Code Section 715.69 “municipal utility  districts” (MUDs). The provisions governing MUDs are contained in  new Revised Code Section 715.84.

Amended Substitute House Bill No. 492 (House passed on April  9, 2014; Senate passed May 28, 2014; House concurred June 3,  2014; awaiting Governor’s action.) This Bill, among many other things,  expressly authorizes municipal corporations to award job creation and  job retention municipal income tax credits even if a corresponding state  tax credit has not been awarded, and modifies certain State tax credit  programs.

Substitute Senate Bill No. 172 (Governor signed June 5, 2014.) This  Acts amends land reutilization programs and property tax foreclosure  procedures to improve the efficiency and effectiveness of land banks  and the tax foreclosure process used to acquire and sell vacant and  abandoned properties.