Across the country, municipalities have been facing increasing pressures to cut costs. Here are some areas that your municipality can control to contribute to a strong credit rating.
Across the country, municipalities have been facing increasing pressures to cut costs. Here are some areas that your municipality can control to contribute to a strong credit rating.
Across the country, municipalities have been facing increasing pressures to cut costs, stemming from rising levels of emigration—which hinders tax revenues and causes reductions in state funding levels. For an area like New England, cities and towns are under the gun to become more efficient with available funds and to cut costs if they want people to keep living here.
With bonding as such a prevalent source of public funds, the credit rating of a municipality is critical, as it can have a large impact on both the availability of that funding and amount of interest that will need to be paid. Maintaining and increasing a credit rating, however, can be a challenge.
Many of the factors used to determine a municipality’s credit rating can be out of the direct influence of the municipality – this generally includes items of an environmental, legislative, economic, or regulatory nature. However, there are still several areas that are in direct control of a municipality and can contribute to a strong rating, namely in financial management and in debt management:
The most important controllable factors for any municipality in maintaining or improving its bond rating are in financial management. Rating agencies look to see that an organizational system is in place that shows planning for meeting obligations before they become due, and such a system is generally evidenced by the following:
All of these areas show that municipal management has a vision beyond the current budget year. Rating agencies look favorably on cities and towns that have this vision as well as adherence to the policies; it is indicative of an entity that is well prepared to make payments on debt.
The second main consideration in assessing the creditworthiness of a municipality is the structure and types of long-term debt that it currently holds.
While many aspects affecting a credit rating are out of a municipality’s control, active financial management and properly managed debt structure can be the difference between a highly or lowly rated city or town. No individual item is the sole determining factor when it comes to municipal credit ratings, but in the aggregate these attributes are consistently found to be common threads running through highly rated organizations. Additionally, they are routinely referenced by the rating agencies as areas given serious consideration during the determination.