In September 2023, S&P Global Ratings announced a pivotal restructuring of its rating methodology that affects over 400 state and local government issuers across the United States. This strategic move reflects an evolving landscape of public finance assessments, driven by the need for increased transparency and comparability in rating evaluations. S&P’s updated criteria instill a singular framework complemented by a uniform set of weighted factors, which aim to enhance the evaluation of governmental credit profiles and the institutional frameworks that guide them.
This new methodology delineates the importance of institutional frameworks apart from the direct credit profile of individual issuers. By emphasizing the institutional context, S&P argues that it is better equipped to assess the multifaceted environment in which local governments operate. This distinction fosters clearer insights into the financial health of governments across varied jurisdictions, aligning with the agency’s objective of delivering more consistent and relevant credit assessments.
The motivation behind S&P’s refined criteria is twofold: consolidation and clarity. Jane Ridley, senior director and sector lead at S&P, underscored the agency’s ongoing commitment to refining its rating criteria to better serve investors and market actors. By adopting a more streamlined, uniform approach, S&P aims to facilitate straightforward comparisons between different governmental entities.
Equally significant is the recognition that governmental stability and creditworthiness hinge not only on individual financial profiles but also on the strength and reliability of the institutional framework. “We wanted to improve consistency within our U.S. public finance market,” said Sarah Sullivant from S&P’s State and Local Government Ratings Group. This insight reveals a paradigm shift: recognizing that financial resilience is often embedded within the structures and policies of governing bodies, rather than being solely a trait of individual agencies.
In this latest iteration of S&P’s rating criteria, traditional credit factors have been reweighted to better reflect their significance in credit evaluations. Notably, the weight assigned to budget reserves and liquidity has been adjusted, now occupying a dedicated space within the individual credit performance metrics. This realignment emphasizes the critical role these financial attributes play in augmenting governmental operational agility during economic downturns or crises.
Moreover, in the evaluations of counties and municipalities, adjustments made to the weights of the five key credit factors underscore a nuanced understanding of local financial landscapes. The recalibration of these weightings aims to reflect a more comprehensive perspective on economic health, including variables such as annual pension costs and per capita income, which are pivotal for assessing a municipality’s capacity to manage its obligations and deliver services effectively.
The reception to S&P’s updated criteria has been largely positive, as indicated by the perspectives of observers like Municipal Market Analytics, Inc. Their endorsement reflects a growing acknowledgment of the need for a flexible approach in credit assessments, particularly in unpredictable economic times. This sentiment highlights an industry-wide movement toward transparency and adaptability in rating methodologies.
While around 95% of public ratings are anticipated to remain unchanged under the new criteria, the methodology aims to bring forth greater precision and reliability to the reasoning behind any adjustments. Any notable changes in ratings will predominantly stem from the reweighting of critical assessment factors rather than from inherent weaknesses within specific districts. This message alleviates concerns among issuers who might fear sudden downgrades based on subjective analysis.
S&P’s revaluation is part of a broader trend in which rating agencies, including Moody’s and Fitch, are reevaluating their methodologies more frequently and comprehensively than in the past. The post-2008 financial landscape has prompted an increased focus on methodological rigor, instilling a heightened standard for credit assessments across the board.
Ridley pointed out the lack of an immediate market crisis driving these changes, which reflects a proactive stance rather than a reactive adjustment. This foresight is crucial as it instills confidence among stakeholders—investors, policymakers, and the general public—that ratings are not merely responsive to immediate financial shocks but are based on carefully considered principles that enhance long-term market stability.
S&P Global Ratings intends to revisit the issuers affected by this criteria observation within a six-month window, thereby ensuring regular oversight and adaptation as required by the new standards. This consistent evaluation methodology not only promotes confidence in the ratings assigned but also prepares the ground for a resilient public finance landscape amid shifting economic conditions.
The detailed scrutiny and thoughtful consideration that inform these ratings thus mark an ongoing commitment by S&P to uphold the integrity and efficiency of public finance rating processes in the United States. As this evolution occurs, the ultimate beneficiaries will be the investors and communities relying on sound, transparent, and comparable assessments of governmental creditworthiness.