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Credit FAQ: S&P Global Ratings' Approach To U.S. State Credit Enhancement Programs

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Credit FAQ: S&P Global Ratings' Approach To U.S. State Credit Enhancement Programs

Frequently Asked Questions

What types of state credit enhancements are there?

U.S. state credit enhancements give bondholders additional security when compared with bonds that are only supported by the general creditworthiness or similar pledge of a related entity. With enhancements, the program participant, such as a school district, local government, or higher education institution, pays debt service when due based on its own ability. In addition, the state commits itself to paying debt service on behalf of the participant should the participant not be able to make timely payment on the obligations. The state's commitment can take on a variety of forms such as:

  • General fund pledges,
  • Appropriation pledges,
  • State aid withholdings,
  • State aid intercepts,
  • Moral obligations,
  • Permanent funds, and
  • Guarantees.
Which criteria does S&P Global Ratings use to rate state credit enhancement programs?

S&P Global Ratings applies different criteria based on legal features and linkages to the state's general creditworthiness. We rate most state credit enhancements that are linked to the state's general creditworthiness within scope of the "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness" (RLOC) criteria (published Nov. 20, 2019, on RatingsDirect).

We rate state permanent fund enhancements under our "U.S. Public Finance Long-Term Municipal Pools" criteria (published March 19, 2012). For state guarantees that are irrevocable or unconditional obligations and meet legal standards, we apply our "Guarantee" criteria (published Oct. 21, 2016).

What is the relationship between the state credit enhancement rating and the state rating?

Credit enhancements that fall within the scope of the RLOC criteria may be notched off the state rating and typically move in tandem with the state rating. However, the notching differential varies based on several characteristics and may differ among issues within a given program. If a rating is capped due to features such as weak coverage, it is possible that the rating would not move in tandem with the rating on the state.

We may rate state permanent funds enhancing obligations higher than our rating on the state, and the former does not move in tandem with the state rating. These ratings reflect a combination of enterprise and financial risks of the program, including the assessment of loss coverage, operating performance, and financial policies and practices.

Guarantee enhancement ratings, those where the state irrevocably secures the obligation, are equivalent to the state rating.

Can ratings differ within a specific program?

While state programs identify common structural elements, state statutes, and constitutional provisions to be considered for eligibility of the enhancement, our analysis of ratings includes a review of issue-level qualification for participation in the program, related bond documents, and a review of rating qualifications that may exceed state requirements. We evaluate features such as state support, timing and administrative risks, and coverage as applicable. While generally, states structure the enhancements to have similar characteristics across program participants, we take into account credit-specific attributes such as state support, coverage, timing, or adequacy of a debt service reserve. For example, we may differentiate notching below the state based on coverage or cap certain issues three notches below the state due to unmitigated appropriation risk.

What are S&P Global Ratings' primary scope considerations within the criteria?

To be in scope of our RLOC criteria, the state program and the underlying issues have to meet all of the following features:

  • The timing of the receipt of funds from the state occurs prior to debt service, and if applicable, includes advance notification to the state of a potential participant default by an independent paying agent;
  • The flow of funds from the state is directly to the paying agent (there is no comingling of funds with program participant's operating funds);
  • The state is aware of who is participating in the program and the respective debt service associated with each participant;
  • Bond documents, state statutes, state policy, or what we view as equivalent are in place and clearly detail the approval process; outline the parties involved in receipt, transfer, and disbursement of state aid; and specify the steps necessary to transfer revenues to the paying agent to ensure timely debt service; and
  • The program is authorized by the state statute or constitution or other documents that we view as the equivalent.

We monitor to see if a participant meets state requirements for eligibility for the credit enhancement. Otherwise, aspects that determine what may be in the scope of our criteria are included in greater detail within our criteria and are not program specific.

How does S&P Global Ratings evaluate credit enhancements for issuers other than school districts?

S&P Global Ratings rates credit enhancements for municipal governments, charter schools, and higher education institutions in addition to school districts. Our criteria allow us to differentiate by sector if we view different industry risks or issue-specific risks. For example, in a given state, we may view political or funding risks as heightened for charter schools.

How does S&P Global Ratings evaluate the effect of late budgets on state intercept/withholdings or programs with appropriation risks?

If we view late-budget risk as not mitigated, we will cap the rating at three notches below the state issuer credit rating (ICR) and no higher than 'A+', according to the RLOC criteria. Based on our assessment of the risk, we could rate the issue lower. We may differentiate ratings among issues based on the proximity of debt service due dates to the beginning of the state fiscal year.

How does S&P Global Ratings differentiate between a state aid enhancement and a dedicated tax (that is collected and remitted by a state) with a state intercept feature?

We do not consider bonds supported by pass-through of state-shared taxes and no other extraordinary state liquidity support, such as advancement of revenues, as a state credit enhancement. In these cases, the rating would generally be linked to the underlying obligor. For priority-lien bonds, however, there may be additional linkages to the state as a revenue-sharing entity under certain circumstances.

How does S&P Global Ratings assign and display ratings when there are underlying and state credit enhancement ratings?

Some program participants request ratings from S&P Global Ratings based on their own ability to make timely payments in full, in addition to the state credit enhancement; others only request ratings based on the credit enhancement. In addition, the issue may also be bond insured.

The local currency long-term rating reflects the highest of the ratings requested (bond insurance, state credit enhancement, or the program participant's own creditworthiness).

For issues where S&P Global Ratings rates the bond insurance higher than that on the program participant but lower than the state credit enhancement, the underlying rating (SPUR) reflects the rating on the bond insurer.

The underlying rating for credit program reflects the program participant's own creditworthiness.

Rated State Credit Enhancement Programs

The list of current state programs below is not an exhaustive list. For example, S&P Global Ratings rates several weak-link and long-term municipal pools that have state aid intercept features. Other state credit enhancements only apply to a limited number of issuers. We have chosen to highlight broad-based credit enhancement programs.

List Of Rated State Credit Enhancement Programs
State Enhancement program Pledge Criteria
Arizona Public School Credit Enhancement Program Permanent Fund Long-Term Municipal Pools
California Health Facility Construction Loan Insurance Program Guarantee Guarantee
California Infrastructure and Economic Development Bank General Fund RLOC
Colorado State Aid Intercept Program for Higher Education General Fund RLOC
Colorado State Aid Intercept Program (School Districts) General Fund RLOC
Colorado Moral Obligation Program for Charter Schools Moral Obligation RLOC
Georgia State Aid Intercept Intercept RLOC
Idaho Credit Enhancment Program For School District Bonds Permanent Fund Long-Term Municipal Pools
Idaho School Bond Guaranty General Fund RLOC
Indiana State Aid Intercept Intercept RLOC
Kentucky State Aid Intercept for Universities Intercept RLOC
Massacushetts Massachusetts Qualified Bond Act General Fund RLOC
Massacushetts Massachusetts State College Building Authority Appropriation RLOC
Michgian School Program Intercept RLOC
Michigan Bond Loan Fund General Fund RLOC
Michigan Revenue Sharing Bonds Withholding RLOC
Minnesota State Standing Appropriation for Schools General Fund RLOC
Minnesota County Credit Enhancement General Fund RLOC
Minnesota City Credit Enhancment General Fund RLOC
Mississippi Development Bank and Junior College Intercept RLOC
Mississippi State Aid Capital Improvement Intercept RLOC
Missouri Direct Deposit of State Aid Withholding RLOC
Nevada School District Bond Guarantee Program Permanent Fund Long-Term Municipal Pools
New Jersey Support of Free Public Schools General Fund RLOC
New Jersey Qualified Bond Program Withholding RLOC
New York State Dormitory Authoirty; School State Program Appropriation RLOC
North Dakota State Aid Intercept Intercept RLOC
Ohio Market Access Program General Fund RLOC
Ohio State Aid Intercept Intercept RLOC
Oregon School Bond Guaranty Program Guarantee Guarantee
Oregon State Aid Intercept Withholding RLOC
South Carolina State Aid Intercept Appropriation RLOC
South Dakota Health and Education Facilities Authority State Aid Intercept Intercept RLOC
Tennessee State School Bond Authority Withholding RLOC
Texas Permanent School Fund Permanent Fund Long-Term Municipal Pools
Utah School Bond Guarantee Program Guarantee Guarantee
Utah Moral Obligation Program for Charter Schools Moral Obligation RLOC
Vermont Bond Bank Permanent Fund Long-Term Municipal Pools
Virginia Virginia Resources Authority Permanent Fund Long-Term Municipal Pools
Virginia Virginia College Building Authority State Intercept Intercept RLOC
Washington School Bond Program Guarantee Guarantee Guarantee
West Virginia Municipal Bond Commission General Fund RLOC
*RLOC: Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness criteria.

For a current list of state ratings, please refer to "U.S. State Ratings And Outlooks: Current List".

This report does not constitute a rating action.

Primary Credit Analyst:Carol H Spain, Chicago (1) 312-233-7095;
carol.spain@spglobal.com
Secondary Contacts:Oscar Padilla, Farmers Branch (1) 214-871-1405;
oscar.padilla@spglobal.com
Victor M Medeiros, Boston (1) 617-530-8305;
victor.medeiros@spglobal.com

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