This article presents S&P Global Ratings' proposed criteria for rating U.S. governments. This proposal consolidates the criteria for U.S. states, counties, municipalities, school districts, and special government districts under a single framework for determining a stand-alone credit profile (SACP) (see "Related Publications" section for details of superseded criteria).

These proposed criteria would apply only to U.S. governments not in scope of other issuer credit rating (ICR) criteria.

Although the scope of activities may vary, governments share the following characteristics:

• Leadership is elected or is appointed by others who are elected;
• The entity provides public services and/or public infrastructure; and
• The entity is supported directly or indirectly by taxes and fees levied on residents or funds transferred from other levels of government.

KEY CHANGES

This proposal adopts largely the same factors of the existing criteria, while adopting a common scored framework to all U.S. governments. Key changes from existing criteria are as follows:

States

• Separates the institutional framework (IF) assessment from the weighted factors of the government's individual credit profile (ICP) and gives a greater weight within the framework. These changes improve comparability in our analysis of all local and regional governments globally.
• Relocates budget reserves and liquidity by moving the factor out of budgetary performance to a separate ICP factor. This highlights the role reserves and liquidity play in paying debt service and supporting operations during times of distress.

Counties and municipalities

• Increases the weighting of the IF assessment and relocates the IF analysis to stand apart from the weighted factors of the government's ICP. This improves comparability with our analysis of all local and regional governments globally.
• Updates the weights for each of the five key credit factors of the ICP to 20%. This includes a change from the current approach in which debt and contingent liabilities is 10% and economy is 30% of the analysis. This change improves comparability with our analysis of all local and regional governments globally.
• Reorients our initial economy assessment to reflect broader regional indicators, including gross county product (GCP) and county per capita income, rather than specific scoring of taxable market values.
• Adds annual pension and other postemployment benefits (OPEB) costs to our initial assessment within the debt and liabilities factor of the ICP. This elevates the importance of pension and OPEB costs in our analysis of a government's fixed costs.
• Incorporates a more flexible approach to modifiers, caps, and adjustments to incorporate more analytical flexibility, which allows us to better capture atypical credit characteristics.

School districts and special districts

• Introduces a scored framework that includes the same factors as the current criteria. This improves comparability with our analysis of all local and regional governments globally.
• Introduces the IF assessment. This improves comparability with our analysis of all local and regional governments globally.

IMPACT ON OUTSTANDING RATINGS

There are approximately 10,700 public ratings in scope of these proposed criteria, including 51 ratings on U.S. states and territories, 1,000 ratings on counties, 3,900 ratings on municipalities, 5,100 ratings on school districts, and 500 ratings on special districts. Across all ratings in scope of these proposed criteria, we expect approximately 95% will remain unchanged.

Assuming that the U.S. governments maintain their current credit characteristics, testing indicates that these proposed criteria, if adopted as proposed, will likely result in the following:

• For U.S. state and territory ratings, all ratings will remain unchanged
• For county ratings, approximately 3% could change, generally by one notch higher or lower
• For municipality ratings, approximately 5% could change, generally by one notch higher or lower
• For school district ratings, approximately 6% could change, generally by one notch higher or lower
• For special district ratings, approximately 6% could change, generally by one notch higher or lower

RESPONSE DEADLINE

S&P Global Ratings is seeking feedback on the proposed criteria by March 11, 2024. We encourage interested market participants to submit their written comments to https://disclosure.spglobal.com/ratings/en/regulatory/ratings-criteria. Comments may also be sent to CriteriaComments@spglobal.com should participants encounter technical difficulties.

PROPOSED METHODOLOGY

Overview

We determine the ICR on a government according to the following steps (depicted in chart 1):

• 1. Assess the IF;
• 2. Establish the ICP based on the equally weighted average of five factors (economy, financial performance, reserves and liquidity, management, and debt and liabilities);
• 3. Combine the IF and the ICP to establish the anchor (see table 1);
• 4. When relevant, adjust the anchor for credit-specific modifiers, caps (see table 2), and our holistic view of the government to establish the SACP; and
• 5. When relevant, apply our methodology for rating U.S. governments above the sovereign.

Both the IF and the ICP are assessed on a '1' to '6' scale. The final assessment for the IF is rounded to a whole number, whereas the final assessment for the ICP is not rounded.

Table 1 indicates how the IF and ICP are combined to determine the anchor. Table 1 uses lowercase letters to highlight that the outcomes are not ratings themselves but rather indicative credit levels suggested by the IF assessment and ICP.

If the ICP is not a whole number or a midpoint between two whole numbers, the anchor would fall within ranges outlined in table 1. For instance, if a government is operating in an IF of '2', with an ICP of '2.2', the table outcome would be between 'aa' and 'aa-'. In these cases, we determine the anchor by considering:

• The position within the range (that is, whether the ICP is at the high or low end of the range); and
• The expected future performance of one or several of the five ICP credit factors; or
• Any credit characteristics that may be over or understated in our analysis; or
• A peer comparison.

The next step is to apply any relevant modifiers, caps, and our holistic analysis to reach the SACP. Table 2 provides the modifiers and caps that improve or worsen the anchor. In general, individual modifiers improve or worsen the anchor by only one rating level. When the application of several modifiers or caps is warranted, we improve or worsen the anchor by the cumulative effect of those modifiers and then take into account the cap that would result in the lowest rating.

Table 2

A holistic analysis is the final step in determining a government's SACP. It captures a broader view of stand-alone creditworthiness. When relevant, the holistic analysis can have a one-notch impact up or down and is not limited by any credit-specific caps or modifiers. Such an adjustment is based on factors not already incorporated in the determination of the anchor, including our forward-looking view of an issuer's credit factors, a peer ratings analysis, or strengths or weaknesses that are not fully reflected in the application of the criteria.

The modifiers and caps cannot lower the anchor below 'b-'. In addition, use of holistic analysis cannot lower the anchor below 'b-'. For SACPs and ratings below 'B-', see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012, and "S&P Global Ratings Definitions," June 9, 2023.

When determining the ICR, if the SACP of a government is higher than the U.S. sovereign rating, we would apply "Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions," published Nov. 19, 2013, to determine the ICR. Otherwise, the ICR is based on the SACP.

When determining the issue credit rating, we review the legal structure of the debt issuance. As part of this analysis, we evaluate the security pledge and covenants to determine the issue credit rating or whether other criteria apply. If the pledge is sufficiently broad, we assign an issue credit rating equivalent to the ICR. For more information, see "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness," Nov. 20, 2019, and "Priority-Lien Tax Revenue Debt," Oct. 22, 2018.

KEY CREDIT FACTORS

Institutional Framework

The IF is the set of formal rules and laws, practices, customs, and precedents, that shape the environment in which governments operate. Our assessment is mostly qualitative. We consider track record and future changes that are likely to shape the framework.

The IF assessment includes three subfactors:

• Predictability (25%) - the ability of a government to forecast its revenues and expenditures
• Revenue/expenditure balance and system support (50%) - the ability of a government to finance the services it provides, and the degree of ongoing and exceptional support from a higher-level government
• Transparency and accountability (25%) - the comparability of a government's relevant financial information

We assess each of the IF subfactors on a preponderance basis according to the conditions outlined in tables 3, 4, and 5. Then we combine the assessments using the weights indicated above to arrive at the initial assessment.

In exceptional situations, where an IF factor assessment of '5' or '6' is warranted, we assess based on the severity of the effect of that factor.

State constitutions and laws broadly dictate the terms under which U.S. governments operate; therefore, we assess the IF by state and government type. Special districts generally receive the same IF assessment as municipalities in the same state. When the legal or practical environment for a specific local government differs from the norm in its state, we will assess accordingly.

Our assessment of predictability and revenue and expenditure balance also considers a government's level of reliance on own-source revenue compared with shared revenue. System support is assessed in combination with revenue/expenditure balance and becomes more important in our assessment when revenue/expenditure balance is constrained. For example, local governments with a very strong revenue/expenditure balance, but no evidence of exceptional systemwide support, may receive a strong assessment when they are unlikely to need support. On the other hand, local governments with weaker revenue/expenditure balance might receive uplift in their score if there is very strong system support.

Table 3

Table 4

Table 5

Individual Credit Profile

After analyzing the institutional framework, we then assess the five key credit factors that make up a government's individual credit profile (see chart 2).

Each factor is equally weighted at 20% and composed of an initial assessment and qualitative adjustments to derive the final factor assessment. Initial assessments typically use data from the most recent reported year.

We assess factors on a forward-looking basis. In particular, quantitative indicators falling at or near the cut-off points presented in the applicable text and tables can receive a better or worse assessment through the application of qualitative adjustments if trends are improving or worsening, and those trends point to a different assessment in the near future, generally the next one to two years.

The adjustment of the initial assessment for each qualitative factor is generally up to two assessment categories but could be more in exceptional circumstances. We also may adjust the initial assessment by half points in the debt and liabilities factor.

Each of the qualitative adjustments within the five factors of a government's ICP includes several examples for when the adjustment might apply. These examples are not exhaustive and the methodology allows for the adjustments to be made in atypical cases not outlined in the examples.

When economic or demographic data to determine any of the initial assessments is unavailable, we first seek to assess using a proxy, if available; if not, we typically assume a '6' initial assessment.

For financial analysis, we seek to use data as reported under Generally Accepted Accounting Principles (GAAP). However, the criteria allow for other forms of financial information when GAAP basis statements are not available.

Economy

The initial economy assessment considers income levels and economic output.

For states, the initial assessment considers the following subfactors:

• Gross state product (GSP) per capita as a percent of the U.S. gross domestic product (GDP) per capita (50%)
• State per capita personal income (PCPI) as a percent of the U.S. PCPI (50%)

For local governments, the initial assessment considers the following subfactors:

• GCP per capita as a percent of the U.S. GDP per capita (50%)
• County PCPI as a percent of the U.S. PCPI (50%)

In limited circumstances where a rural local government spans multiple counties, the initial economic assessment will likely rely on the county with the largest population concentration within the service area. For urban local governments that span multiple counties, the initial economic assessment may rely on the Metropolitan Statistical Area, or MSA (for instance, New York City).

Each of the initial subfactor assessments is determined based on thresholds outlined in table 6 on a scale of '1' to '6'. Then the subfactor assessments are combined using the weights indicated above to arrive at the initial assessment. To determine the final economy assessment, we then consider adjustments to the initial assessment for:

• Local economic profile,
• Economic volatility and concentration, and
• Economic growth prospects.

Table 6

Table 7

Table 8

Table 9

Financial Performance

The financial performance initial assessment considers the annual operating results of a government over time.

For states, we consider budget-based and GAAP financial performance. States typically prepare financial statements each year using GAAP, which includes accruals; however, the budget development, appropriations, budget monitoring, and reserves are expressed on a budgetary basis, which is more closely aligned with a cash basis presentation. Budget-based financial information is a primary focus of our financial review because it shows how state finances are managed day-to-day. However, we also analyze the GAAP audited financial statements and variations between GAAP and budget-based financial disclosure to gain a more complete understanding of a state's financial condition.

For local governments, our initial assessment is generally based on the average annual operating result of the three most recent years, but also looks back at historical performance over economic cycles.

Initial assessments for states and local governments are determined based on considerations outlined in table 10 on a '1' to '4' scale. To determine the final financial performance assessment, we then consider adjustments to the initial assessment for:

• Under or overstated operating results
• Performance volatility
• Projections that suggest a different initial assessment

Final assessments of '5' or '6' are reached through the application of qualitative adjustments. Generally, governments exhibiting structural imbalance would not receive a final assessment better than '5', and if there is no credible plan to correct, no better than '6'.

Table 10

Table 11

Table 12

Table 13

Reserves And Liquidity

The reserves and liquidity initial assessment considers the level and stability of a government's reserves and liquid assets.

For states, our initial assessment is based on the budgetary reserve targets as a percentage of revenue or spending combined with a track record of funding to the target and replenishing reserves over economic cycles.

For local governments, our initial assessment is based on the available reserves as a percentage of revenue.

For states, initial assessments are determined on a preponderance basis using considerations outlined in table 14 on a scale of '1' to '4', with final assessments of '5' or '6' reached through the application of qualitative adjustments. For local governments, initial assessments are determined based on thresholds outlined in table 15 on a scale of '1' to '5', with final assessments of '6' reached through the application of qualitative adjustments. To determine the final reserves and liquidity assessment, we then consider adjustments to the initial assessment, for:

• Under or overstated reserves
• Projections that suggest a different initial assessment
• Liquidity and contingent liability risks

Table 14

Table 15

Table 16

Table 17

Table 18

Management

The initial management assessment considers three subfactors:

• Budgeting practices (35%): Considers revenue and expenditure assumptions and budget adjustments and updates
• Long-term planning (35%): Considers long-term financial and capital planning
• Policies (30%): Investment management policies, debt management policies, and reserve and liquidity policies

We determine each of the initial subfactor assessments on a preponderance basis based on the conditions outlined in tables 19, 20, and 21, which are assessed on a scale of '1' to '4'. We then combine the subfactor assessments using the weights indicated above to arrive at the initial assessment.

To determine the final management assessment, we then consider adjustments to the initial assessment for:

• Transparency and reporting,
• Governance structure, and
• Risk management, credit culture, and oversight.

A final management factor assessment worse than '4' is reached through the application of qualitative adjustments. A final management assessment near '5' could indicate a challenging management and governance environment or a management team that is understaffed, or lacks relevant skills or experience. A final management assessment near '6' generally indicates our view of issues related to leadership competency, knowledge, or credit culture.

Table 19

Table 20

Table 21

Table 22

Table 23

Table 24

Debt And Liabilities

The debt and liabilities initial assessment considers three subfactors:

• Current cost for debt service and liabilities (50%)
• Net direct debt per capita (25%)
• Net pension liability (NPL) per capita (25%)

Current cost is measured by a government's annual debt service, pension, and OPEB expenditures divided by total governmental revenue. Net direct debt is determined by calculating gross direct debt and then subtracting self-supporting debt. The NPL is calculated by subtracting the fund's plan fiduciary net position from the total pension liability as reported in a government's financial statements under Governmental Accounting Standards Board (GASB) standards. When a government has multiple plans, we generally add the NPL, but not net pension assets, of all the plans and compare the sum to its population to determine the NPL per capita.

When defined-benefit plan data is limited or unavailable, we may incorporate other sources of information, such as recent actuarial reports and cost-sharing plan information. When plan liability data is completely unavailable, we typically assume an initial subfactor assessment of '6'.

We determine each of the initial subfactor assessments based on thresholds outlined in tables 25, 26, and 27. We then combine the subfactor assessments using the weights indicated above to arrive at the initial assessment. Initial subfactor assessments are determined on a scale of '1' to '6'.

To arrive at the final debt and liabilities assessment, we then consider adjustments to the initial assessment for:

• Under or overstated current costs,
• Under or overstated liabilities, and
• Projections that suggest a different initial assessment.

Table 25

Table 26

Table 27

Table 28

APPENDIX 1: DEBT STATEMENT ANALYSIS

To measure a government's net direct debt burden, we start by assessing its gross direct debt, which includes:

• General obligation bonds;
• Short-term debt or commercial paper;
• Other tax-secured obligations such as sales, gas, or excise tax obligations;
• Capital and operating lease obligations;
• Annual appropriation debt;
• Moral obligation secured debt;
• Tax increment and special assessment secured obligations;
• Pension obligation bonds;
• Enterprise or revenue–based debt; and
• Public-private partnership (PPP) obligations.

For certain obligations where there may be a conduit authority that issues the debt for the obligor, we would include all debt where the government is the obligor, regardless of the issuer.

For capital appreciation bonds, we use the accreted value presented in the government's audited financial statements.

We then subtract self-supporting debt from gross direct debt to calculate the government's net direct debt. Self-support is an analytic judgment and will not necessarily match statutory calculations of self-support. Typically, we deduct the following:

• Tax anticipation notes, revenue anticipation notes, and tax and revenue anticipation notes;
• State aid reimbursements for well-defined, long-standing programs;
• Federally supported grant anticipation revenue vehicles (GARVEE);
• Enterprise debt secured by revenues only;
• Moral obligation debt that has not required any contribution to the debt service reserve fund from the morally obligated party; and
• Revenue or nontax-secured PPP obligations.

Bonds that are supported by special assessments, sales tax, gas tax, or tax increment financing revenues are not considered self-supporting and are included in the net direct debt of the issuer.

Tax-secured enterprise debt that is fully or partially self-supporting is included in the net direct debt of the issuer. However, the initial debt and liabilities assessment could be improved if self-support for utilities, such as water, sewer, solid waste, and electric utilities, is consistently sufficient.

When calculating current costs, we remove any pass-through federal revenues and annual debt service relating to self-supporting debt that distorts the ratios.

APPENDIX 2: GLOSSARY

Table 29

Table 30

RELATED PUBLICATIONS

Criteria to be fully superseded

• U.S. State Ratings Methodology, Oct. 17, 2016
• U.S. Local Governments General Obligation Ratings: Methodology And Assumptions, Sept. 12, 2013
• Key General Obligation Ratio Credit Ranges, April 2, 2008
• GO Debt, Oct. 12, 2006
• Debt Statement Analysis, Aug. 22, 2006
• Financial Management Assessment, June 27, 2006

Criteria to be partially superseded

• Priority-Lien Tax Revenue Debt, Oct. 22, 2018 (to remove the reference to criteria to be fully superseded, and to update the "broad and diverse" definition to match with the definition provided in Special Assessment Debt, April 2, 2018)

Related criteria

• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness, Nov. 20, 2019
• Priority-Lien Tax Revenue Debt, Oct. 22, 2018
• Contingent Liquidity Risks In U.S. Public Finance Instruments: Methodology And Assumptions, March 5, 2012
• Principles Of Credit Ratings, Feb. 16, 2011
• Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010