For the thousands of small- and mid-sized communities without a municipal bond rating, simply getting your first rating can be daunting. Although it’s an intensive process, knowing what to expect – and what bond rating agencies expect – can set your community up for success. IBTS recently expanded its local government services to provide a full suite of community finance advisory solutions, including assisting with the municipal bond rating process.
“City managers and staff are often so immersed in the day-to-day that it can be difficult to take a step back and develop a long-term financial plan,” says Claire Collins, IBTS Development Manager and a former city manager. “If you have a third-party like IBTS, we can help serve in the coaching role as the eyes and ears to pull together and set your community up for financial success.”
Why would you want to issue a bond in the first place?
Municipal bonds are a useful financing mechanism for local governments to ensure long-term financial security. Municipal bonds have lower interest rates that result in greater cost-savings over time, especially when issued to finance larger projects. The result? More reserve funds to spend on smaller, less expensive projects without having to raise taxes.
Before issuing a bond, municipalities typically must have a bond rating from Standard and Poor’s (S&P), Moody’s, or Fitch. They evaluate local, state and federal governments on the economic well-being of the area and your government’s ability to pay back debt issued on a bond. Ratings from S&P and from Moody’s are typically required to issue a bond, while Fitch is more useful for larger cities. After your initial rating, bond rating agencies will re-assess your rating annually through a less-intensive process.
Below, IBTS community finance experts pull from their own government service experience to provide insider advice on the bond rating process and how to prepare. If you want to know more about how IBTS can help your community, contact IBTS Development Manager Claire Collins at ccollins@ibts.org.
Prepare your staff to handle the administrative burden.
- The formal credit rating process itself may take 4-6 weeks after the initial request, and can include in-person meetings, calls with rating analysts, and project site visits.
- Consider consulting with third-party financial experts, who can prepare information and assist with developing a long-term financial plan for presentation to bond rating agencies.
Provide a consistent message and information to the bond rating agency.
- Before providing any information to a bond rating agency, make sure you and your staff have developed – and practiced – a consistent financial message. Inconsistencies can result in skepticism and lower bond ratings.
- S&P and Moody’s also often share notes and will look for inconsistencies between interviews. Be sure to provide consistent information to both agencies.
Be prepared to answer challenging questions about your financial past, present and future.
- S&P and Moody’s look at a wide range of factors when determining your municipal bond rating. Be prepared explain your community’s financial landscape, including factors such as:
- Where does your revenue come from?
- What projects do you need to complete and why?
- Who are your largest employers?
- How do you spend funds?
- What services you provide?
- Diversity of your tax base and tax revenue.
- What project(s) you plan to issue a bond for and why.
Know which financial features to highlight and which to downplay.
- Factors that can set you up for a stronger rating include:
- Continuity and low turnover within city finance management/administration.
- Ability to be flexible with expenditures.
- Self-supporting funding through fee-based service revenue such as water and sewer fees.
- Having a capital improvement plan or structured long-term financial planning.
- Factors could result in a lower rating include:
- Ignoring the recommendations and action items outlined in our annual financial audit. Credit rating agencies consider this in their initial rating, and in their annual reassessment.
- City Charter amendments for issues such as limiting terms a city manager can serve, or unions proposing changes to police and fire wages and benefits.
It’s okay to have questions – don’t be afraid to ask them!
- Good sources of information include local government membership organizations such as the National League of Cities (NLC), the National Association of Counties (NACo), or the Government Finance Officers Association; municipal leagues; or third-party community finance experts like IBTS.
- By law, S&P and Moody’s also make all municipal bond rating criteria publically available.
