Wednesday, January 15, 2014

Strong Municipal Bond Ratings Propelled by Priority Based Budgeting!



At the Center for Priority Based Budgeting, we've been extremely interested for some time in how credit rating agencies (CRA's) would evaluate the Priority Based Budgeting (PBB) efforts of the communities we're working with. Our core concepts of fiscal health and priority based budgeting have proven to ensure that local governments are clear and transparent about what truly is their economic reality. Communicating that picture simply, clearly, and understandably without volumes of numbers, spreadsheets, tables, and an endless series of charts is frankly a challenge that has plagued managers for years. If managers are going to be able to demonstrate financial reality internally to elected officials and staff, and externally to CRA's and residents, they have to find better ways to make fiscal situations understandable and transparent to everyone
 
Finding creative, clear, and nontechnical ways to demonstrate what the next five to 10 years might look like is a must if people are going to address fiscal concerns. All too often, local governments are unable to make sound, timely decisions regarding investing in new resources, starting new programs, or initiating major capital projects because elected officials, local government managers, and staff members are paralyzed by the uncertainty of whether they actually have enough money to appropriate for these purposes. Developing a long-term financial forecast is key to gaining a better understanding of what the future might hold.
 
How CRA's assess municipal bond ratings for a community has a tremendous impact on the communities ability to borrow. A municipal bond is a bond issued by a local government, or their agencies. Potential issuers of municipal bonds include states, cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) at or below the state level. Municipal bonds may be general obligations of the issuer or secured by specified revenues. 
 
 
Municipal bonds are securities that are issued for the purpose of financing the infrastructure needs of the issuing municipality. These needs vary greatly but can include schools, streets and highways, bridges, hospitals, public housing, sewer and water systems, power utilities, and various public projects. 

Communities are seeking every possible means to prevent downgrades in their ratings (and simultaneously increase ratings). And the credit rating agencies are facing immense pressure to substantiate the ratings they report - strong or weak. We've been keeping a close eye on this as we better understand how the CRA's perceive how priority based budgeting can provide evidence that a community is taking a sustainable and responsible approach to resource allocation, basing decisions on the long-term health of the community in light of its values and priorities.

And we've seen mounting success in priority based budgeting communities that CRA's
undeniably value the long-term fiscal responsibility that PBB brings to public entities. Our first case study focused on the city of Chesapeake, Virginia. In August 2011, the three major bond rating agencies reconfirmed their prior ratings and each gave the city a "stable outlook." Per the press release, "the rating agencies confirmed the City's strong ratings, based in part on the evidence of their long-term view."
 
"There is no question these are difficult times for governments at all levels," said the city manager. "The Chesapeake City Council has said time and again that we must keep our focus on our long term goals, while still maintaining the best quality of life for our citizens. These ratings provide clear evidence that we are indeed charting a sustainable course for the City's future."

"The three ratings are a testament to the conservative and forward-looking fiscal management leadership of Chesapeake's City Council and staff," said the city manager. "Achieving a ‘stable outlook,' given the current economic challenges facing cities locally and across the nation, speaks volumes to the hard work our staff and elected officials have done to strategically position Chesapeake for continued success."
 
Then, in 2012, Standard and Poor’s rating agency gave Douglas County, Nevada, an A+ bond rating for its “strong and imbedded financial management practices.” Douglas County has been one of the most successful implementers, and now practitioners, of priority based budgeting. In fact, they were the first county in the nation to implement priority based budgeting. 

In 2012, the County embarked on the priority based budgeting process with one of the primary objectives being to bring their community into an ownership position with respect to decision making. What unfolded in their ground breaking use of an online tool to engage citizens sets the bar at a whole new level in participatory budgeting (see story here).
 
Per the Douglas County bond rating press release, "We have made great progress implementing solutions to long-term challenges, including strong financial management, regional partnerships, infrastructure investment and business development," said County Manager Steve Mokrohisky. "Our local economy is still in a slow recovery and we have a lot of work to do to address critical issues such as road maintenance, main street revitilization and duplication of local services, but we are moving in the right direction and there is reason to be optimistic about the future."     

Additionally, Douglas County began developing 5-year financial forecasts to address long-range financial challenges, rather than short-term fixes. As a result, the County has been successful in closing the $3 million annual shortfall in its General Fund, through long term contracts with employees, elimination of positions and regional partnerships that stabilize expenses. The County has also implemented a new priority based budgeting program that focuses on continuous improvement of local services and providing the greatest value to taxpayers.
 
Now, Douglas County has done it again! Through a multi-year effort, the County's bond rating has just recently been upgraded an unprecedented two notches from A+ to AA. Per the press release (below and here), "the rating upgrade is a significant event for the County and reflects recent efforts to implement several fiscal health practices, including long-range financial forecasting, revenue and expense stabilization and priority based budgeting." 


 
Congratulations to Douglas County, Nevada, for their masterful stewardship of local government resources, ability to successfully orchestrate a sound short and long-term economic plan, and thus a well-deserved, concrete AA bond rating! Bravo!



PRESS RELEASE
  
Douglas County’s Bond Rating Upgraded to Highest in History


January 13, 2014. Minden, Nevada.   Standard and Poor’s (S&P) Rating Services upgraded Douglas County’s underlying bond rating by two notches to ‘AA’ or “very strong” on January 10, 2014.  The new bond rating is the first upgrade in 10 years and is the highest underlying rating ever provided to Douglas County from S&P.  The rating upgrade is a significant event for the County and reflects recent efforts to implement several fiscal health practices, including long-range financial forecasting, revenue and expense stabilization, and priority based budgeting.

“This historic upgrade is the result of our unwavering commitment to excellence,” said County Manager Steve Mokrohisky.  “The fact that our rating was increased by two notches is significant and demonstrates the impact of the financial practices that we have implemented over the past several years.  The leadership of our Board, the tireless efforts of our staff and the support of our residents is reflected in this upgrade.”

A higher bond rating allows the County to lower the cost to taxpayers for financing public projects, and is considered a reflection of an organization’s high quality financial management, very low credit risk and very strong capacity to meet its financial commitments.

In its rating upgrade, S&P referenced the County’s financial management practices that have been implemented over the past three years, stating, “We view the county’s management conditions as very strong with strong financial practices that are well embedded, and likely sustainable.”  S&P concluded that, “The stable outlook reflects Standard and Poor’s opinion that county officials will likely continue to manage general fund operations prudently, making the budget adjustments necessary to maintain stable financial operations and very strong available reserves.  Therefore, we do not expect to change the rating over the two-year outlook horizon.”

S&P also referenced the County’s recent success in structurally balancing its budget, stating: “Officials balanced the 2014 budget . . . We believe officials have successfully 
implemented corresponding expenditure adjustments, permitting the county to add to reserves in fiscal years 2012 and 2013 after consecutive deficits in fiscal years 2009-2011.”

S&P’s bond rating upgrade comes just six months after Moody’s Investors Services, Inc. rated Douglas County with its third highest bond rating of ‘Aa2’ in 2013.  Standard and Poor’s Rating Services previously rated Douglas County ‘A+’ or “strong” in 2012.  In 2012, S&P stated that the highlights of the County’s management techniques were its formal financial policies, utilizing external and internal resources for budget assumptions, and engaging in multiyear financial planning, but noted that it wanted to see these practices continued before upgrading its rating.  The last upgrade from S&P was in 2004, when the County’s bond rating increased one grade from ‘A’ to ‘A+’.

In the last several years, bond rating agencies have created more stringent criteria for local governments to meet in order to maintain their ratings.  Numerous municipal bankruptcies have been filed since 2010, due to declining revenues, increasing expenses and unfunded employee benefit liabilities.  Visit www.douglascountynv.gov for additional information.

Related articles:

Innovations in Economic Modeling & Forecasting

Economic Data Visualization

Priority Based Budgeting Case Studies

 
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If you're thinking of jumping into the world of Fiscal Health and Wellness through Priority Based Budgeting we would certainly like to be part of your efforts! Contact us to schedule a free webinar and identify the best CPBB service option(s) to meet your organization's particular needs.

 

"DATA VISUALIZATION" for Local Government


 

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