Agenda - 08-23-2011 - 9b - Laserfiche WebLink

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4 State And focal ~over_nment Ratings Ar_e-Not Directly constrain-pd By That of The U,S, Sovereign Despite Standard & Poor's Ratings Services' downgrade of the U.S. sovereign debt rating to AA+/Negative/A-1+, we may still assign a 'AAA' rating to some state and local governments. We do not directly link our ratings on U.S. state and local governments to that of the U.S. sovereign debt rating for reasons outlined in our criteria. However, we recognize generally that U.S. state and local governments'economic performances frequently similar-to the nation and they share responsibility for some spending items with the federal government. Yet individual state and local governments' funding interdependencies with the federal government vary considerably. A minority of state-and local obligors rated by Standard & Poor's have achieved the highest long-term rating of 'AAA'. We expect that many of these obligors, particularly those with relatively low levels of funding interdependencies with the federal government or those that, in our view, are likely to manage declines in federal funding without weakening their credit profile, should be able to retain ratings above the U.S. sovereign rating if we would otherwise assign ratings above the U.S. sovereign rating based on our view of other rating factors. However, in light of the potential for common economic and credit environments between the U.S. and state and local governments, we expect that in most instances in which state and local governments have ratings above-that of the U.S., the differential will be limited to one notch . It is possible for state and local governments to have higher ratings than the U.S. sovereign rating, most likely by no more than one notch. We derive our credit ratings by evaluating a borrower's individual credit factors based on our credit rating criteria. . A factor in rating a state or local government above the U.S. is whether it is insulated from negative federal intervention in fiscal management. Our credit rating criteria allow for a higher rating on a state or local government than on the sovereign if, in our view, the state or local government demonstrates the following characteristics: • The ability to maintain stronger credit characteristics than the sovereign in a stress scenario, • An institutional framework that is predictable and that is likely to limit the risk of negative sovereign intervention, and The projected ability to mitigate negative sovereign intervention by a high degree of financial flexibility and independent treasury management. Pursuant to our criteria, the fiscal autonomy, political independence, and generally strong credit cultures of U.S state and local governments can support ratings above that of the U.S. sovereign. Standard & Poor's ~ RatingsDirect on the Global Credit Portal ~ August 8, 201.1