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

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State And Local Government Ratings Are Not Directly Constrained By That O f The U.S. Sovereign 5 Ability To Maintain Stronger Credit Characteristics Than The Sovereign In A Stress Scenario A central feature of our U.S. public finance criteria is the independence of individual state and local governments from the federal government: In-part, this is based on our view of the Tenth Amendment to the U.S. Constitution, which provides that rights not_expressively given to the federal government remain with the states. Although our ratings reflect the role of the federal government in state and local finances and economies, we believe that this decentralized governmental structure in the U.S. suggests that we also analyze state and local government credit quality independent of the federal impact. When viewing credits on a standalone basis, we expect that some state and local govermnents in the U.S. are capable of maintaining relatively consistent credit quality even through a period of stress at the sovereign level. Compared with many of their peers on a global basis, U.S. state and local governments function with a high level of revenue independence. Specifically, most state revenues (including almost all discretionary revenue) are derived within the states themselves, i.e., they do not come from the federal government. Revenues are even less linked to the federal government at the local level (although some state-shared revenues originate with the federal government). In addition, historically we have found that state and local governments generally have distinct credit cultures backed by well-established frameworks that provide for enforcement of important public finance laws. We view this to be important in the U.S. public finance setting because we predominantly assign issue ratings as opposed to issuer credit ratings. Debt issues in the U.S. municipal market tend to be backed by dedicated taxes, revenues, or fees and include specific protections that are legally enforceable in the T7.S. context. Given the depth and magnitude of the U.S. economy, state and local governments operate within a wide range of disparate economic bases throughout the country. We have found that some state or local economies regularly perform differently from that of-the U.S. as a whole. Our criteria describe how we analyze the attributes of state and local economies and incorporate our analysis into our ratings. Beyond analyzing economies in isolation, however, we have observed that some state or local governments have more favorable balances between resources and responsibilities (i.e., they may be less leveraged) than the federal government. We believe that certain state and local governments have historically shown a greater commitment to fiscal discipline or a more resilient local economy, which may be reflected in ratings higher than that of the U.S. government. In a minority of cases (3.9% of U.S. public finance ratings), state and local governments. currently demonstrate what we consider to be particularly strong credit characteristics consistent with our highest rating and, thus, are rated 'AAA'. Because we have assigned these ratings based on our view of individual rating factors pursuant to our criteria, we believe these ratings are appropriate notwithstanding the downgrade of the U.S. sovereign debt rating. A Predictable Institution Framework, Financial Flexibility, And. Independent Treasury Management In our view, the institutional framework for U.S. public finance is among the most stable and predictable in the world. We believe this is primarily a result of the constitutional separation of power between the central and sub-national levels of government that is intended to restrain intervention in state and local government administration. U.S. state and local governments enjoy considerable financial autonomy from federal intervention. State-and in www.standardandpoors.com/ratingsdirect 3