How Policies Factor Into GO Credit Analysis

1. How Policies Factor Into GO Credit Analysis May 15th, 2008

2. General Obligation Credit Analysis (Review) • SECURITY: • GOULT • Debt Certificates • TAW • TAX/ECONOMIC BASE • Composition/Role • Demographics • FINANCES • Operating Performance • Reserve Levels • Financial Flexibility • DEBT FACTORS: • Composition/Structure • Amount of Leveraging • Referendum History • GOVERNANCE • Multi-year planning • Succession & Contingency Planning • Legal Environment

3. CREATION OF POLICIES • Important to remember polices need to suit individual features of district • Types which come up during the course of credit analysis include: Debt, Finance, and Investment Policies • Forms taken can be, in descending strength: formal, informal (simply lacking explicit endorsement), or as loose as “matter of practice” • There is no Moody’s requirement to have formalized and adopted policies in place to achieve specific rating categories, BUT… • There tends to be a strong correlation between articulating targets, guidelines and policies as you ascend the rating scale • Moody’s does not actively participate in the creation of any policies, but is available to discuss impact (if any) to credit rating

4. WHY POLICIES ARE IMPORTANT FOR CREDIT ANALYSIS • Governance (which includes factors both inside and outside a district’s control) is one of the cornerstones of GO credit analysis & policies allows for peer comparison • In some cases establishes performance benchmarks • In others, provides insight into philosophical approach should unexpected or uncertain environments arise • In the case of formalized policies, demonstrates vision is shared by more than one individual and will endure despite personnel changes or during heavy board turnover • Unifies organizational focus, cutting across areas of responsibilities and reporting lines (less of an issue for schools) • Fosters a disciplined atmosphere, by focusing on already established guidelines

5. Policies: Debt (Typical elements) • Targeted & maximum debt burden beyond which district will not bond (usually expressed as % of full value or statutory debt ceiling) • Caps placed on amount of operating budget debt service represents • Limitations on duration or structure (i.e. level vs. ascending, balloon maturities etc.) • CIBS vs. CABS • Circumstances when DSEB would be accessed • Use of working cash bonds • Items to bond for vs. cash finance • Creating a multi-year CIP which identifies both capital needs and funding sources

6. POLICIES: Debt (Variable Rate) • No rule of thumb governing % of overall debt per rating level, but there are practical limits • Statement which clearly articulates the purposes of and circumstances under which variable rate debt would be issued • Need to convey the district understands and plans for contingencies against the inherent risk (interest rate, termination, counterparty, collateral posting etc.) • Responsibility and frequency of monitoring not only overall debt portfolio but the range of expected termination payments, and what resources might be available to apply to a termination payment if necessary

7. Not Policies But Good Practices (Debt): • Two way communication with overlapping/underlying entities for district borrowing plans • For rapidly developing districts dialogue with cities/developers to predict future class sizes and possibility negotiating impact fees/contributions • Strategy for having public outreach for upcoming bond (or operating) referendums (promises, if any to voters) • Model impact of additional debt on projected debt levy tax rate / demonstrate underlying assumptions • Flexibility as conditions warrant (alternate revenues, use of trustee etc.)

8. Policies: Finance • Like debt ratios, no single amount for per rating category (point of diminishing returns) • Policy which identifies both minimum and target levels are most valuable • Circumstances under which surpluses or actual fund balance can be used (does board and staff have same target in mind?) • Monitoring cash flow cycles vs. short term borrowing needs • Attitude towards Working Cash Fund • Investment policies: Goals, Permitted Investments, Responsibility • Goals for funds outside General Fund: Internal Service and Transportation

9. Not Policies But Good Practices: Finance • Like debt planning, having a multi-year financial plan • Triggers/Cycles for going to voters for operating referendums & are voters informed of what financial targets are? • Specific identification of budget priorities or flexibility should a referendum fail, or period of fiscal distress arise (i.e. program cuts, increases to class size ) • Timely audited financial documents which are attested to by an outside firm, and the direct disclosure of any material events as soon as possible • If presenting on a cash basis , how are subsequent year’s property taxes treated (i.e. May/June disbursals) • Accessibility of information

10. Summary • Policies are only targets and do not speak to a district’s willingness, ability, methods or plausibility to achieve established goals • Policies should be periodically reviewed to ensure continued suitability • Moody’s recognizes the need for flexibility. Changes can be credit positive, negative, or neutral • If charges are contemplated, and questions arise about impact on credit, think in terms of 5 fundamental factors • A credit whose factors nicely fit its rating category can likely assume some modest weakening in certain area’s without impacting overall quality • Likewise if a credit’s fundamental’s are below its peer group on many fronts, but there is a very strong compensating facet, and that is what is being weakened, a rating action is more likely

11. Contacts • John Humphrey: 312-706-9962 • Ted Damutz (Co-Head of Local Office / State Lead): 312-706-9953 • Jeannie Iseman: 312-706-9958 • Sarah Haradon: 312-706-9957