Improving Your Bond Rating

Transcription

1 4:15 5:30 May 7, 2018 Room th Annual Conference May 6-9, 2018 St. Louis, Missouri Moderator/Speakers: Timothy M. Ewell Chief Assistant County Administrator, Contra Costa County David Erdman Capital Finance Director, Wisconsin State Capital Finance Office Oscar Gutierrez Senior Director of Facility Strategy and Financing, The Mind Trust Improving Your Bond Rating

2 Case Study: State of Wisconsin David Erdman Capital Finance Director State of Wisconsin

3 Introductory Comments Bond Rating = Credit Opinion; Everyone Has Difference in Opinions Investor Opinion Is Most Important Finance Officers No Praise/Recognition With Rating Upgrade, But 100% Blame With Rating Downgrade Manage Expectations of Local Officials Insights and Strategies to Maximize Rating Agency Experience

4 Rating Agency Review GFOA Best Practice Using Credit Rating Agencies How many ratings do you need? Moody s Investors Service, S&P Global Ratings, Fitch Ratings, and Kroll Bond Rating Agency Costs of Rating Versus Benefit Benefit Directly Relates to Who Uses The Rating Investor; Internal Credit Affirmation Other; Elected Official/Politics Rating Agency Sector Outlook Example; S&P/State Sector

5 State of Wisconsin (-) History of Large Negative GAAP Balances (-) Limited Liquidity and Limited Budget Reserves (+) Fully Funded Pension and Minimal OPEBs Positive Outlook Moody s November 2014 Three Rating Upgrades Late 2017 Moody s Aa2 to Aa1 August 2017 Fitch AA to AA+ October 2017 Kroll AA to AA+ October 2017

6 State of Wisconsin Governor Walker Fiscal Position Stopped Borrowing Funds to Pay Current Liabilities Act 10 State Union/Collective Bargaining Reduction of Large Expenditure Base Growth in Rainy Day Fund Cash Liquidity Budgetary Balances Improvement in GAAP Balances

7 Rating Agency Strategies Large/Frequent Issuer Versus Small/Infrequent Issuer Manage Issuer Expectations Know Rating Agencies Criteria What Criteria Has Most Weight/Scoring What it Takes To Move Rating Up/Move Rating Down Maintain Open and Regular Communications Explain Unique Stories Especially Related to Weakness Ask Questions - WHY

8 Manage Local/Issuer Expectations Rating Changes Take TIME Budget Cycles Sustainability of Change Addressing One Rating Concern Not Likely to Result in Rating Change You Can Run, But Cannot Hide Press and Internet Single Rating Agency Contact Rating Agencies Need To Know Management

9 Know Rating Agencies Criteria Each Rating Changes Has Own Criteria Must Publish Moody s April 2018 Assessment Factors Economy Finances Governance Debt and Pensions Moody s April 2018 Sub-Factors and Notching Adjustments Details Provided; Issuer/Municipal Advisor Can Self-Score Rating Other Rating Considerations and Additional Factors

10 Know Rating Agencies Criteria Source: Moody s Rating Methodology US States and Territories, April 12, 2018

11 Know Rating Agencies Criteria Source: Moody s Rating Methodology US States and Territories, April 12, 2018

12 Know Rating Agencies Criteria Model Rating Presentation After Respective Criteria Minimal Benefit from Comparisons to Neighbors/Other Ratings Tell Your Story Per Criteria Economic Data Can Provide But Many Rating Agencies Have Own Data Highlight and Address Erroneous Data/Reporting

13 Rating Process Time Consuming?!?! Issuance Calendar Allow Rating Agencies TIME to Complete Review and Gather All Issuer Information Timing of the Rating Call Resources; Rating Change Possibility Versus Other Tasks Needing Focus Open and Ongoing Communication Material Events Ramp Up Closer to Expected Issuance Date Communication Needed For Prior Rating Maintenance Rating Agency Visits Periodic; Consider Inviting Rating Analysts to Home of Issuer

14 Discuss Weakness; Explain History How Material is the Weakness? Does it Have Long History With NO Impact on Credit? Wisconsin Long History of GAAP Deficit No Significant Change Since Creation of GAAP

15 Final Thoughts and Considerations Know Your Rating Analyst Ask Questions Disclosure Reminder and Considerations Should Discussions With Rating Agencies Be Disclosure Material? Review Rating Agency Reports; Document Is About YOU! Work With Financing Team on Rating Appeals and Strategies

16 Rating Process Control Oscar Gutierrez Senior Director of Facility Strategy and Financing The Mind Trust

17 What Can You Control? The Why Communication Rating Criteria Policy (Financial Management) Financial Characteristics Information Presented

18 Why Savings to the taxpayer Lower interest and Underwriter Discount Credibility validation for Department/Agency Political talking point

19 Rating Savings Comparison

20 Savings There are 5 to 25 basis points in savings between rating notches depending on maturity (I.e., 5 year 10bps, 20 year 25bps)

21 Credibility and Political Builds confidence of Financial Management with Public, Fiscal Body, Executive body Great to combat attacks on fiscal stewardship Upgrades with proper communications plan can have positive impact on the image of elected officials

22 Communications Have communications plan ready for better or worse Celebrate rating upgrades Coordinate communications prior to sale to publish through Bond Buyer

23 What Do You Control in the Process? Rating agencies have the following common themes (some variation) Economy Management Entity financial characteristics Liquidity Budgetary Institutional Framework Debt and pensions

24 Policies Took the City of Fishers from AA to AAA Documentation Know your rating agency policy criteria Write the policy to something you can adhere to or write to adhere to historical numbers with a goal of best practice Rating agencies can weigh up to 20% of overall rating

25 Policies (Cont.) GFOA has a policy best practice book Fishers created the following: 5-year Capital Plan Multi-year budgetary projections 3 forward and 3 historical Investment Policy Liquidity Policy Reserve Policy

26 Financial Characteristics Financial Presentation CAFR vs Cash CAFR does a better job on presenting actuals and rates better with most rating agencies One-time Revenue Rating Agencies will normally subtract Provide explanations for one-time, unforeseen expenses Ask for them to be subtracted out of surplus/deficit

27 Liquidity Spending levels to maintain liquidity and cash flow should be managed and should be supported by leadership (Understanding how hard it is to control spending of departments)

28 Present the Case for the Rating Using the criteria the agencies use, and their weighted amounts, do a credit grading that can be discussed and set a benchmark for following ratings. Translate your data into information that aligns with the criteria Ensure you address weak areas Highlight strengths

29 Thank You Oscar Gutierrez

30 Case Study: Contra Costa County Tim Ewell Chief Assistant County Administrator County of Contra Costa (CA)

31 Discussion Topics Introduction to the County Rating Agency Presentation Items Summary Management Update Issuer Overview County Budget and Finance Specific Pension System Update Investment Pool Update Debt Portfolio and Plan of Finance Closing Question and Answers

32 Contra Costa County, California Located in the San Francisco Bay Area about 20 miles East of San Francisco Ninth most populous County in California (1.1 million) 733 Square Miles 19 incorporated cities, plus unincorporated area

33 Contra Costa County, CA Budget Information FY 2018/19 Recommended Budget - $3.5 billion ($1.611 billion General Fund)

34 Contra Costa County, CA Budget Information California counties deploy state programs Little discretionary revenue relative to entire budget ($447 M) Top 5 departments allocated 64% of discretionary, general purpose revenue

35 Contra Costa County, CA Credit Ratings

36 Contra Costa County, CA Debt Information

37 Rating Agency Presentations Summary (discuss what presentation includes, lead with expectation for rating of current deal and ask for review of underlying rating if appropriate) Management Update (key issuer personnel) Issuer Overview (demographic information, local economy) County Budget and Finance (discuss financial indicators, Pension, OPEB liabilities, fund balance, etc.) Specific Pension System Update (if any) Investment Pool Update (how is the Treasury invested, is the pool rated?, etc.) Debt Portfolio and Plan of Finance (what debt is out there currently, what is the current borrowing trying to accomplish and what is nomenclature (i.e. COPS, LRBS, GOs, POBS, etc.) Closing (Q&A, reiterate rating expectation)

38 Rating Agency Presentations - Summary Discuss what presentation will include Introduce presenters and role within your entity and in the deal Lead with expectation for rating of current deal and ask for review of underlying rating (if appropriate)

39 Rating Agency Presentations Management Update Update from the lead issuer representative present For cities, should be City Manager For counties, could be County Executive or Treasurer Representative should have a strong presence and grasp of not only the deal but the big picture Identify long term trends, goals and challenges facing the organization Have a slide organizing these items, but important for the issuer representative to provide detailed discussion rather than read off the slides

40 Rating Agency Presentations Issuer Overview Demographic Information Population Employment by Industry Local Economic Data Anchor Employers (retail, commercial, industrial?) Unemployment Rate Revenue Drivers Sales Tax Property Tax

41 Rating Agency Presentations Issuer Overview

42 Rating Agency Presentations Budget/Finance Discuss budget process Most recent FY budget highlights Performance of Critical Funds (General Fund) over time Composition of revenues by year

43 Rating Agency Presentations Budget/Finance Discuss status of reserves Benchmark to the entities reserve policy (Have a reserve policy!) If reserve levels are under the adopted policy, what is the plan to bring them in line

44 Rating Agency Presentations Budget/Finance OPEB Issues Summary What is entities policy regarding OPEB OPEB Liability Current AAL Current Assets (if any) Current UAAL What compensation reforms have been made to reduce future OPEB liability

45 Rating Agency Presentations Budget/Finance Pension Issues Summary What entity provides pension benefits In California CalPERS (Statewide), 37 Act Systems (Local) Identify projected budget impacts and discuss how those challenges will be approached

46 Rating Agency Presentations Budget/Finance Provide an update on Labor impacts on horizon Critical for heavily unionized agencies

47 Rating Agency Presentations Pension Discuss financial indicators for Pension system (including assumptions) Total Assets UAAL Assumed Rate of Return Funded Ratio Rate of Return Information likely derivative of Pension system financial statements (cite your sources!)

48 Rating Agency Presentations Investment Pool Describe how your Treasury is managed Compliance with treasury and investment policies (have policies in place!) Rating history for the pool (if any) Highlights of Treasury over past several years

49 Rating Agency Presentations Debt Portfolio What is the composition of your current debt portfolio Simply summary table helps to illustrate Highlights of current portfolio (rapid amortization, all fixedrate) How does proposed issuance fit into the larger portfolio Graph helps to illustrate

50 Rating Agency Presentations Plan of Finance Nomenclature (GO, LRB, COP, POB, TIF) Fixed, Variable? Level Debt Service New Money Capital Projects Buy down Pension UAAL Refunding NPV Savings Comprehensive Restructure Deal Schedule Let rating agency know when you would like rating opinion

51 Rating Agency Presentations Closing Recap highlights and takeaways Reiterate rating expectations Q&A with Rating Analysts It s ok not to have all answers, but send follow up promptly following the meeting (don t guess!)

52 Case Study: Contra Costa County Tell your story If entity is an infrequent issuer, use that as an opportunity for a comprehensive update to the rating agency

53 GFOA Resources Best Practice Using Credit Rating Agencies Debt 101 Volumes I and II

54 112 th Annual Conference May 6-9, 2018 St. Louis, Missouri Questions: Speakers will take questions and comments. This session is being recorded, please utilize the microphone in the aisle to ask all questions. Provide Feedback: Please take a few minutes to provide your feedback at Discuss/Comment: Join the discussion at #GFOA2018 Contact GFOA: To contact GFOA about session topics please research@gfoa.org