Municipal Credit Research Glossary of Terms

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1 Municipal Credit Research Glossary of Terms 2012 Morningstar, Inc. All rights reserved. Reproduction or transcription by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. Morningstar's Credit Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization ( NRSRO ).

2 Overall GASB--The Governmental Accounting Standards Board establishes standards of U.S. state and local governmental accounting and financial reporting. GAAP--Generally accepted accounting principles. Economy Population--Total number of residents, as reported by the census. Results from most recent American Community Survey five-year estimate, as conducted by the U.S. Census, are used as a default with current-year estimates used when available. Full Market Value--The dollar value of an asset as measured by current sale prices. This is often used to discuss property values and can be abbreviated as MV. Taxable Assessed Property Value--The dollar value subject to property taxes, as determined by the property assessor. This is often abbreviated as AV or TAV. Several factors can cause a variance between AV and market value and vary by locality, including homestead exemptions, assessment timing, and legal limitations on growth and decline of assessed values. Tax Levy--The total dollar amount of taxes imposed by a government, usually used in conjunction with property taxes. Operating Tax Rate-The portion of the aggregate tax rate designated to fund operating needs. Debt Service Tax Rate--The portion of the aggregate tax rate designated to fund debt service needs. Millage Rate--A tax rate expressed per $1,000 of taxable assessed value of property. Gross Product--The market value of goods and services produced by an area. Morningstar uses gross product data as reported by the U.S. Bureau of Economic Analysis and generally references gross product on either the state or metropolitan area level. Gross product is referenced on a nominal basis, based on current dollar value. Institutional Presence--The presence of any major government body (state or federal) or higher education provider. Industry Concentration--Morningstar examines the employment and production in areas as measured and reported by the U.S. Bureau of Labor Statistics. Industry concentration measures total nonfarm employment as reported by the BLS. Unemployment Rate--Morningstar uses data provided by the U.S. Bureau of Labor Statistics without adjustments for seasonal employment. Both monthly and annual data are used as available and appropriate. Dependency Ratio--The sum of residents, as reported by the U.S. Census, who are either age 18 and younger or 65 and older, divided by total working age population. Median Age--As determined and reported by the U.S. Census, for the most relevant and available geographic unit. 2

3 Median Household Income--As determined and reported by the U.S. Census, for the most relevant and available geographic unit. Median Per Capita Income--As determined and reported by the U.S. Census, for the most relevant and available geographic unit. Poverty Level--As determined and reported by the U.S. Census, for the most relevant and available geographic unit. The poverty level changes annually and varies based on the number of people in a family unit. Labor Force--Morningstar uses data provided by the U.S. Bureau of Labor Statistics. Both monthly and annual data are used as available and appropriate. Debt Direct Debt--Total outstanding principal of debt associated with the entity. For local and state governments, Morningstar includes all tax-supported obligations of the entity, including general obligation, special tax bonds, lease-secured obligations, and capital leases. Self-Supporting Debt--Debt that may be secured by general governmental revenue but repaid by enterprise revenue is considered self-supporting by Morningstar if applicable enterprise revenue provides at least 1.0 times debt service coverage for the past three audited years and debt service is expected to remain at least at 1.0 times coverage going forward. Net Direct Debt--Total direct debt less any analyst adjustments and excluding self-supporting debt, as applicable. Overlapping Debt--Debt from overlapping and underlying jurisdictions that residents of the entity would be responsible for repaying. On the local level, counties, underlying municipalities, school districts, and special districts are generally included in overlapping debt. Overall Debt--The combined amount of net direct debt and overlapping debt. Interest Rate Swap--An agreement between two parties to exchange future flows of interest payments, usually in connection with debt service. Typically, one entity agrees to pay a fixed interest rate in exchange for a variable rate payment. Hedged--Used to refer to debt that is attributable to an interest rate swap. Liquidity Agreement--For variable-rate demand obligation bonds, a liquidity agreement is an arrangement used to provide liquidity to purchase securities that have been tendered to the issuer or its agent that cannot be immediately remarketed. Common forms of liquidity agreements include letters of credit and standby bond purchase agreements. Letter of Credit--A legal agreement in which a bank guarantees payment of debt service under set conditions. Often abbreviated as LOC. 3

4 Standby Bond Purchase Agreement--An agreement with a third party, typically a bank, in which the third party agrees to purchase tender option bonds (usually variable-rate demand obligation bonds) tendered for purchase in the event that they cannot be remarketed. Unlike a letter of credit, a standby bond purchase agreement does not guarantee the payment of principal and interest by the issuer and is not an unconditional obligation to purchase the tender option bonds. Often abbreviated as SBPA. Mark to Market--The fair market value of an asset. This is often used as an accounting term on interest rate swaps. To terminate a swap, the party that has a negative mark-to-market value would need to pay that amount to the counterparty. Capital Improvement Plan--Usually encompassing a five-year period, a capital improvement plan details planned capital projects and equipment purchases over a period of time. Funding sources are also often included. Commonly abbreviated as CIP. Amortization Rate--The percentage of total principal repaid within a period of time. Morningstar uses the 10-year amortization rate as part of its debt analysis. Debt Service--Combined principal and interest payments required to repay bonds. Bond Anticipation Note--A short-term borrowing that is repaid with bond or note proceeds. Often abbreviated as BAN. Commercial Paper--An unsecured short-term debt instrument issued by entities for cash flow purposes. Commonly abbreviated as CP. Lease Financing--A legal agreement in which an entity borrows money to rent facilities or equipment that it will typically acquire at the end of a set period. Private Placement--Debt sold directly to an investor. Long-Term Liabilities Other Post-Employment Benefits--As defined by GASB, this includes health-care and other forms of benefits, for example life insurance, offered to retirees when provided separately from a pension plan. Morningstar analysis focuses on post-employment health-care benefits. Often abbreviated as OPEB. Defined-Contribution Plan--Usually referring to pension benefits or OPEB, a defined-contribution plan entails payments being determined by market returns as opposed to a set formula. Often abbreviated as DC plan. Defined-Benefit Plan--Usually referring to pension benefits or OPEB, a defined-benefit plan entails payments being determined by a set formula, as opposed to market returns. Often abbreviated as DB plan. Hybrid Plan--Usually referring to pension or OPEB plans, Morningstar considers a hybrid plan to entail both definedbenefit and defined-contribution options. Cost-Sharing Multiple-Employer Plan--As defined by GASB, cost-sharing multiple-employer plans are administered by trusts, or equivalent arrangements, in which (a) employer contributions to the plan are irrevocable, (b) plan 4

5 assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan, and (c) plan assets are legally protected from creditors of the employers or plan administrator. Agent Multiple-Employer Plan--An aggregation of single-employer plans with pooled administrative and investment functions. Annual Required Contribution--In accordance with GASB, the annual required contribution is the actuarially determined amount the employer would be required to contribute in a given year in order to fully fund the liability over a set period of time. Commonly abbreviated as ARC. Funded Level--The funded level represents assets divided by total liabilities. Pay-Go Liability Funding--Funding long-term liabilities, usually pension and OPEB obligations, without a legally defined trust. Pay-Go Capital Funding--Paying for expenses from current revenue or reserves, as opposed to the use of debt proceeds. Finances Liquidity--A measure of a government's ability to pay expenses as they become due. Fund Balance--The variance between assets and liabilities. Restricted Fund Balance--In accordance with GASB 54, restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation. Committed Fund Balance--In accordance with GASB 54, committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the government s highest level of decision-making authority. Unassigned Fund Balance--In accordance with GASB 54, unassigned fund balance is the residual classification for the government s general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned. Assigned Fund Balance--In accordance with GASB 54, assigned fund balance is intended to be used by the government for specific purposes that do not meet the criteria to be classified as restricted or committed. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. Nonspendable Fund Balance--In accordance with GASB 54, nonspendable fund balance includes fund balance not able to be spent, such as fund balance associated with inventories. 5

6 Unrestricted Fund Balance--In accordance with GASB 54, unrestricted fund balance is the sum of committed, assigned, and unassigned fund balance. Reserved Fund Balance--Before the implementation of GASB 54, reserved fund balance represented the portion of fund balance that was restricted for specific purposes or was nonspendable. Unreserved Fund Balance--Before the implementation of GASB 54, unreserved fund balance was the total fund balance less any reserved portion. Legally, unreserved fund balance can used for any purpose of the fund. Unreserved fund balance included unreserved, designated as well as unreserved, undesignated. Undesignated Fund Balance--Before the implementation of GASB 54, undesignated fund balance represented the portion of unreserved fund balance that was not designated to be used for a specific purpose. Designated Fund Balance--Before the implementation of GASB 54, designated fund balance represented the portion of unreserved fund balance which, while legally it could be used for any purpose of the fund, the government intended to use for a specific purpose. Spending--Total expenditures plus transfers out. Days Cash on Hand--Morningstar determines days cash on hand by dividing current unrestricted cash and investments by daily spending (total spending divided by 365). Management and Operating Environment Collective Bargaining Agreement--Legal agreement between an employer and a group of employees, often represented by a union, regulating working conditions. 6

Municipal Credit Research U.S. Local Government Methodology

Municipal Credit Research U.S. Local Government Methodology July 2012 2012 Morningstar, Inc. All rights reserved. Reproduction or transcription by any means, in whole or in part, without the prior written