On Jan. 11, 2024, S&P Global Ratings published a request for comment (RFC) on its proposed Methodology For Rating U.S. Governments. The proposed criteria apply to U.S. states, counties, municipalities, school districts, and special government districts. S&P Global Ratings believes it will be useful to provide additional context about the proposed criteria and to address questions on it, including scope, expected rating impacts, and key differences between the proposed and existing criteria. For the full proposed framework, see "Request For Comment: Methodology For Rating U.S. Governments."

Frequently Asked Questions

What is the scope of the proposed criteria and what governments would not be rated under the proposed criteria?

The proposed criteria apply to U.S. states, counties, municipalities, school districts, and special government districts.

The criteria do not apply to governments located outside the U.S. or to governmental entities in scope of other issuer credit rating criteria, for example:

• U.S. Municipal Water, Sewer, And Solid Waste Utilities: Methodology And Assumptions;
• U.S. Municipal Retail Electric And Gas Utilities: Methodology And Assumptions;
• Global Not-For-Profit Transportation Infrastructure Enterprises: Methodologies And Assumptions;
• U.S. And Canadian Not-For-Profit Acute Care Health Care Organizations;
• Global Not-For-Profit Education Providers;
• U.S. Public Finance Charter Schools: Methodology And Assumptions;
• Methodology And Assumptions: Rating Unlimited Property Tax Basic Infrastructure Districts.

What is the potential impact on ratings?

Across all ratings in scope of these proposed criteria, we expect approximately 95% will remain unchanged.

• For U.S. state and territory ratings, we expect all ratings will remain unchanged
• For county ratings, approximately 3% could change, generally by one notch higher or lower
• For municipality ratings, approximately 5% could change, generally by one notch higher or lower
• For school district ratings, approximately 6% could change, generally by one notch higher or lower
• For special district ratings, approximately 6% could change, generally by one notch higher or lower

What are the key differences between the framework of these proposed criteria and existing criteria?

The proposed criteria adopt a single scored framework for all U.S. governments. The scored credit factors comprising the government's individual credit profile (ICP) are largely the same as existing criteria, but the proposed criteria adopt a common set of weights across all U.S. governments. The new framework separates the institutional framework (IF) assessment from the ICP, giving the IF greater prominence in the criteria. These changes align closely with the framework in our "Methodology For Rating Local And Regional Governments Outside Of The U.S.," improving comparability of our analysis globally.

Of the ratings that are changing, what are the key drivers?

For schools and special districts, expected changes are primarily due to the movement from non-scored to scored criteria and the adoption of a methodology that assesses the IF and ICP in a consistent manner.

For counties and municipalities, expected changes are primarily due to changes in the factor weightings, with less emphasis on economic factors and more emphasis on debt and liabilities relative to the existing criteria.

What is changing in S&P Global Ratings' analysis of financial performance and reserves and liquidity?

For states and territories, we maintain the same analytical approach to both financial performance and reserves and liquidity; however, they are now separate ICP factors to highlight the role financial performance and reserves play in maintaining credit quality. We enhanced the analytical approach for evaluating financial performance of local governments by including a three-year trend of operating results in the initial assessment to reflect performance over time. There is little change to the analysis of reserves and liquidity from criteria aside from combining the two into one factor. For school districts and special districts, we are using similar metrics and thresholds but in the proposed approach both financial performance and reserves and liquidity would be weighted factors within a scored framework.

Why does the analytical approach for evaluating states versus local governments differ for some credit factors?

There are slight differences when the available information for the assessment of states and local governments requires a different approach. For example, when evaluating a state's financial performance, and reserves and liquidity factors, we use qualitative assessments to consider budget-based and generally accepted accounting principles financial performance over economic cycles, which is the same as our current approach for our state ratings. Analysis of budget-based financial information allows for more forward-looking analysis but requires a qualitative approach to the initial assessment. For local governments, our initial assessment relies on the local government's financial statements. We incorporate forward-looking information, as available, primarily through qualitative adjustments.

In the economy ICP factor, why is S&P Global Ratings proposing to use gross county product, gross state product, and per capita personal income as initial assessment metrics?

We elected to use these metrics because they are widely understood and relevant economic measures that are comparable across government types and geographies. Gross state product/gross county product reflects the market value of goods and services produced within a state or county's geographic boundaries, while U.S. state or county personal income considers income earned by its citizens within and beyond its geographic borders. Taken together, these indicators provide a well-rounded and comparable view of a government's economic strength. All municipalities, school districts, and special districts that operate within the same county will receive the same initial economic assessment. We further assess local economic characteristics through qualitative adjustments. In limited circumstances where a rural local government spans multiple counties, the initial economic assessment relies on the county with the largest population concentration within the service area. For urban local governments that span multiple counties, we may rely on the Metropolitan Statistical Area statistics to establish the initial assessment.

How do the proposed criteria differ from the existing Financial Management Assessment and why?

The proposal maintains the same foundational concepts within the existing Financial Management Assessment (FMA) criteria; however, we streamline the approach by combining the seven FMA criteria subfactors into three: budgeting practices, long-term planning, and policies. In addition, the proposed criteria change the initial management subfactor assessments to a four-point scale from a three-point scale in the current FMA criteria to provide greater differentiation between governments. The proposed criteria also include qualitative adjustments that could improve or worsen the final management assessment for atypical situations related to transparency and reporting, governance structure, or risk management, credit culture, and oversight. Final management assessments of '5' or '6' can be reached only through these qualitative adjustments.

How does the proposed methodology incorporate emerging risks into the analysis?

We will continue to reflect emerging risks in our credit rating analysis in any of our ICP factors when they could materially influence the creditworthiness of a rated entity and for which we have sufficient visibility and certainty. We also assess management's preparedness for these risks in our evaluation of long-term planning, preparation, and risk management and reflect those through qualitative adjustments. For evolving credit events, wherein the effects are not yet incorporated across the ICP factors, we can apply the modifier for "rapidly rising or unexpected risks" to change the rating by one or more notches.

Is S&P Global Ratings' approach to calculating a government's debt burden changing?

The proposed approach is largely the same as our existing approach; how we calculate a government's debt burden is included in "Appendix 1: Debt Statement Analysis" of the proposed criteria. We updated the approach to align with Governmental Accounting Standards Board reporting standards and will include both capital and operating lease obligations in a government's gross direct debt burden.

The proposed criteria update our approach to tax-secured self-supporting debt. In calculating the initial debt and liabilities assessment, tax-secured debt that is fully or partially supported by an enterprise will be included in the net direct debt of the issuer. The initial debt and liabilities assessment could be improved through a qualitative adjustment if self-support from utilities, such as water, sewer, solid waste, and electric utilities, is consistently sufficient. This provides greater transparency to an issuer's total amount of tax-secured debt outstanding and our assessment of self-support.

How is the approach to pension and OPEB obligations changing?

The proposed criteria consolidate and harmonize our approach to analyzing pensions and other postemployment benefits (OPEB) across the governments in scope. For states, the scoring approach is simplified by moving to quantitative metrics for the initial assessments and qualitative adjustments to account for under or overstated current costs or liabilities.

For counties and municipalities, the proposed criteria will increase the relative weighting of debt and liabilities compared with the existing criteria, and annual pension and OPEB costs and net pension liabilities per capita are included in the initial assessment. These changes elevate the importance of pension and OPEB costs in our analysis of a government's fixed costs.

For schools and special districts, the proposed criteria introduce scored assessments that align with counties and municipalities, improving consistency in our analysis and comparability across governments.

Why is S&P Global Ratings using government size as a rating modifier?

Governments that serve a small population tend to have limited operations and economies that may be more vulnerable to credit events, and therefore, could be more susceptible to rapid credit deterioration. These governments are at a greater risk of economic and financial disruption, which affects all ICP factors. To account for that inherent volatility, we can modify the anchor by one notch if a government's year-round population is less than 5,000 and there is no offsetting economic strength. We will consider indicators such as the size and strength of the government's total market value or other economic metrics of revenue-generating capacity to determine whether to apply the notch.

Where do I make comments?

• You can submit comments to https://disclosure.spglobal.com/ratings/en/regulatory/ratings-criteria
• Or, you can email CriteriaComments@spglobal.com
• Comments are due by March 11, 2024. This is a 60-day comment period

When will S&P Global Ratings publish the final criteria?

Once the RFC period closes, we will review the comments and assess whether these comments warrant changes to the proposed criteria. Therefore, we cannot give exact timing on the final criteria publication, but we will proceed as promptly as possible. At the time the final criteria is published, we will also publish an RFC process summary that provides an overview of the comments received and any changes that were made between the RFC and final criteria and why those changes were made.

Will S&P Global Ratings provide a list of affected ratings with the final release?

Yes, on the day the final criteria are published, we will publish a list of entities that are under criteria observation (UCO), which is intended to identify which issuer and issue ratings could be affected by the criteria change. The UCO identifier will remain in place until the conclusion of the review under the final criteria, which we expect to be within six months after the final criteria are published. During this period, the ratings and/or outlook of entities that are UCO may be affirmed, changed, or placed on CreditWatch.

The final criteria may be different from the proposed RFC either because of changes we made that arose from market feedback or because of analytical changes we independently determined were warranted. Our testing indicates that the criteria, if adopted as proposed, will likely result in 95% of ratings remaining unchanged. For U.S. state and territory ratings, no ratings are expected to change.

I have an issue coming to market soon. Can S&P Global Ratings rate it under the new criteria?

No, any financings rated before publication of the final criteria will be rated under existing criteria. All issues rated after the publication of the final criteria will follow that methodology.

What is the anticipated review cycle?

We will review all entities on the UCO list within six months of the publication of the final criteria. We cannot accept any requests for expedited reviews of ratings except for new issuance. Following the publication of the final criteria, any rating reviews, either scheduled or event-driven, will be assessed under the final criteria.