S&P Global Ratings' ESG report cards qualitatively describe how and why environmental, social, and governance factors may have a more positive, negative, or neutral influence on an individual entity's credit fundamentals that we incorporate into our forward-looking credit rating analysis. In this report, we analyze the ESG credit factors that could be most influential and material in our credit rating analysis for U.S. public finance (USPF) government and not-for-profit enterprise issuers in the Midwest and Central region of the country, which includes Iowa, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Wisconsin, and West Virginia. These comparative views of ESG factors are qualitative and established by analysts during analytic discussions and described in issuer-level credit rating reports, with the goal of providing insight and transparency.
We grouped the states covered in this report based on geographic proximity and commonly shared credit rating risks, including those associated with ESG. The risks and opportunities highlighted in this report are not exhaustive but rather broadly illustrative and represent where issuers across different sectors are positioned relative to those risks and opportunities. Beginning April 2020, S&P Global Ratings incorporated a summary paragraph in all issuer-level credit reports to provide transparency, on a comparative basis, of how material and influential ESG risks and opportunities are in our credit rating analysis. Select ESG summary paragraphs from issuers within this region are reproduced in the Appendix.
ESG In Credit Ratings
ESG risks and opportunities can affect an entity's capacity to meet its financial commitments, including debt service. S&P Global Ratings incorporates ESG considerations into its ratings methodologies and analytics, which enables analysts to integrate the qualitative and quantitative effects throughout our credit rating analysis (see "Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors," published March 2, 2022, on RatingsDirect, and "Environmental, Social, And Governance Principles in Credit Ratings," Oct. 10, 2021).
Environmental - Neutral
The Midwest and Central region accounts for about 24% of the U.S. population (over 78 million) and spans 850,000 square miles. Environmental risks vary across this large area yet are typically neutral to our credit rating analysis for most USPF governments and not-for-profit enterprises. In some cases, we observe heightened or emerging risks at local levels stemming from flooding and severe storms, water contamination, and reliance on heavy greenhouse gas emitting industries; but the influence from these risks for most entities is limited because of infrequent occurrence or available financial mitigants, such as strong budget flexibility and liquidity, availability of insurance, and support from the Federal Emergency Management Agency (FEMA). In addition, the presence of the Great Lakes, the largest body of fresh water in the world, is an unparalleled opportunity for much of this region, providing ample access to drinking water in close proximity to population centers. Over time, affordable access to water could improve the region's draw for both business and residential relocation.
Physical risk. This region's geography and climate insulate it from many physical risks and climate hazards that entities in other regions face. Inland flooding has been widespread in the region as the Mississippi and Missouri rivers flow through many of the states. However, it commonly occurs in sparsely populated areas or designated flood zones along rivers without much economic development, which can limit the materiality of the risk in our credit rating analysis. According to FEMA, severe weather events occurred more frequently in the region over the last five decades (see chart 1), and urban areas with aging utility infrastructure could face increased risks for damage potentially requiring additional capital or operational costs to restore. For example, metro Detroit has experienced increased flooding events in in recent years, including record rainfall in 2021 that overwhelmed portions of the Great Lakes Water Authority's system, a problem worsened by a power failure that caused drain backups that flooded thousands of homes. Similarly, Davenport experiences periodic flooding given its location along the Mississippi River, with a major flood in 2019. The city has since been working with the state on a $165 million flood mitigation plan to remediate the risk.
In addition, changing weather and precipitation patterns can trigger hydrological variation in the Great Lakes water basin, ultimately leading to rising and lowering water levels in relatively short time periods. This risk can render waterfront parks or beaches unusable and curb tourism over time, and potentially damage personal property and suppress assessed values. Furthermore, frequent or severe periods of excessive heat or rainfall can reduce crop output, a key economic component for the region's agricultural communities.
Federal funding and insurance are often available to help offset weather damage costs, but entities--particularly the smaller ones--with nominally slim reserves or liquidity to fund upfront expenditures face potentially higher credit rating risks. In addition, local governments and utility systems with repeated infrastructure failures following more intense weather events could also lose population or interest from developers in the long term depending upon how entities implement risk management, resiliency, and adaptation measures to harden infrastructure and assets against these events.
Chart 1
Waste and pollution. Relative to the rest of the nation, most of this region is exposed to lead and copper water pipes, reflecting comparatively older infrastructure and a smaller percentage of rebuild (see chart 2). We expect that aggressive regulation such as the Environmental Protection Agency's Lead and Copper Rule will be effective in eliminating lead service lines but the timeline for compliance is unclear and costs could be significant for issuers with substantial exposure. We also view water contamination as a health and safety (social) risk that tends to disproportionately occur in vulnerable communities where affordability pressures may already be high, such as the cases in Flint and Benton Harbor, Mich. Some states may be better positioned to receive and deploy federal resources to replace water lines, which could help accelerate mitigation efforts.
Chart 2
Climate transition risk. Regulation toward renewable energy production could have negative effects for governments and not-for-profit enterprises whose revenues and economic bases rely on the fossil fuel industry, which in this region includes much of North Dakota (oil drilling) and West Virginia (coal), small pockets of Illinois, Kentucky, Ohio, and Indiana (coal), and several areas of Pennsylvania with either coal or natural gas mining (Pennsylvania is the nation's second largest natural gas producer). About 46% of the nation's electric generation from coal is supplied by power providers in these states (according to the Energy Information Administration), leaving power utilities and end users particularly vulnerable to high costs of decommissioning coal mines and transitioning and connecting to new energy sources. Jobs in these sectors do not account for substantial overall employment in the region, but North Dakota and West Virginia have the first and third highest concentration in energy sector jobs in the nation, at 3.7% and 2.7%, respectively, with the national average at 0.4%. However, cyclical revenue trends tied to this industry can affect budgetary balance and periodically influence economic output. Transition to wind powered generation could create an opportunity for entities in this region, with some already paving the way. Iowa is among the three largest wind power generating states in the country, and North Dakota, Minnesota, and Illinois are also in the top 10 (according to the Energy Information Association).
In addition, heavy reliance on manufacturing and the automobile industry exposes much of this region to transition risks of changing regulation and consumer sentiment, considering the carbon emissions released throughout the manufacturing lifecycle. Chart 3 shows the high concentration of auto plants in this region. Positively, we believe this region is well positioned to attract new electric vehicle (EV) investment, as it has skilled work forces, infrastructure, and proximity to existing suppliers and manufacturers. In fact, sites in Michigan, Kentucky, and Indiana have secured multi-billion-dollar investments from the EV industry. S&P Global Ratings forecasts the EV market share in the U.S. will increase to above 15% by 2025, up from 4% in 2021, and we believe those communities that are able to secure investment will likely maintain or experience economic growth, supporting jobs, demand for transportation, health care, and education enterprises over the long term.
Chart 3
Social - Elevated
We view the exposure to social risks as moderately negative within our credit rating analysis for rated entities in this region. In our view, the risks stem from long-term demographic trends reflected in population stagnation or decline, which are driven by out-migration trends for employment opportunities in other parts of the country. We believe the recent trend of housing price and home value appreciation, particularly in certain urban areas in this region could exacerbate social risks and affordability.
Social capital. During the last decade, most of the Midwest and Central states exhibited weaker population growth than the nation (see table 1). Notably, Illinois and West Virginia represented two of only three states that saw population declines, and the decline in Illinois is expected to accelerate to minus-2.5% during 2020-2025, the second largest across the nation.
Table 1
| Historical And Projected Population Growth In The Midwest And Central Region | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Growth, 2010-2020-- | --Projected growth, 2010-2025-- | |||||||||||||
| 2020 pop. | 2025 pop. (proj.) | Percent | Relative to the U.S. | Percent | Relative to the U.S. | |||||||||
| Iowa | 3,189,055 | 3,229,508 | 4.43 | Weaker | 1.27 | Weaker | ||||||||
| Illinois | 12,768,951 | 12,453,334 | (0.64) | Weaker | (2.47) | Weaker | ||||||||
| Indiana | 6,788,931 | 6,927,976 | 4.52 | Weaker | 2.05 | Stronger | ||||||||
| Kentucky | 4,504,843 | 4,561,480 | 3.53 | Weaker | 1.26 | Weaker | ||||||||
| Michigan | 10,065,932 | 10,050,194 | 1.84 | Weaker | (0.16) | Weaker | ||||||||
| Minnesota | 5,706,635 | 5,798,975 | 7.32 | Stronger | 1.62 | Weaker | ||||||||
| Missouri | 6,156,723 | 6,232,147 | 2.66 | Weaker | 1.23 | Weaker | ||||||||
| North Dakota | 778,272 | 785,019 | 15.01 | Stronger | 0.87 | Weaker | ||||||||
| Ohio | 11,789,673 | 11,835,831 | 2.13 | Weaker | 0.39 | Weaker | ||||||||
| Pennsylvania | 12,986,292 | 13,005,731 | 2.06 | Weaker | 0.15 | Weaker | ||||||||
| South Dakota | 887,866 | 926,166 | 8.68 | Stronger | 4.31 | Stronger | ||||||||
| Wisconsin | 5,892,503 | 5,948,691 | 3.47 | Weaker | 0.95 | Weaker | ||||||||
| West Virginia | 1,789,303 | 1,754,707 | (3.52) | Weaker | (1.93) | Weaker | ||||||||
| Region avg. | 83,304,979 | 83,509,760 | 3.96 | Weaker | 0.73 | Weaker | ||||||||
| U.S. avg. | 331,533,230 | 337,554,290 | 6.70 | 1.90 | ||||||||||
| Source: S&P Global Market Intelligence | ||||||||||||||
In line with its weak population trends, the region has a higher old-age dependent population compared to that of the nation (65.6% vs. 63.1%), with Michigan projected to have the nation's largest increase in the next two decades (see "Increasing Generational Dependency Poses Long-Term Social Risks To U.S. States' Fiscal And Economic Stability," Feb. 24, 2020). In chart 4, we illustrate "old-age dependency ratio" or the number of persons age 65 and over divided by the labor force (age 15 to 64) as defined by the Organization for Economic Cooperation and Development.
Chart 4
When analyzing the working-age population trends, we note that all but one state in the region saw weaker growth than national average from 2010-2020, based on S&P Global Market Intelligence data, and Michigan, Illinois, Ohio, and West Virginia are among the 10 states projected to experience the largest working-age population declines in the next two decades.
A shrinking working-age population could hinder long-term economic diversity and development as well as challenge demand for not-for-profit entities. This, coupled with a population that is aging more quickly compared to the nation, could result in state and local government budgetary pressures relating to education (public and private K-12 and higher education), health care, and social services as well as pension and other postemployment benefit contributions. It may also present affordability revenue challenges, such as property taxes and utility fees as costs for services and infrastructure are spread across a smaller or shrinking base. In the utility sector, this could make it difficult to fund infrastructure maintenance, expansion, and transition to renewable energy sources. As mentioned, lack of funding for deferred maintenance could result in repeated infrastructure failures and dampen future growth prospects. While an aging population could bolster demand for not-for-profit health care providers, it could increase the providers' expenditure for advanced and more expensive medical technologies and impact their ability to manage lower governmental reimbursement through Medicare, depending on the payer mix.
In the education sectors, public school district enrollment follows similar trends as those of the general population. According to National Center for Education Statistics data, from 2010 to 2020 there were relatively large enrollment declines in Illinois, Michigan, and West Virginia, while Iowa, Minnesota, North Dakota, and South Dakota enjoyed growth, supported by stronger population increases compared to the regional average. Overall public school district enrollment in the region declined by 4.8%, compared to only 0.2% for the U.S. These declines could also be partially driven by the prevalence of school choice programs (especially in Indiana and Michigan) and charter school law, which introduces more demand competition. Since the funding formula for school districts in most of these states are driven by enrollment, declining enrollment and heightened competition could pressure those schools that may be required to enhance curriculum and renovate facilities to attract prospective students.
For higher education, all but one of these states had enrollment declines over the last decade, each exceeding the nation (see table 2). Total higher education enrollment declined by 9.9% in the region as compared to 1.8% in the U.S., suggesting out-migration in the younger-age group toward education and future employment opportunities in the other parts of the country. Declining enrollment in higher education could have implications for state appropriations and direct impacts on student tuition and auxiliary revenue. With growing affordability concerns, especially for private colleges and universities, we think higher education institutions could face constraints to raise tuition revenue when competing with weaker demand. Indiana was an outlier, with a 26% enrollment increase, mainly driven by expansion of online and physical campuses by Purdue University and the opening of other higher education institutions. We believe the online education experience in Indiana highlights a potential mitigant to the region's social capital risk to expand demand nationally or even globally, subject to effective financial governance and successful management of program quality and student outcomes.
Table 2
| Percent Change In Enrollment, 2010-2020 | ||||||
|---|---|---|---|---|---|---|
| Public school district | Higher education | |||||
| U.S. | (0.2) | (1.8) | ||||
| Illinois | (9.6) | (17.2) | ||||
| Indiana | (1.3) | 26.0 | ||||
| Iowa | 2.2 | (11.8) | ||||
| Kentucky | (2.1) | (4.8) | ||||
| Michigan | (9.6) | (23.6) | ||||
| Minnesota | 4.1 | (10.6) | ||||
| Missouri | (4.0) | (8.8) | ||||
| North Dakota | 19.3 | (9.6) | ||||
| Ohio | (6.2) | (7.5) | ||||
| Pennsylvania | (5.0) | (10.1) | ||||
| South Dakota | 10.7 | (8.8) | ||||
| West Virginia | (10.4) | (4.2) | ||||
| Wisconsin | (4.8) | (11.0) | ||||
| Source: National Center for Education Statistics; Integrated Postsecondary Education Data System, Fall Enrollment component | ||||||
Human capital. Correlating with its lagging demographic trends, the region's employment base is growing at a slower pace compared to that of the U.S. and over the last decade, and the gap appears to be widening as shown in chart 5.
Chart 5
We estimate an approximate net loss of 1.7 million manufacturing jobs in the region from 2000 through 2019, followed by a sharp drop of 304,000 in 2020 largely due to the pandemic. Manufacturing jobs have since grown modestly in 2021 and are projected to improve further in 2022. However, with changing greenhouse gas emissions policies and increasing automation of work, we believe the region is unlikely to see a significant resurgence in manufacturing employment except for activity that may be driven by electric vehicles. Table 3 shows the share of manufacturing as a percentage of each state's GDP and employment. The loss of manufacturing jobs could have a significant effect on human capital and potentially require government financial or operational support to attract new industries or retrain employees, given how reliant the region is on this industry.
Table 3
| Manufacturing Contribution To GSP And Employment | ||||||
|---|---|---|---|---|---|---|
| Percent of total | ||||||
| To GSP | To employment | |||||
| Illinois | 12.3 | 9.7 | ||||
| Indiana | 25.3 | 16.9 | ||||
| Iowa | 17.3 | 14.4 | ||||
| Kentucky | 0.8 | 12.8 | ||||
| Michigan | 17.5 | 13.8 | ||||
| Minnesota | 13.1 | 11.1 | ||||
| Missouri | 11.8 | 9.6 | ||||
| North Dakota | 7.1 | 6.1 | ||||
| Ohio | 15.5 | 12.4 | ||||
| Pennsylvania | 12.2 | 9.6 | ||||
| South Dakota | 8.3 | 10.2 | ||||
| West Virgnina | 9.4 | 6.6 | ||||
| Wisconsin | 18.1 | 16.3 | ||||
| U.S. | 10.9 | 8.6 | ||||
| Source: Bureau of Labor Statistics | ||||||
The workforce in the region is relatively heavily unionized; labor union activities and negotiations can result in financial risks and operational disruptions for local governments and not-for-profit enterprises. A key aspect of our credit rating analysis is management's ability to manage operational challenges such as labor strikes and maintain budgetary balance.
Governance - Neutral
Ineffective identification, monitoring, and mitigation of risks, which can disrupt service delivery and budget balance, can have a significant influence on our view of an issuer's ability and willingness to pay its obligations, including debt service, on time and in full. Furthermore, we believe those entities burdened by high pension contributions could be negatively affected by risk management, culture, and oversight governance risks. While we believe there are some governance weaknesses in the region, overall we view it as neutral given the comparatively stable management and governance assessments in our credit rating analysis for governments and not-for-profit entities.
Risk management, culture, oversight. Poorly funded pension and retiree health care obligations are somewhat common across this region. In addition, the aforementioned social risks (i.e., aging populations, shrinking labor force, and strong collective bargaining groups) in many of these states could also make it more difficult to fund these plans or implement changes. School districts in Illinois, Michigan, Kentucky, and Pennsylvania participate in state cost sharing pension plans that typically are poorly funded and therefore inherit decision making risks from these states that potentially create budgetary pressure if states reduce subsidies or shift contribution burdens. Many local governments in Illinois and Michigan also face severe pension pressure that stems partially from poor funding discipline of single employer plans. In Illinois, we view pension risk management as having a moderately negative influence on our state rating, due to limitations on altering pensions and a statutory requirement to meet funding goals of 90% by 2040, rather than 100%. We would view prudent funding policies, including assumptions and amortization practices that realistically capture liabilities and reduce the likelihood of volatility, as governance decisions that can mitigate pension funding risks (see "ESG Brief: ESG Pension And OPEB Analysis In U.S. Public Finance," Oct. 7, 2021).
Transparency and reporting. The prescribed state frameworks that local governments and non-profit enterprises operate within are more likely to negatively influence credit ratings when they reduce predictability or flexibility or fail to support strong transparency. Almost all local governments and schools in these states are required to produce annual or biannual financial reports, but the quality and depth can vary. The only states in this region requiring all or nearly all its municipalities and counties to produce audits on a GAAP basis of accounting are Michigan, Minnesota, Ohio, and West Virginia. Issuers often produce GAAP audits even if not required but cash accounting remains common for schools in Illinois and Ohio, municipalities in Iowa and Pennsylvania, counties in Kentucky, and is the predominant statement basis for schools in Missouri and all local governments in Indiana. We believe cash accounting could reduce transparency and may negatively influence our credit rating analysis, as we have specific adjustments in our criteria for municipalities, counties, and utilities to account for this risk.
The Indiana State Board of Accounts is statutorily required to review and publish financial reports for Indiana municipalities, but these are often produced more than a year after the statement period and prescribe to a basis of accounting that is different than the accounting principles generally accepted in the United States. These comparatively weaker financial statement reporting requirements are described in our institutional framework for Indiana municipalities and counties that are not required to file a GAAP audit and, in some cases, have negatively influenced our credit rating analysis when not provided in a timely manner.
Appendix
| Select Paragraphs From The Most Recently Published Issuer-Level Reports That Represent ESG Risks And Opportunities | |||
|---|---|---|---|
| Obligor | Sector | Rating/Outlook | ESG paragraph |
| Environmental | |||
| Milwaukee Metropolitan Sewer District | Utilities | AA+/Stable | Overall, we think management mitigates most environmental, social, and governance risk by adopting, adhering to, and adjusting operating and financial policies and procedures. Management's well-defined and conservative long-term planning proactively addresses compliance with all environmental standards. The district has committed to improving its effect on the environment and sustainability, including: meeting 100% of energy needs with renewable sources; nature approach to the drainage system where possible for flood control; using solar panels to offset carbon use; identifying climate-change-related risk to inform risk management practices, and cataloguing emissions to identify where it can reduce its effect on the environment. These efforts are in line with the district's use of a programmatic structure when issuing certified climate and green bonds, which requires it to obtain initial verification of the program and annual reporting for each bond issuance meeting. In our view, overall social risk is elevated as a result of rate affordability pose greater pressure on the service area economy than national peers. While the region is susceptible to periodic flooding, management has utilized long-term planning to reduce this environmental risk. In addition, the district is conducting a long-term study of the impact of raising lake levels on sewer and drainage systems. In our opinion, environmental, social, and governance risks are in line with those of similarly rated peers. |
| Williston, ND | Local government | A+/Negative | We believe that Williston's elevated environmental risks include the city's large oil and gas presence and potential for increasing regulatory challenges or costs as some sectors of the global economy transition to more renewable energy, which could in turn pressure the local economy and revenue performance. Social risks and governance risks are in line with the sector. |
| Lewis and Clark Community College, IL | Higher education | A-/Stable | Despite being in close proximity to the Dec. 10, 2021, tornado outbreak, management reports there was no physical damage to campus facilities, but there were power outages and related debris cleanup. The district's location might make it vulnerable to future similar storm events, exposing it to acute environmental physical risks that influence our credit rating analysis such as unexpected costs that affect financial performance. In our view, the district, like other higher education entities, faces elevated health and safety social risks due to the COVID-19 pandemic, with the spread of the virus and its variants potentially affecting enrollment trends. The district was recently a victim of a ransomware attack on Nov. 23, 2021, which resulted in systems being taken offline and school being closed for a week. The district had protocols in place to detect suspicious activity and it has cyber-security insurance, which is helping facilitate the response and recovery process. Management does not expect a material financial impact related to this cyber-security event and has identified additional levels of security they will invest in to further protect against future events. The existing risk mitigation plans as well as management's evaluation of additional mechanisms to enhance its cyber hygiene leads to our view that governance risks are considered neutral within our credit rating analysis. |
| Social | |||
| Detroit, MI | Local government | BB/Positive | We view Detroit as facing elevated social risks, specifically social capital risks. Commuting patterns changed significantly through the pandemic and more than 30% of nonresidents continue to work remotely. This translates to revenue losses directly from refunds, but also slowed recovery of jobs that rely on a regular course of business and leisure activity in the city. Detroit's population trend remains a risk, as do its high poverty levels, as these can limit revenue-raising abilities and increase service needs. The city's leadership views building up its residential tax base as fundamental to its future and invests significant resources in these efforts. Successes to date are reflected in increasing property values, improved public safety metrics, and reduced poverty rates; and substantial new job creation within the city likely reflects the private sector's recognition of an increasingly skilled labor force. Detroit reduced its poverty rate by nearly 9% from 2014 to 2019, lowering it to 31%, but 2020 Census figures show an increase to 35%. We see governance as a strength, with strong fiscal controls, formal long-term forecasting, well-framed policies that are consistently met, and commitment to long-term goals that keeps the city's rebound moving forward. We do not consider there to be high environmental risk. Detroit is building a sustainability plan and continues to seek solutions to fight flooding of the Detroit River in certain pockets of the city. It also anticipates that federal infrastructure act funding will yield substantial investment in lead pipe removal, road repair, and broadband expansion. |
| Philadelphia, PA | Local government | A/Stable | While health and safety social risks stemming from the pandemic are abating, our rating incorporates our view that they remain somewhat elevated for Philadelphia and have weakened many of the city's revenue sources, including income taxes generated by commuters. The city has given $95 million in refunds to commuters in 2021 due to work-from-home requirements. It is still unclear how work patterns will change after the pandemic, but the city has assumed that 15% of nonresident salaries will be permanently lost as commuter behavior changes. Notably, the commuter tax still applies to nonresidents if work from home is considered an optional benefit rather than a requirement, which we believe may mitigate some of the future losses. Furthermore, the pandemic affected the city's financial performance by the need to focus expenditures on addressing the health and safety of the community. Social capital risks reflected in its relatively weaker sociodemographic profile, including higher-than-average unemployment and poverty, could inhibit its ability to raise or collect revenue and also create a greater demand for services. While poverty rates in the city had decreased over the last few years, we do not yet have data post-pandemic, which likely exacerbated economic conditions for the most vulnerable. We analyzed Philadelphia's environmental and governance risks relative to its economy, management, financial measures, and debt and liability profile, and determined that all are in line with our view of the sector standard. |
| Indianapolis Public Schools, IN | Local government | A/Stable | We view the district's social risks as above the sector average given elevated poverty levels, which lead to higher costs to educate students, as well as competition from charter schools and declining enrollment, which leads to a lower revenue base. We consider the district's environmental and governance risks in line with our view of the sector standard. |
| Goshen Health System, IN | Health care | A-/Stable | We consider Goshen Health's social risk as elevated compared with that of peers based on a combination of factors. The hospital's location in a very limited service area with a population of less than 100,000 and the region's concentration of jobs in manufacturing contribute to higher social capital demographic issues that weakens our view of the overall enterprise profile and could potentially affect overall demand for services over time. Furthermore, the county's vaccination rates compared with the national average keeps health and safety risks elevated and could expose the organization to a prolonged recovery from the pandemic with higher associated expenses and lost revenue related to managing a greater volume of COVID-19 patients. In addition, the core mission of health care facilities is to protect the health and safety of communities, which is further evidenced by responsibilities to serve patient demand during COVID-19. We believe this exposes Goshen Health and its peers to additional social risks like prolonged labor shortages that could present financial pressure in the short term. We analyzed Goshen Health's environmental and governance risks and determined that they are in line with our view of the sector standard. |
| Minnesota State Colleges & Universities Board Of Trustees | Higher education | AA-/Stable | Vaccine progress in the U.S. has helped to alleviate some of the health and safety social risks stemming from pandemic; however, the higher education sector remains one at a greater risk from remaining uncertainties. We view the risks posed by COVID-19 to public health and safety as a social risk under our ESG factors. In addition, we view the past year's civil unrest, centered in Minneapolis, as an elevated social risk for the state. We do not believe the protests and community unrest represent an immediate budget pressure for the system, but we will continue to monitor the longer-term implications, if any. The system's newly adopted strategic plan, Equity 2030, aims to heighten the focus on equity, inclusion, and social justice. In addition, we believe Minnesota State is affected by changing demographic and population trends, which we view as a social risk, and have led to several years of enrollment declines. We anticipate demographic pressure will continue for the next two years with a lower number of graduating high school students expected in the state. Despite the elevated social risk, we believe Minnesota State's environmental and governance risks are in line with the sector standard. |
| Governance | |||
| Balaton, MN | Local government | BB/Stable | In our view, Balaton's weak financial policies and practices, in particular the city's lack of planning for long-term operations, are a significant contributor to structural imbalance and a negative reserve position, reflecting governance risk that we consider above those of sector peers. We also view Balaton's environmental risk as elevated relative to the sector standard, given the city's history of infrastructure damage caused by flooding and snowstorms. We view social risks as being in line with our view of the sector as a whole. |
| Brackenridge Borough, PA | Local government | BBB/Stable | As reflected in our vulnerable FMA, we view Brackenridge as lacking a culture of risk management and oversight that result in outsize governance risks when compared to sector peers, which resulted in budgetary performance fluctuations that drives our rating action. Furthermore, we believe limited monitoring of financial information could increase the likelihood that management may not respond to changing conditions in a timely manner, potentially resulting in recurring negative budget variances, as have occurred in the past. Although the financial position is stable, we view management's ability to address unforeseen issues as a risk. In addition, we believe the borough is also exposed to some social risk stemming from demographics that reflect declining population trends. The borough has not experienced any increases in extreme weather events or other environmental factors, although its location along the Allegheny River leaves it vulnerable to possible flooding. Therefore, we view its environmental risk as in line with that of the sector. |
| Illinois | State government | BBB+/Stable | We view Illinois' governance factors as a moderately negative consideration in our credit rating analysis for the state (see "ESG Brief: ESG Pension and OPEB Analysis In U.S. Public Finance," Oct. 7, 2021). Constitutional limits constrain the state's legal flexibility to modify or implement pension benefit reforms. In addition, the statutory funding policy framework requiring contributions sized to achieve a 90% funded ratio in 2045 has led to persistent underfunding that does not meet S&P Global Ratings' static funding measurement. In our view, this creates an annual near-10% structural gap in the budget. Illinois expects pension costs should remain stable at about 25% of general fund expenditures. We view environmental and social risks as having a neutral influence on our analysis. See "ESG Credit Indicator Report Card: U.S. States And Territories," March 31, 2022. |
| Portage, IN | Utilities | BBB-/Stable | Governance risks are significantly elevated due to the findings identified above. Adopted policies and procedures to date, which help mitigate these governance risks, include the following: reconciling city financial reporting and utility ledger entry so that accurate financial reporting can occur; working progress toward various cash handling and internal control policies to better track revenue receipts and their proper accounting for when received; various staff training efforts to implement internal control improvements; hiring a consultant to help implement internal control changes and improve financial reporting capabilities for both the city and utility operation funds; and development of a comprehensive plan covering historical and expected operating plans for 2022 and 2023. While this plan does not cover the utility operations, it is our understanding that management is making efforts to adopt similar plans for its sewage and stormwater utilities.Unless these efforts start to bring about more consistent and transparent financial reporting and bond disclosures, we believe governance risks will remain a limiting factor for any upside potential in the credit rating, regardless of the strength of future financial results. Social capital risks for the utility are also somewhat elevated because of uncertainty regarding the results of a planned utility rate study. The last rate ordinance for sewer and stormwater was effective in 2016 and allowed for small annual inflators. However, the city's demographics, including median household incomes that are just below the national average with median household effective buying income equal to 88% of the national average, could challenge affordability of the implementation depending on the future rate structure. Environmental risks are typical for the utility sector, with no discharger permit violations to our knowledge and no significant capacity issues due to repair needs or growth pressures. |
| Michigan State University | Higher education | AA/Stable | Like other higher-education institutions, MSU faces elevated social risk due to the ongoing pandemic. While vaccine progress has alleviated some of the health and safety social risk stemming from the pandemic, we believe the higher-education sector remains at greater risk than other sectors, given the importance of the resumption of pre-pandemic activities and the corresponding influence on operating revenue. For fall 2021, MSU required vaccination for students, faculty, and staff. We believe MSU is also affected by changing demographic and population trends, which we view as a social risk. We anticipate demographic pressure will continue, with fewer graduating high school students in Michigan anticipated for the next several years. For MSU, while we continue to view governance risk as somewhat heightened following a significant scandal, MSU has managed recent transitions in senior management and the board well; our outlook revision to stable reflects our view of lower risk management, culture, and oversight risks as the institution has managed successfully through the Nassar situation and other scandals. Despite the elevated social and governance risk, we believe MSU's environmental risk is in line with our view of the sector as a whole. |
This report does not constitute a rating action.
| Primary Credit Analysts: | Ying Huang, San Francisco + 1 (415) 371 5008; ying.huang@spglobal.com |
| John Sauter, Chicago + 1 (312) 233 7027; john.sauter@spglobal.com | |
| Secondary Contact: | Nora G Wittstruck, New York + (212) 438-8589; nora.wittstruck@spglobal.com |
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