For information about the initial publication of this article as of July 26, 2024, including key changes made following the publication of "Methodology For Determining Ratings-Based Inputs" on July 26, 2024, the impact on ratings, and superseded criteria, see "Criteria Released To Clarify Method For Determining Ratings-Based Inputs."

1. This criteria article describes S&P Global Ratings' methodology and assumptions for rating U.S. public finance issues and issuers backed by long-term municipal pools.

2. This article is related to our criteria article "Principles Of Credit Ratings," published Feb. 16, 2011.

3. Long-term municipal pool programs (hereafter referenced as municipal pool programs) vary in structure, funding, and purpose. Examples of municipal pool programs range from government-supported state revolving funds and bond bank programs to more localized private sector-related economic development programs and pool programs that enjoy only a tangential relationship with a quasigovernmental organization. Most programs operate only in a single state.

4. The criteria reference criteria for municipal and corporate collateralized debt obligations (CDOs), reflecting the similarities in structure and purpose. The use of the other criteria reflects a desire to further illustrate comparability across sectors. Accordingly, readers should also reference the following articles:

• "CDOs And Pooled TOBs Backed By U.S. Municipal Debt: Methodology And Assumptions" July 26, 2024 (the Muni CDO criteria)
• "Global Methodology And Assumptions For CLOs And Corporate CDOs," published June 21, 2019 (the corporate CDO criteria)

5. While the criteria reference these similarities, they also recognize that the public purpose nature of municipal pool programs affect credit quality. Public-sector objectives of funding infrastructure improvements and recycling this money in a sustainable manner can result in different risk-taking behavior relative to the goals of maximizing yield return or profit. The methodology therefore uses a public finance enterprise framework to assess both enterprise and financial risk, consistent with other types of municipal enterprises.

I. SCOPE OF THE CRITERIA

6. These criteria apply to ratings on U.S. public finance transactions backed by long-term municipal pool programs.

II. SUMMARY OF THE CRITERIA

7. The criteria apply to ratings on transactions backed by municipal pool programs using an overall framework that considers the enterprise risk and financial risk scores characterizing a program. The chart below summarizes this framework. Industry risk, market position, and geographic concentration of the area served determine the enterprise risk score. Loss coverage carries the most weight in the financial risk score, with operating performance and financial policies and practices playing a lesser role. The CDO evaluator methodology detailed in the Muni CDO criteria is the starting point for the loss coverage score. For state-sponsored municipal pools with management powers to influence better local performance, the criteria apply the recovery levels presented in table 16 of "Appendix C: Municipal Recovery Parameters." The largest obligor test may further worsen the loss coverage score.

8. Absent overriding factors, the final rating outcome for a municipal pool program will be within one notch of the indicative rating resulting from the combination of the financial and enterprise risk scores shown in table 1. To receive a 'AAA' rating, a municipal pool program should also pass the leverage test presented in paragraph 12.

III. METHODOLOGY

A. Overall Framework For Rating Municipal Pool Programs

9. The criteria result in ratings for transactions backed by municipal pool programs based on an overall framework that considers both the enterprise risk and the financial risk scores of a program. The enterprise risk score results from the assessment of industry risk, market position, and geographic concentration. The financial risk score results from the assessment of loss coverage, operating performance, and financial policies and practices. Our assessments are based on a forward-looking view. In particular, when quantitative metrics fall at or near a cut-off point, we assign a better or worse assessment if we believe trends are improving or worsening. The final rating results from the combination of the enterprise risk and financial risk scores, as shown in table 1. Absent overriding factors, the final issue or issuer rating will fall within one notch of the indicative rating outcomes shown, with one-notch deviations resulting from the presence of significantly favorable or unfavorable credit features.

Table 1

10. The final rating assigned could further differ from table 1 in four instances. First, where a municipal pool program is winding down and reserve balances in credit enhancement programs do not fully offset losses, the rating may not exceed the lowest-rated participant in the pool if no other factors apart from the loss coverage score deteriorated to a point suggesting a lower rating. This reflects the diminished value of the CDO evaluator analysis as the number of loan participants drops below 10. Second, if an issue would otherwise qualify for a 'AAA' rating, the transaction should also pass a leverage test consistent with that presented in paragraph 12. Third, the final rating could move up by a maximum of one notch over the indicative rating due to significantly favorable credit features. These include the municipal pool program being able to withstand a stressed default level in excess of 1.5x the level determined by the CDO Evaluator, or a history of exceptionally low loan delinquencies (0%) for the past five years. Finally, the rating could move lower by a maximum of one notch for significantly unfavorable credit features. These include the likelihood for significant additional parity debt to be issued without a commensurate increase in collateralization levels, such that the current loss coverage score is likely unsustainable, or a multiyear history of high (more than 6%) recurring loan delinquency rates. These positive and negative credit features could potentially be offsetting.

11. While S&P Global Ratings' CDO evaluator model is a valuable tool for assessing a municipal pool programs' loss coverage, no single model can capture the full range of possibilities, relationships, and evolution that can occur during times of stress. Consequently, the criteria supplement our analysis with a leverage test that serves as an independent constraint on the amount of exposure a 'AAA' rated program can have relative to its available reserves and program revenues. This test addresses both event risk and model risk that might be present. The test is restricted to 'AAA' programs because of the view that the possibility of stress associated with either model error or event risk is remote and not captured by the 'AAA' stress in the model. Moreover, limiting leverage is consistent with 'AAA' credit stability (see "S&P Global Ratings Definitions," updated from time to time).

12. The maximum leverage for a municipal pool program to achieve and maintain a 'AAA' rating is 75x. For these criteria, leverage is defined as the ratio of total debt service payable to revenues and reserves available for repayment. The criteria limit the rating on a pool program exceeding the maximum leverage consistent with a 'AAA' rating to no higher than 'AA+', with the actual level determined by the application of the remainder of the criteria.

B. Enterprise Risk Score

13. To calculate the enterprise risk score, the criteria first score industry risk and market position. Scores for each range from '1' (the strongest) to '6' (the weakest). Second, these two scores combine to form the initial enterprise risk score as detailed in table 3. Finally, the outcome of this initial score may then move up (worsen) if the pool program predominantly serves only one metropolitan area.

1. Industry risk

14. The criteria assess industry risk using the methodology detailed in the criteria "Methodology: Industry Risk," Nov. 19, 2013. See Appendix III of the industry risk criteria for public finance-specific considerations. The most recent industry risk assessments, which are updated from time to time, are in Appendix IV of the industry risk criteria.

2. Market position

15. The market position score reflects the level of government support received and the presence of significant challenges that could affect demand. Programs that enjoy regular capital infusions from multiple layers of government and which are established through legislative action receive the highest score. Programs that lack legislative authorization, have no formal direct link to governments, and receive no public funding are scored lower. Programs facing equity withdrawals from their sponsoring entity receive a lower score, and programs facing challenges that will likely harm future demand significantly will receive the lowest score. Examples of such challenges could include government investigation into the program's legitimacy or other legal standing, program mismanagement or program deterioration. Table 2 details the scoring methodology for market position.

Table 2

3. Combining industry risk and market position with geographic concentrations

16. The industry risk and market position scores combine to form the initial enterprise risk scores in table 3. Because a program's geographic concentration can further limit demand, programs that target only one metropolitan area receive a one-notch negative adjustment.

Table 3

C. Financial Risk Score

17. To calculate the financial risk score, the criteria first assess loss coverage, which plays the dominant role in the score. Second, the criteria score operating performance and financial policies and practices and calculate the average of these two scores. Finally, the level of this average may move the overall financial risk score one notch away from the loss coverage score, as detailed in table 4. The criteria average the operating performance and financial policies and practices scores with equal weight, and decimal outcomes are rounded to the nearest whole number.

Table 4

1. Loss Coverage Score

18. The criteria measure loss coverage at the program or parity indenture level by determining the highest rating attainable given the program's loan portfolio, overcollateralization, and cash flow pattern. The loss coverage score equals the score associated with the highest rating category attainable under the CDO evaluator test, adjusted for performance against the largest obligor test as per table 5.

Table 5

a) CDO evaluator and cash flow application

19. To determine relative default rates given the credit quality of an underlying loan portfolio, the criteria use S&P Global Ratings' CDO Evaluator and assumptions as detailed in the Muni CDO criteria. Relevant assumptions and references from the Muni CDO criteria include:

• Use of the same methodology for assigning obligor exposures based on security type as described in paragraphs 9-11,
• Use of the same underlying municipal industry classifications as those detailed in Appendix A, and
• Use of the CDO Evaluator modeling parameters described in paragraphs 30-35.

20. Following the determination of the scenario default rate (SDR), the criteria also use assumptions from the Muni CDO criteria to determine recoveries. Where underlying loans have different recovery rates, the criteria use a weighted average recovery rate based on loan balances outstanding. Relevant assumptions include:

• Use of the same recovery groupings described in table 1 of the Muni CDO criteria, and
• Use of the same recovery rate parameters described in table 3 of the Muni CDO criteria.

21. However, for state-sponsored programs that have powers to influence local borrower behavior, the criteria use the higher recovery rates specified in table 16 of "Appendix C: Municipal Recovery Parameters." Examples of such influence include program involvement of a regulatory or oversight authority, state intercept provisions, or other measures to compel or remedy borrower nonpayments without court action.

22. State-sponsored programs also often have large reserve balances pledged to cover losses. The criteria recognize the full amount of reserve balances invested in guaranteed investment contracts meeting our counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," March 8, 2019) and reserve balances in other instruments meeting eligible investments criteria (see "Global Investment Criteria For Temporary Investments In Transaction Accounts," May 31, 2012, and the commentary "Investment Guidelines," June 25, 2007). Otherwise, the criteria include reserve balances as assets in the CDO evaluator and receive related reductions in value.

23. The criteria then apply these default (SDR) and recovery assumptions to program cash flows to determine whether the municipal pool program has sufficient loss coverage at a given rating level from surplus revenues or reserves. The criteria assume that losses begin over a consecutive four-year period, with 25% of the losses occurring in year one, followed by an additional 25% each year until 100% is reached in the fourth year. Recovery timing parameters are those detailed in table 2 of the Muni CDO criteria. In order to receive a score commensurate with the rating level detailed in table 5, a program should have sufficient loss coverage across the entire amortization of related debt. See the Appendix A for an example of the application of these assumptions to program cash flows.

b) The largest obligor test

24. While the CDO evaluator addresses the question of reserves and surplus relative to a severe, wide-scale stress environment, the largest obligor test addresses credit stability in the context of occasional, large discrete defaults by individual obligors. Large exposures to a small number of defaulting issuers could threaten a pool program's viability.

25. For this reason, S&P Global Ratings standardizes largest obligor metrics calculated for exposures to individual issuers or issues. The approach reflects the possibility that, even in a benign credit environment, a small number of issuers or issues could suffer large discrete losses for idiosyncratic reasons. The methodology measures the possible default of a minimum number of the largest obligor exposures within the loan portfolio, factoring in the underlying assets' credit quality, against available reserves and repayment surplus. The largest obligor test reflects the expectation that the severity of the loss will be great, differentiated by the recovery characteristics of the obligor's sector.

26. Table 4 in the corporate CDO criteria specifies different combinations of the number of exposures that must be covered to pass the largest obligor test, depending on the desired tranche or issue rating. The municipal pool criteria use the set of thresholds in this table commensurate with the initial loss coverage score as determined by paragraphs 19 through 23 above. For example, a program receiving a '1' score under the CDO Evaluator test would use the 'AAA' tranche thresholds detailed in table 4 of the corporate CDO criteria. The total amount of this exposure expressed as a percentage of total loans outstanding represents a second default rate that the program should withstand using the cash flow analysis detailed in paragraph 23. This test also uses lower assumed recovery rates as detailed in table 5 of the Muni CDO criteria. To achieve a "favorable" score, the municipal pool program should have a sufficient combination of reserves and surplus revenues to cover the losses resulting from these assumptions. Otherwise, the resulting score is "least favorable" and the loss coverage score will be adjusted by +1.

27. When a municipal pool program has more than one debt instrument from the same obligor, the criteria aggregate such debts as a single obligor for this analysis if those instruments have the same rating and the same security. When the issue ratings are different, only those exposures that are rated within the largest obligor analysis parameters will be aggregated. For example, assume the loan portfolio holds two rated issues from the same obligor, one with a 'AA-' rating and another with a 'A+' rating. When aggregating exposures for assets rated below 'AAA', both issues would be aggregated. However, when aggregating exposures for issuers rated below 'AA-', the 'AA-' rated instrument would not be included because under this analysis, only obligor issues up to the 'A+' rating are aggregated. See Appendix B for an example of the application of the largest obligor test.

c) Rating inputs for the CDO evaluator test

28. The use of CDO Evaluator requires a rating input for each individual borrower in the program.

• S&P Global Ratings' public issuer credit ratings or issue ratings secured by the same pledge of the borrower may serve this purpose if these exist.
• We also may use available information in our assignment of a credit estimate to each borrower.
• If no S&P credit estimate is available, we may, in accordance with our criteria for determining ratings-based inputs for primary rating drivers, use public issuer ratings or issue ratings secured by the same pledge of the borrower from other credit rating agencies (CRAs) if they meet the conditions for use in our analysis of primary rating drivers in application of our criteria for determining ratings-based inputs, and up to a maximum of 25% of the portfolio amount.
• Otherwise, or where no information is available to us, we assign rating inputs to municipal debt according to the nature of the security, as specified in table 6.
• For exposures to non-municipal debt that carry a CRA rating beyond this limit or with a CRA rating we do not use, we determine the rating inputs case by case based on information made available to us and considering their impact on the ratings analysis. When no information is available to us on these exposures, we assume a 'ccc' rating input.
• However, we don't use other CRA ratings for exposures that we assess are substantial rating drivers. The credit estimate in Table 6 represents the highest rating we would assign absent information. Lower estimates could result depending on credit-specific concerns.

Table 6

2. Operating Performance

29. Operating performance consists of two measures: the number of nonperforming loans as a percentage of total loans and the percentage of payments more than five days late in the past 12 months. These measures address the degree to which a program is proactive in its management of more-challenging loans. Because these factors are meant to assess repayment management rather than loan quality, both factors are measured at the organizational level to provide a broader view. A nonperforming loan is defined as a loan more than 90 days late in payment. A loan more than five days late is included in our second calculation even if the delay is not an event of default under the loan agreement. The criteria measure both statistics as a percentage of the total number of loans outstanding, rather than as a percentage of the total loan par amount outstanding, again due to the focus on management performance instead of payment impact. Table 7 details the scoring for these measures. By definition, the nonperforming loans score cannot be lower (better) than the late payments score.

Table 7

30. The average of the nonperforming loans score and the late payments score represents the operating performance score. Any fractional number result is rounded up to the next whole number.

3. Financial Policies And Practices

31. Financial policies and practices considered include those governing loan origination, loan monitoring, default remedies, long-term planning, and investment policies. Such policies may exist at a program or organizational level. When different policies for different programs exist, the criteria consider the policies associated with the rated program. Tables 8-12 detail the attributes of each component associated with scores of one, three, and five. A pool program does not need to display all of the attributes associated with a given score but should display a preponderance of attributes. A score of two results from a roughly equal mix of attributes in the one and three categories, while a score of four results from a roughly equal mix of attributes in the three and five categories. The final financial policies score results from the average of the five component scores, with each component receiving equal weight. Final averages are rounded to the nearest whole number to determine the score. However, regardless of this average, a score of six would result from program management not maintaining any clear written policies or internal procedures to monitor financial or investment performance, with an inability to demonstrate a clear understanding of long-term program goals or demand.

Table 8

Table 9

Table 10

Table 11

Table 12

IV. STATE PERMANENT FUND PROGRAMS

32. In general, credit enhancement programs are designed to give bondholders additional security for particular bonds. While the criteria differ depending on the program's structure and the specifics of a state's statutes and constitutional provisions, all programs typically include the following features:

• An independent paying agent, which acts as the state's notification agent in the event of a potential default;
• Sufficient coverage and liquidity of a revenue stream to be used for a debt service deficiency that is independent of the issuer; and
• State oversight of program participants to ensure a well-managed program.

33. Ratings on programs structured on the basis of permanent fund support do not have any direct link to the corresponding state rating. These funds are constitutionally created, and the corpus of the fund is leveraged to provide a guaranty of a participating local government's debt service. The program rating is based on an analysis of the legal structure of the fund, investment policies, liquidity, and operating guidelines as generally determined by the criteria "U.S. Public Finance Long-Term Municipal Pools: Methodology And Assumptions."

34. If S&P Global Ratings determines an issue is eligible for a state credit enhancement, it will assign a rating to the issue on par with the respective state permanent fund program rating. If the participating issuer also requests a rating based on its own ability to make timely payments in full, S&P Global Ratings will assign the issue an underlying rating in addition to the state program rating.

V. APPENDIX A: Example Application Of Default And Recovery Parameters To Program Cash Flows

35. The example below uses assumed loan repayments from pool borrowers totaling $1 million each year, a 'AAA' scenario default rate of 20% (as determined by the CDO Evaluator), and a recovery rate of 85% for a 'AAA' rated pool. Defaults in the example begin in year one, with 25% of the defaults beginning each year for four years. Recoveries of initially defaulted amounts occur four years after the default, with recoveries recognized at the scheduled payment date thereafter. Thus, the current effective recovery rate represents 85% of the default rate four years ago.

36. To calculate net revenues received each year, the example subtracts defaulted payments from scheduled annual loan payments and adds back recovered payments from prior periods. Defaulted payments result from multiplying the scheduled annual loan payments by the net current default rate. Recovered payments from prior periods represent 85% of the defaulted payments for each year in which defaults commenced, lagged by four years. In each year, net revenues received must be sufficient to cover debt service due, or available reserves must cover the shortfall. If reserves do not cover the shortfall, the program does not receive the loss coverage score associated with that rating level ('AAA' in this case).

Table 13

VI. APPENDIX B: Example Of The Largest Obligor Test For A 'AAA' Rated Municipal Pool Program

37. As in the criteria for rating corporate CDOs and municipal CDOs, the criteria for rating long-term municipal pools assess whether the rated program is projected to withstand the defaults of a minimum number of the largest obligor exposures within the portfolio. If a pool scored a '1' in the CDO Evaluator test, suggesting it could withstand stresses at a 'AAA' level, the largest obligor test would apply the thresholds consistent with a 'AAA' tranche rating as detailed in table 1 of the corporate CDO criteria. Per that table, a pool rated 'AAA' is generally expected to have collateralization levels sufficient to withstand resulting losses from the default of the greater of these seven scenarios:

• The two largest exposures rated between 'AAA' and 'CCC-';
• The three largest exposures rated between 'AA+' and 'CCC-';
• The four largest exposures rated between 'A+' and 'CCC-';
• The six largest exposures rated between 'BBB+' and 'CCC-';
• The eight largest exposures rated between 'BB+' and 'CCC-';
• The 10 largest exposures rated between 'B+' and 'CCC-'; and
• The 12 largest exposures rated between 'CCC+' and 'CCC-

38. The data for table 14 represent a mock pool consisting of 30 loans to 30 separate borrowers, with $200 million of loan outstanding and collateralized with $20 million of pledged reserves. Also, in this case, the security for each loan is either a GO or water and sewer revenue pledge, so the assumed recovery rate equals 60% (see table 5 of the Muni CDO criteria).

Table 14

39. Table 15 shows the results for each of the seven scenarios outlined in paragraph 34. The largest of the seven scenarios results in a gross loss of $48 million. In this example, $48 million of gross defaults represents 24% of the loans payable. This 24% default level would be stressed against the cash flows as detailed in paragraph 23 using a 60% recovery rate. If the program fails to pass this test, then the result would be "least favorable" and a +1 adjustment made to the loss coverage score.

Table 15

VII. APPENDIX C: Municipal Recovery Parameters

40. Risk categories 1-4 are used to represent the recoveries on defaulted municipal bonds that are expected to be realized in a 'AAA' stress scenario. Risk category 1 obligations generally have the highest recoveries because of the nature of the funds from which these obligations can be repaid. Recoveries for risk categories 1, 2, and 3 are higher than for corporate assets given the ability of a municipal entity to maintain its operations and generate additional revenues for eventual repayment. Issuers within risk category 4 are more corporate-like, in our view, and have lower recovery assumptions.

Table 16

VIII. REVISIONS AND UPDATES

We released this criteria article on July 26, 2024, following the publication of our new criteria for determining ratings-based inputs (see "Methodology For Determining Ratings-Based Inputs"), which was subject to our request for comment process. In this new version, we clarified how we determine the rating input we consider in the "Credit estimates for the CDO evaluator test" section.

Changes introduced after original publication:

• On Aug. 22, 2024, we republished this criteria article to make nonmaterial changes. We added clarifying language in paragraph 10 and table 1 about our treatment of municipal pool programs that are winding down.
• On April 9, 2025, we republished this criteria article to make nonmaterial changes. We clarified in paragraph 9 how we incorporate a forward-looking view in our quantitative assessments and updated the citation in paragraph 14 for industry risk assessments, which are now located in Appendices III and IV of "Methodology: Industry Risk."

IX. RELATED PUBLICATIONS

Fully Superseded Criteria

• U.S. Public Finance Long-Term Municipal Pools: Methodology And Assumptions, March 19, 2012

Related Criteria

• Methodology For Determining Ratings-Based Inputs, July 26, 2024
• CDOs And Pooled TOBs Backed By U.S. Municipal Debt: Methodology And Assumptions, July 26, 2024
• Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
• Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Methodology: Industry Risk, Nov. 19, 2013
• Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• Principles Of Credit Ratings, Feb. 16, 2011

Other Publications

• RFC Process Summary: Methodology For Determining Ratings-Based Inputs, July 26, 2024
• Criteria Released To Clarify Method For Determining Ratings-Based Inputs, July 26, 2024
• S&P Global Ratings Definitions, updated from time to time