Local governments' creditworthiness

Guidelines on Local Government Borrowing and Recent Developments in South East Europe

Local governments' creditworthiness indicators

Financial Risk Profile Analysis according to Standard and Poor's credit rating methodology

Financial Risk Analysis

Surplus Generation and Debt Servicing Ability

Cash Flow Adequacy

Capital Structure

Liquidity and Financial Flexibility

Analytical distinctions with profitability

Type and structure of debt

Analysis cash flow coverage and cash generation abulity

Focus on debt service capability

Analytical distinctions with profitability

Type and structure of debt

Analysis cash flow coverage and cash generation abulity

Leverage

Type and structure of debt

Hedging arrangements

Off-balance sheet obligations

Asset values

Sources of liquidity

Potential calls on liquidity

Short term debt maturity

Bank credit facilities

Unencumbered assets and debt capacity

Overview of typical financial ratios used in assessing local governments' financial position

Ratios	Definitions	Interpretation
Recurrent Revenues / Total Revenues	Measures the degree to which a local government relies on recurrent revenues.	A ratio of 100% or close to 100% may be inappropriate for a local government that is funding the acquisition of significant nonfinancial assets.
Recurrent Revenues per Capita	Measures the relative burden of taxes and user charges on local taxpayers and service users.	A higher level of operating revenues per capita indicates a relatively high burden of taxes and charges.
Own-Source Revenues / Total Revenues	Measures a local government's own-source revenues compared to its total revenues.	A relatively high percentage of ownsource revenues (max indicator 100%) indicate that the local government is more reliant on recurrent, predictable revenues to fund its activities.
Own-Source Revenues / Operating Expenditures	Measures a local government's own-source revenues compared to its operating expenditures.	A ratio of 100% or more indicates that the local government has surplus ownsource revenues available to apply to non-operating expenses. A ratio of less than 100% indicates that a local government that is dependent on non-own source revenues.
Key Own-Source Revenues / Total Revenues	Measures the reliance by a local government on each of the principal own-source revenues for local governments generally.	The relative reliance on each of the ownsource revenues by a local government can be indicator of creditworthiness.
Actual to budget	Measures the ratio of initial and final budget projections to actual results.	Show the degree of accuracy in budgeting. It represents how well a local government can plan and manage its finances over time
Relative growth	Shows how changes in revenue compare to changes in expenditures over time.	Faster growing expenditures will eventually lead to a deficit, if revenue growth decreases. Conversely, faster revenue growth will produce or maintain a future operating surplus.
Long-Term Debt Service / Recurrent Revenues	Measure of the ability of a local government to service debt.	The higher a local government's liquid short-term assets compared to its short term liabilities, the greater its liquidity and the greater its ability to cover its short-term liabilities during periods of unexpected revenue shortfalls.
Liquid Short-Term Assets / Short-Term Liabilities	Measures a local government's liquidity position.	The higher a local government's liquid short-term assets compared to its short term liabilities, the greater its liquidity and the greater its ability to cover its short-term liabilities during periods of unexpected revenue shortfalls.
Outstanding debt	This indicator looks at the structure and amount of long-term debt liabilities.	These are basic indicators and therefore the data must be consistently available from balance sheets to be a reliable indicator.
Net Financial Balance and Debt Service Coverage Ratios	Provides a margin of financial safety in case of unanticipated expenses or revenue shortfalls.	A portion of a net financial surplus can be used to support additional debt and/ or to pay the cost of acquiring nonfinancial assets to the extent that revenues from non-financial assets and the planned issuance of debt don't fully cover that cost.
Debt Service Coverage Ratios	It is a measure of the financial margin of safety provided in the local government's budget to ensure lenders that the local government will have sufficient funds available to service its debt.	A debt service coverage ratio of 1.0 indicates that the borrower will have funds available in exactly the same amount as the required debt service. A debt service ratio of less than 1.0 implies that that the borrower will have insufficient funds available to service the debt. Lenders typically require debt service coverage greater than 1.0 when they consider making a loan.