23 Replies Latest reply: Apr 1, 2016 4:09 PM by 545477 RSS

    Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating

    C4D Explorer

      A crowdsourcing initiative has been launched to capture and disseminate the collective knowledge of our community members. You can be part of this crowdsourcing initiative to learn and to teach, to discuss and to network, and even to become a co-author. See LINK for additional background information.

       

      How to participate:

      Take a look at the Solution Finder attached to this post.  Do you have any ideas of ways to make it stronger? If so, please go ahead and edit the document, using the track changes functionality, and post your edited document as a reply to this message.


      You can post your reply in three easy steps:

      1.    Log in to the Municipal Finance Practitioners Community.

      2.    Click the “reply” link in the bottom right corner of this message.

      3.    Write your reply and then click “Add Reply” to post it.

      Note: If you want to attach a document to your reply, click on the “use advanced editor” link. Write your message in the box that appears, and click on the “Attach” link next to the paperclip in the bottom right corner. A box will then appear which allows you to choose a document to upload. If you have difficulties, please contact hjohnson@ifc.org

       

      All input is very welcome!

        • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
          545477 C4D Extraordinaire

          This is an exciting initiative! Everybody's contributions to this draft document will be acknowledged among the authors/reviewers of the final report. So please chime in if you have ideas, experience, or any other feedback on the content of this draft.


          To help get our creative wheels spinning, let me highlight here the first question (and corresponding solutions) presented in the Solution Finder. This question is designed to help cities determine whether a particular action/solution is appropriate for them. Based on the answer to each question, the Solution Finder highlights additional solutions for consideration. Of course, this is only meant as a first-aid kit pointing to a few options. The identification and definition of final actions will always require a much closer understanding of the cities' context and priorities.


          Question 1: Depending on the level of preparedness by the local authority to obtain a credit rating, different approaches can beconsidered to pursue that objective. Has the local authority conducted any type of independent review of its financial management and performance over the past year or two?


          If a city official answers "no" to the above question, here's the draft advice provided by the Solution Finder (for you comments):

           

          In the absence of any (recent) independent review of the local authority’s financial performance, it may be useful to conduct such a review before pursuing a credit rating. The objective of the review, or financial management assessment, will be to help the local authority identify key strengths and weaknesses in its financial management and performance. Based on the findings from the review, the local authority will determine the opportunity to secure further improvements and reforms prior to obtaining a credit rating. A well designed review will be an invaluable guidance to the administration, as well as a powerful signal to the private sector and the public at large of the public authority’s proclivity toward reform, transparency, and results-based improvements. Assuming the findings from the independent review will indicate promising overall fundamentals, even in the context of a few negative indicators, and assuming that subsequent monitoring confirmed the underlying trends towards improvement and reform, the local authority may consider obtaining a credit rating at that point.


          Different instruments are available to local authorities seeking a review of their financial management and performance. Select among the options listed below to inform your action-plan accordingly – these options are listed in ascending level of effort required:

           

          1. Review by an independent expert of the results from self-assessments. This is only suggested as a preliminary step in case more detailed analyses are not easily available.
          2. Basic financial management assessment performed by a consultant.
          3. Completion of a full-fledged Municipal Finance Self-Assessment with step by step support from an expert consultant.
          4. Same as point 3 above, with additional urban audit providing a snapshot of the local authority’s quantity and quality of services and identifying a municipal investment program.
          5. Completion of a Subnational PEFA (Public Expenditure Financial Accountability) to assess specifically the condition of public expenditure, procurement, and financial accountability systems.
          6. Comprehensive financial management assessment by a firm.
          7. Same as point 5 above, with the addition of a sub-national Debt Management Performance Assessment (DeMPA).

           

          Does the advice above seem useful to you? How would you improve it? What additional solutions would you recommend? Do you have experience with any of the proposed solutions? What worked or didn't work? Which factors would you want to highlight for cities that are looking at such options for the first time? We look forward to your contribution!

            • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
              545477 C4D Extraordinaire

              While our web-server recovers from the overflow of comments to my earlier post , I thought I would open a small parenthesis to highlight the urgency for cities to achieve creditworthiness. Why does this blog flag as a challenge the lack of credit ratings among municipalities (see the blog's title)? Below is a colorful answer:

              Creditworthiness.GIFThe crowdsourcing exercise launched in this blog helps city officials determine how to go about seeking a credit rating. Based on the infographic above, only a small fraction of cities in developing countries have a credit rating. As a result, capital doesn't flow to these cities and they have to rely on (extremely limited and typically unpredictable) central government resources. However, cities may not be familiar with the process of seeking a credit report. And in many cases, seeking a credit rating may not be the opportune first step in the process.

               

              The "Solution Finder" introduced in this blog (for which we seek your inputs as co-authors), tries to guide cities on the factors they should keep in mind when considering the option of a credit rating. In particular, the first posting in this blog suggests alternative diagnostic tools that are available to cities in lieu of a full credit rating. It's important that city officials are familiar witih as many options as possible so that they can make an informed decision on the opportunity to seek a credit rating. The Solution Finder offers an introductory guidance to address the lack of credit ratings among municipalities.

               

              This is the first challenge we invite you to contribute to. Become a co-author of our Solution Finder by sharing your comments and experience. How do you suggest we improve the advice to city officials? Do you have other ideas/solutions that we should reflect? Is the guidance clear and useful? If not, why not? We'll acknowledge your contributions in the final document.

              • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                khalifeh C4D Expert

                Really, we don't have procedure in our financial policies. But it is another lesson that I learnt from (Creditworthiness Academy and Municipal Finance Practitioners). In order to be go to the right track, I think this attitude is very crucial and required as it reflects to you the points of weakness of your financial work so that you can revise your policies and adjust them to overcome such weaknesses.

              • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                545477 C4D Extraordinaire

                No co-author found thus far On the other hand, this is a new experiment and I suspect it's still unclear what we're asking for. You're invited to become co-authors of the "Solution Finder" on credit ratings (attached to the first posting in this thread). Bottom-line: what guidance would you provide to a city official who is considering the obtainment of a credit rating? Would you simply say "go for it", or would you offer a more nuanced feedback?

                 

                The first posting above made the point that cities should consider alternative reports if they are unclear about their overall financial performance. Prior to a full credit rating, cities have the option of pursuing assessments that are similar to credit ratings but offer other benefits. Some of these options are cheaper, others are more focused on specific aspects, others allow the city to retain closer control of the final output (thereby forgoing key features of credit ratings, such as independence and reputation), etc.

                 

                Today I'd like to break a taboo (or two) by sharing my experience on the cost of credit ratings.Some people are under the impression that these reports are incredibly expensive. It doesn't help that when you raise the issue with rating agencies, they elegantly elude the topic by referring you to another department in the team (for reasons that escape me). So here's my dummy's guide to the cost of credit ratings: the lowest price I paid was about $8,000, and the highest was about $45,000, with an average of about $30,000.

                 

                Other experiences/comments on this mysterious side of credit ratings?

                • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                  545477 C4D Extraordinaire

                  As we continue the mass-review of our toolkit for municipalities (Decision Finder), here's a glance at some pros/cons of credit ratings. The postings above pointed to various factors/options that municipalities may find useful when considering credit ratings. Do you have other tips to help cities make an informed decision on these (and related) products?

                   

                  Ratings.GIF

                  • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                    545477 C4D Extraordinaire

                    A couple of (very relevant) breaking-news on this topic:

                     

                    • The debt of the City of Chicago, United States of America, has just been downgraded to "junk" status, a two-notch drop. (see story from the Wall Street Journal, plus follow-up article from the Wall Street Journal, courtesy of Elizabeth Bauch)
                    • The City of Kampala, Uganda, has just achieved investment grade on the national-scale, an historic achievement for the whole country. (link to rating report forthcoming)


                    For the purpose of our crowdsourcing challenge, note that Kampala started the process with a Financial Management Assessment, then got a Debt Management Performance Assessment, and eventually secured a shadow credit rating which Kampala decided to turn public. So they have followed exactly the steps reflected in our Decision-Finder. Congratulations Kampala!

                     

                    This is a picture of Kampala's Executive Director, Jennifer Musisi, announcing the historic achievement at our Academy in Uganda last week:

                    KCCA2.JPG

                    • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                      545477 C4D Extraordinaire

                      Further to the credit rating report successfully obtained by the Kampala Capital City Authority (original attached to the previous posting), here are a couple of media-articles reporting on this historic news.

                      • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                        545477 C4D Extraordinaire

                        When delivering presentations on municipal credit ratings, I usually start off saying that this is an excellent topic to impress friends at dinner-parties. Why focus on politics, wine, and opera, when you can impress your friends with a few fundamentals on credit ratings? At the recent Creditworthiness Academy in Amman, Jordan, my assertion was confuted by no other than Nat Gandhi, the former Chief Financial Officer of Washington, District of Columbia, United States of America. Apparently his experience at dinner parties (and the mass participation to this blog) points to radically different outcomes when the topic of credit ratings is raised. I probably should admit here that I don't go to many dinner parties, so I may have to adjust my opening statements at the next presentation. BUT... I'm not giving up on this topic!

                         

                        So let me try a different approach. I turn to my friends Khalifeh Al-Dayyat and ahmad abandeh /Jordan, super-stars at the last Academy in Amman (I have a video of one of them taking the microphone during the Academy and singing a cappella!). Both of them are extraordinary individuals and professionals. Khalifeh is a Mayor, Ahmad is a Municipal Financial Manager. Perhaps they can break the ice of this (virtual) dinner-party by sharing their reaction to the Solution Finder attached to this blog. Does it seem clear to them? Is it useful? In their action-plans, did they select an activity related to credit ratings? How did they go about making that selection? Does this Solution Finder reflect what we discussed during the Academy?

                         

                        OK, now back to work (currently in Kampala, Uganda, to help this great City plan their next steps after their historic achievement getting their first and very strong credit rating).

                        • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                          545477 C4D Extraordinaire

                          Friends, at last, we found co-authors for our crowdsourcing experiment! After a couple of months of attempts, I'd like to acknowledge our friends ahmad abandeh /Jordan and Khalifeh Al-Dayyat for their contributions to this exercise. They've submitted comments in this blog, but also separately in other spaces of our community of practice. As a result, they've become official co-authors of our "Solution Finders" series! The topic of this first issue was: what guidance can we provide to a city official who is considering the obtainment of a credit rating?

                           

                          The contributions by Amhad and Khalifeh are now formally acknowledged in the revised version of the Solution Finder (see attached). Dear Amhad/Khalifeh, please let me know if I've reflected accurately your thoughts (I've applied minor editing to make the text fit in the structure of the Solution Finder).

                           

                          We welcome additional contributions, as always.

                          • Re: Crowdsourcing Challenge #1: Lack of municipal general obligation credit rating
                            545477 C4D Extraordinaire

                            See snapshot below with the new "decision-tree" posted online, thanks to the feedback from this crowdsourcing exercise.

                            Screen Shot 2016-04-01 at 4.05.10 PM.png