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Criteria I Governments I U.S. Public Finance: U.S. Local Governments General Obligation Ratings:Methodology And Assumptions stress.Accordingly,predictions of precise default amounts and probabilities become more suspect.This complicates the calibration of criteria to economically-based stress scenarios but does not prohibit it. The long-term and repeating trend of higher local-government defaults following periods of significant economic stress is well-established and dates back to ancient Greece. 2. The Specific Case Of U.S. Local Governments 12. From a global perspective,U.S. local governments have a fairly high degree of autonomy.Virtually all U.S. local governments levy some sort of tax and levy various other fines,fees, and charges. U.S. census data show that own-source revenues account for 63%of local general government revenues. However,this total includes school districts which typically receive a large amount of state funding. For municipalities and counties specifically, data for credits rated by Standard& Poor's suggest this percentage is 79%. Direct funding from the federal government represents only about 4%of total local government revenues,much of which represents funds designated for capital spending. 13. Due to the federalist structure of the U.S. government,individual states,rather than the U.S. government,make most of the laws regarding what taxes local governments may raise,how much debt they can issue, and other matters of local government finance.A local government rating is not automatically constrained by the U.S. sovereign rating or its respective state rating. The economic and fiscal relationships, dependencies, and/or interdependencies between levels of governments will determine the credit linkages along with our framework to rate entities above a sovereign rating(see"Methodology And Assumptions: Request For Comment: Ratings Above The Sovereign—Corporate And Government Ratings"published April 12, 2013). 14. Although states do have significant power over their local governments,their use of this power pales in comparison to the use of such powers by sovereign or regional governments in other countries.Although states have at times tinkered with the mix of local government revenues and imposed various limits or regulations around the use of debt and taxes,the basic tenets of U.S.local government finance have remained largely in place since colonial times. Neither American independence,the American civil war,nor severe economic downturns, such as those witnessed in the late 1830s,late 1870s, and early 1930s,have changed the basic premise of local governments relying largely on own-source revenues to fund different service levels of their own choosing. Some studies suggest to us that this self-reliance drives the low debt levels and fiscal stability observed in U.S. local governments and similar jurisdictions (see Jonathan Rodden in Related Research). 15. Property taxes remain a cornerstone of U.S. local government finance and often provide stability to finances. This stability results from laws in many states that delink tax base growth from overall market volatility. In addition,the lag between market cycles and their effect on revenues allows public officials to adjust rates to offset market effects. The recent downturn illustrates this. Property tax revenues actually grew in 2009,while income tax revenues declined 17% and sales taxes declined 7.5%. Owing to the aforementioned lag, analysis done by the Pew Charitable Trusts using U.S. Census data shows that property tax revenue did decline in 2010,but only by 1.05%.Although conditions vary, data from local governments rated by Standard&Poor's show no decline in property tax revenues for the average government in fiscal 2010. For more information, see Lutz, Molloy,and Shan in Related Research. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 12,2013 7 1190266 1300881696