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Criteria I Governments I U.S. Public Finance: U.S. Local Governments General Obligation Ratings:Methodology And Assumptions 3. The Strength Of The General Obligation Pledge And State Level Incentives For Debt Payment 16. A general obligation pledge usually obligates a local government to use all legally available funds to pay debt service and--if such current funds are not sufficient--to take actions necessary to increase those funds. This includes an obligation to levy additional property taxes specifically for debt service, although state tax caps may limit this pledge. A limited tax pledge may affect the rating(see"Standard&Poor's Refines Its Limited-Tax GO Debt Criteria", published Jan. 10, 2002). 17. In addition, some states have laws that empower state governments to take over local governments when their financial position deteriorates significantly or to direct state-appropriated monies for debt repayment. Even temporary relief from debt payments may elude local governments if GO debt enjoys the additional benefits of dedicated taxes or other"special revenues".About one-half of states' statutes either fail to provide specific authorization for municipalities to file for bankruptcy, as currently required for a bankruptcy filing under the U.S. Bankruptcy Code, or prohibit such a filing. Of the remaining 28 whose statutes authorize bankruptcy, 15 states only authorize municipal bankruptcy subject to approval or other conditions,and many states have used this approval power to intervene before a bankruptcy can occur. 18. While the nature of the GO pledge may best explain the miniscule net losses experienced on municipal debt during the Great Depression(net losses amounted to 0.4%of debt outstanding),in our view the limitations associated with Chapter 9 bankruptcy, and states'use of their additional oversight powers also contribute to the sector's extraordinarily low default rate by reducing political risk. Faced with the potential for longer-term costs of reduced market access and reputational damage for state and local officials,nonpayment of debt,in our view,makes little sense for most governments experiencing fiscal stress. 4. U.S. Local Government Payment Performance 19. Some proponents of current local government stability criticize references to local government defaults in periods such as the Great Depression or earlier. They cite changes such as lower government debt levels,improved revenue diversification, stronger state oversight, and fundamental changes to the economic and banking sectors as reasons why such previous default performance is less relevant.While the criteria recognize and incorporate many of these changes, such statements,in our view, overlook important reasons to consider past payment performance. First,given the experience of the recent recession and current economic challenges,the idea that the municipal performance seen only since World War II will continue regardless of future conditions is itself suspect. Rather than blind speculation, past performance provides observable data with which to compare and contrast different scenarios. Second,the period since World War II generally does not provide sufficient stressful periods with which to calibrate general obligation criteria(see "Understanding Standard&Poor's Rating Definitions",published June 3, 2009).Although the recent recession may demonstrate that municipal credits in general are investment grade,it provides little insight as to whether the current criteria appropriately differentiate'A', 'AA', and'AAA' credits as suggested by the article above. That evaluation requires more stressful periods. 20. Several studies provide what we consider to be good summaries of past municipal credit performance. The work most often quoted is George Hempel's"The Postwar Quality of State and Local Debt",published by the National Bureau of Economic Research(NBER)in 1971. The criteria also take Hempel's 1964 University of Michigan dissertation, "The Postwar Quality of Municipal Bonds", on which the NBER publication is based as a resource because it provides a bit WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 12,2013 8 1190266 1300881696