Why do you think credit rating agencies care about general fund balance?

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State and local governments borrow on the municipal bond market. They can choose (and payfor) a credit rating service. Moody’s is one of the largest credit rating agencies in the municipalbond market. Click on this http://www.richmondgov.com/PressSecretaryMayor/robocopy/documents/Moodys.pdf to view Moody’s credit opinion about a general obligation debt issued by the city of Richmond, VA in 2017. Answer the following questions:

Theoretically speaking, what are the justifications for local governments like Richmond to engage in pay-as-you-use financing of public capital projects?

What is Richmond’s rating based on this report?

in no more than a few sentences, what does the city use the proceeds from the general obligation bond for? Does it make sense based on your understanding of debt financing of governmental activities?

One thing you notice is that the credit rating agency cares about general fund balance (measured as a percentage of the general fund revenue). General fund balance refers to the difference between assets and liabilities of the general fund. Why do you think credit rating agencies care about general fund balance?

The credit rating agency obtains information about government finance including general fund data from comprehensive annual financial reports (CAFR). Click on this toobtain a copy of Richmond’s FY2016 CAFR (the file is large; it might take a while to load). Go to page 119, and in no more than a few sentences, whatis the city’s current policy regarding general fund balance?

Exhibit 3 of the rating report shows that the general fund balance as a percentage of revenue is about 16% to 17% in fiscal year 2016. We want to perform this calculation using numbers directly from the CAFR. On page 124, what is the general fund balance for Richmond in FY2016? On pages 87-88, how much is the actual total general fund revenue in FY2016? Based on these numbers, what is the ratio between total general fund balance and general fund revenue, and how does your ratio compare with what isreported by Moody’s?