Weekly Opinion & Analysis, Monday 21 January 2008

FiscalStar has developed an improved explanation of its ratings assessment methodology, to cap off the comprehensive review undertaken of all aspects of its operations at the end of its first year.

A summary version can be downloaded by right-clicking on the link below. A fuller version will be published on FiscalStar’s website shortly.

 overview of version 4.1 (355Kb)

The aim of this improved explanation is to increase the transparency of FiscalStar’s approach.

Henceforth, we will be characterising our ratings assessment methodology as follows:

• first, we seek to obtain the most accurate and up-to-date available measures of the two fundamental indicators of a council’s present financial condition, namely its underlying operating deficit ratio (“OD”) and what FiscalStar terms the council’s broad liabilities ratio (“BL”), with the latter being the sum of a council’s long-term debt ratio and an estimate of the council’s infrastructure backlog ratio (both measured as a % of annual operating revenue)
• and, secondly, we compare these observations of a council’s OD and BL ratios with benchmark values applicable to the council’s circumstances (which FiscalStar now illustrates using a Criteria Chart – illustrated below – based on all possible OD and BL ratios) in order to assign the council to one of FiscalStar’s star ratings categories.  

The improved explanation incorporates refinements already announced to FiscalStar’s ratings architecture (see Opinion, 24 December 2007), notably involving the assignment of an additional ½ star where a council’s financial sustainability assessment is better than indicated by the previously-assigned (full) star rating. As a result, such councils are now recognised as 3½ star and 4½ star councils respectively.

The improved explanation also incorporates some previously-announced refinements to FiscalStar’s ratings assessment methodology (see Opinion, 17 December 2007).