Public Finance: U.S. State Annual Appropriation Obligation Rating Methodology

Executive Summary

This document describes Kroll Bond Rating Agency, LLC and its rating affiliates’ (collectively, “KBRA”) general rating methodology as it pertains to rating annual appropriation obligations of U.S. states and in some cases, their local governmental units. This methodology addresses (i) bonds, certificates of participation (COPs) or similar instruments (state appropriation-backed obligations) that are payable by a state pursuant to a lease agreement, installment contract, or funding contract with that state (underlying contract); and (ii) obligations of a state to replenish a debt service reserve fund that secures bonds issued by an authority, agency or other instrumentality (state moral obligations). In either case, the state’s payment obligation is subject to the state legislature’s legal right to determine whether it will appropriate necessary funds on an annual or biennial basis (depending on applicable state law) to make the state’s scheduled payments for the next…