CREDIT SCORE

Jun 26 2020

Fiscal score #Fiscal #score



Fiscal score

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Fiscal score

Background
The Munetrix ® fiscal indicator score is a high level, single digital metric designed to give a quick look at how a community is faring fiscally considering changing economic climates. The lower the score, the more fiscally stable; as the score increases, the probability of fiscal stress increases.

The system is digital in nature, a pass-fail design with ten categories. If a community “passes” a given metric, or beats the trigger, they score a zero in that metric. If they fail, they are assigned a score of one. Add up the ones in all ten categories and that is the fiscal score for that unit of government. It’s that simple.

Authors
Originally developed by the Michigan Department of Treasury and Michigan State University in 1992 as part of Public Act 72 (1) , the scoring system has evolved over time. First updated in 2002 for municipalities, the scoring measures were again improved in 2013 based on guidance from a professional association of government finance officials whose work followed several recommendations to the Michigan Department of Treasury. This work has been incorporated into Munetrix ® and is what drives the current algorithms.

One of the components to the score is a focus on fund balance, which for municipalities, depends on its type of government and fiscal year end. The early warning fund balance triggers range from 4% for Counties with a short fiscal year end to tax collection date ratio; and up to 46% for townships with a long fiscal year end to tax collection date ratio. All other factors also have a threshold or trigger, which is not publicly published. These values are not meant to be suggestions for a fund balance target or policy; instead, they are meant to indicate that falling below these values may create a higher degree of fiscal stress. All units of government should establish their own fund balance policy.

Schools
To offer a consistent look and feel, the core elements of the municipal Fiscal Scoring system were adapted to local school finance in 2012 with collaboration between a major School Business Officials organization, and a team of 12 school finance and business management professionals. Now, both the municipal and school measures are set up to look for chronic fiscal problems while not penalizing entities for managing fund balances effectively. The threshold for school districts’ fund balance is 10%, which also considers that fiscal stress will increase if fund balance drops below this level. School policymakers may want to set targets above this level, since in the case of an emergency or declining revenues, fund balances can be depleted rapidly.

Intuitiveness
Besides building the algorithms and embedding them into its database, Munetrix added a color scheme to the scores to make it easier for the average person to understand.
Green = good. Red = bad.

The scoring is not all encompassing by its nature and is not intended to be an end-all fiscal health or stress determination for a community or school district. We liken the fiscal score to visiting a doctor for a check-up. If vital signs are good and overall appearance is fine, a patient would get a low score as healthy. If blood pressure was up, or the patient was running a fever, a higher score would apply and the doctor may want to run more tests. If vitals are off the charts, hospitalization may be next.

But the real benefit is not with historical information. Who cares how sick you were one or two years ago? Instead, the Munetrix ® Fiscal Score™ is an effective Early Warning measure that, when used against future budget assumptions, can add clarity that helps local leaders make informed decisions. Testing future assumptions against the algorithms, users have the ability to quickly build and model alternative financial plans using their own data and assumptions.

References
(1) Fiscal Distress Indicators: An assessment of current Michigan law and development of a new “early-warning” scale for Michigan communities. Institute for Public Policy and Social Research at Michigan State University. Authors: Robert Kleine, Philip Kloha and Carol Weissert.

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SOURCE: http://www.munetrix.com/solutions/transparency/stress-test/

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