FAQ’s
Does a moral obligation affect a state’s credit rating?
The adoption of a moral obligation program, in itself, has not impacted a state’s credit rating. Moral obligation debt that has not required any contribution to the debt service reserve fund from the morally obligated party is considered self-supporting, and therefore should not weaken a state’s debt metrics.
Would a borrower’s default affect a state’s credit rating?
If many borrowers were to default and the debt service reserve fund were not sufficient, necessitating a state to step in and contribute to the debt service reserve fund, then the amount the state is obligated to pay is considered as debt. If this is a significant number, it could weaken a state’s liability profile.
Has a moral obligation pledge ever defaulted?
We have not discovered any defaults on state moral obligations. Rhode Island’s Studio 38 almost defaulted, but never did. There are known cases of local government appropriation defaults (Vadnais Heights, MN and Platte County, Mo), but no known state defaults.
What if the state chose not to fund the debt service reserve fund?
If a state chose not to fund the moral obligation program, this would likely have a significant impact on a state’s GO rating. According to S&P’s “issue Credit Ratings Linked” criteria: “The failure of an obligor to honor these obligations in a timely manner would likely have a significant impact on the obligor's GO rating or ICR. Should that occur there could be an adverse effect on future debt issuances, as investors may become wary of the obligor's willingness to support their debt. For example, if a state chose to not pay these contingent obligations, we would likely cap the state's GO rating or ICR in the 'BB' category in accordance with "U.S. State Ratings Methodology", and similarly cap the linked issue credit rating in the 'B' category (see section H and table 2 for this and other possible rating caps and rating notches).”
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