Goal: Maintain an Aa2/AA bond rating each year.
What is this?
Financial stability is the ability of an organization's financial system to withstand economic shocks and smoothly fulfill its basic functions, such as the arrangement of payments. We track Memphis's financial stability in two ways: through its bond rating and its level of financial reserves.
Why does it matter?
Memphians want to invest their talent and resources in a city with a future. To secure that future, the city needs to carefully steward its financial resources. A city's long-term viability is negatively impacted when it isn't able to meet its obligations. Its credit rating can also drop, making it harder for the city to borrow money to fund public projects and infrastructure work.
Who is responsible?
CIty of Memphis Executive and Finance divisions, Memphis City Council.
How do we measure performance?
We track two things:
- The City's ability to maintain a credit rating of at least Aa2 (Moody) and AA (S&P).
- The City's ability to maintain financial reserves of at least 10% of our annual budget each year.
Rating agencies assign credit ratings to a government based on their analysis of that government's ability to pay its debts. Moody's and Standard & Poor's (S&P) are the two leading rating services that rate the City of Memphis. The City works directly with them each year to provide the information they need to determine ratings and to monitor how the City's financial decisions would be likely to affect its credit rating in the future.
To assign ratings, Moody's and S&P evaluate more than 20 different elements of a City's finances. This comprehensive assessment serves as a broad-based, high-level measure of a city's financial stability.
The City of Memphis aims to maintain a Aa2 bond rating from Moody's and AA from S&P -- rating levels that represent a high grade for investment worthiness. The City met that goal in 2010 for Moody's and 2008 for the S&P rating, and it has maintained those ratings since. That puts Memphis in a rating league with such cities as San Francisco, Tulsa, Honolulu, and Nashville.
|Year||Reserve (Thousands)||Operating Budget (Thousands)||Reserve Percentage|
We also track how much the City keeps in savings, with 10% of the yearly budget set as the goal. Our financial reserves have ranged from 9.7% of the budget to 12.6% in the past three years. The approved budget for 2016 keeps reserves at 9.7%, just shy of our goal but within close range. We will check on this projection quarterly and update the projection if changes are made.
The Mayor's office, the Executive Division and the Finance Division collaborate to set the financial goals for the city government and maintain financial stability. They consider a number of obligations: infrastructure needs like road repair, staffing needs for divisions like police and fire, benefits for employees and retirees, and a growing pension obligation mandated to increase by $7 million per year. They evaluate the revenue the City will receive from taxes and other sources and decide what can be funded each year. The option exists to raise taxes or pull more from reserves to fund any shortfall. However, removing too much from the reserve could negatively impact the City's credit rating.
Currently, the City is choosing not to raise taxes and to pull minimally from reserves, even though this means that not all of our projects can be funded. To improve long-term financial stability, the City undertook a pension and benefits reform for retirees. Simultaneously, the City is trying to exceed the assigned yearly increases to the pension contribution in order to fully fund the pension contribution as soon as possible, to meet the 2020 deadline imposed by the State of Tennessee.
- City of Memphis Finance Division resources: Budgets, Comprehensive Annual Financial Reports, and Pension Reports.
- For an easy to read look at bond ratings, click here.