S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Housing■including HUD sanctions due to performance,prior liens which may be placed on the funding,or flow of funds problems at the PHA level; and,Availability of a diversified stream of revenues,especially important at higher rating levels.Essentiality, Longevity, And PredictabilityIn evaluating the history of public housing, threeelements are clear contributors to the creditworthinessof capital funding:■ The essentiality of housing for low and very lowincomepeople;■ The long track record of funding for public housingby the federal government; and,■ Increasing predictability of funding levels forindividual public housing authorities.EssentialityThe need for the public housing program is at theheart of gauging the federal government’s continuingcommitment to the program. A review of thedemand for public housing, the general dearth ofaffordable rental housing, and the likely continuationof the undersupply indicates a high degree oflikelihood that public housing will continue to bethe centerpiece of the nation’s supply of housing forthose in greatest need. The federal government is nolonger in the business of developing deeply subsidizedpublicly and privately owned housing and hasmoved toward a paradigm of mixed-finance,mixed-income housing that can sustain affordabilityby renting to higher-income tenants. The number ofexisting deeply subsidized federally assisted unitscontinues to decrease due to the federal government’sreduction in subsidy to fund new conventionalpublic housing and the conversion ofprivately owned subsidized housing properties tomarket rate status upon expiration of subsidy contracts.Major production programs, such as theLow Income Housing Tax Credit program,although affordable, are targeted at higher-incometenants. Some segments of public housing tenancy,such as the elderly, who make up 32% of publichousing tenants, are expected to increase significantlyin coming years.Predictability Of PHA Funding LevelsAs part of analyzing appropriation risk,Standard & Poor’s carefully considered the methodologyfor allocation of Capital Funds to the individualhousing authority. Further changes in theCapital Fund allocations effected under the QualityHousing and Work Responsibility Act of 1998(QHWRA) greatly enhance the predictability andstability of allocations to the individual PHAs by:■ Establishing a formula for the Capital Fundarrived at through negotiating rulemaking, whichhelps to ensure consistency of methodology overthe years;■ Increasing predictability of the formula throughclarification of factors that can affect funding;and■ Allowing for a replacement housing factor, underwhich PHAs may receive funds over a period oftime for units that have been demolished.Although there are many factors that couldchange a PHA’s funding level, such as ongoing andbacklogged needs, impact of unit reduction, andperformance reward factors, projecting increases inPHA funding would not be consistent with investmentgrade ratings. What is consistent with investmentgrade ratings is the development of a worstcase funding level.Another significant factor that can affect PHAfunding levels are sanctions that HUD is withinits right to employ based upon PHA performance,discussed later under “The Importance ofHUD Approvals”.For each PHA transaction, Standard & Poor’sdevelops assumptions for funding levels based uponthe PHA’s actual Capital Fund allocation over time.HUD approvals clearly state that sanctions in relationto performance issues could not affect the level offunding below what is needed to make annual debtservice payments while bonds are still outstanding.Assessing The PHA Managerial CapacityAs part of the rating process, Standard & Poor’sreviews managerial capacity of the PHA as well aselements of the organization’s structure and overallmission that can affect the credit quality of theCFFP bonds. Standard & Poor’s reviews the PHA’sredevelopment plan including scope of work, financialplan, and strategy to ensure completion ofwork in a timely fashion. In addition, Standard &Poor’s assesses the PHAs capacity to complete theredevelopment plan, based on its past constructionand modernization performance, existence of institutionalizedmodernization procedures with checksand balances, and any changes in the proceduresdesigned to address any needs for additionalresources based on the scope of the work planned.Communication with HUD and timely submissionof one-and five-year plans are critical, as is thePHAs history of timely obligating and expendingannually allocated modernization funds. Finally,Standard & Poor’s looks at program and financialoversight practices of the PHA, the board’s backgroundand role in overseeing the PHA and theproject, and the experience, depth and capacity of286 Standard & Poor’s Public Finance Criteria 2007