Long-Term Municipal Poolsand assets that provides the dominant support formost state revolving fund ratings. In such a caseStandard & Poor’s analysis would expand toinclude not only the asset quality and liquidity ofrelated funds, but also overall program income andbalance sheet performance, including non-leveragedprogram areas. Management practices, state-specificregulations, and statewide economic conditionscould also play a larger role in these instances.Other Municipal <strong>Public</strong> Purpose PoolsA variety of pool financing programs have beenestablished over the years to help local governmentsfund various types of improvements. Some programsfocus on specific types of projects, others onspecific types of organizations; some are instrumentalitiesof states, while others are single-purposeorganizations supported by quasi-governmental orother organizations dedicated to serving local governmententities. Each type of organization can playan important role within the context of a state’spublic safety, economic development, or other publicinterest needs.<strong>The</strong> state-sanctioned municipal bond bank structurebegan in the late 1960s, and through a varietyof names state bond banks have offered varied programsover the past 35 years. Although the numberof bond banks has not risen substantially, manyhave seen a significant evolution and expansion oftheir programs. While the security and structure ofbond bank pools varies considerably, these poolstypically benefit from the fact that a state agencyadministers the program; this often brings strongeroversight powers or special security features containedin statutes. Bond banks may be more willingor more able than nonprofit or quasi-governmentalentities to cure program imbalances if shortfallsoccur. Relative to state revolving fund programs,however, bond banks may be more susceptible tochanges in levels of state support.Quasi-governmental pools are typically sponsoredor administered by state level organizationsTable 2 Example Of Applied Default And Recovery Rate For Municipal PoolAssume pool default rate of 40%, with 90% recovery after four yearsA B C D E F GPayments Recovery Net Defaulted(due to be Default rate (%) rate (%) default Defaulted debtreceived before Debt 25% of 40% Four-year rate (%) payments ($) service ($)Year defaults) ($) service ($) each year recovery lag (C–D) (E–A) B–(A–F)1 5,000,000 4,000,000 10 N/A 10 500,000 N/A2 5,000,000 4,000,000 20 N/A 20 1,000,000 N/A3 5,000,000 4,000,000 30 N/A 30 1,500,000 500,0004 5,000,000 4,000,000 40 N/A 40 2,000,000 1,000,0005 5,000,000 4,000,000 40 9 31 1,550,000 550,0006 5,000,000 4,000,000 40 18 22 1,100,000 100,0007 5,000,000 4,000,000 40 27 13 650,000 N/A8 5,000,000 4,000,000 40 36 4 200,000 N/A9 5,000,000 4,000,000 40 36 4 200,000 N/A10 5,000,000 4,000,000 40 36 4 200,000 N/A11 5,000,000 4,000,000 40 36 4 200,000 N/A12 5,000,000 4,000,000 40 36 4 200,000 N/A13 5,000,000 4,000,000 40 36 4 200,000 N/A14 5,000,000 4,000,000 40 36 4 200,000 N/A15 5,000,000 4,000,000 40 36 4 200,000 N/A16 5,000,000 4,000,000 40 36 4 200,000 N/A17 5,000,000 4,000,000 40 36 4 200,000 N/A18 5,000,000 4,000,000 40 36 4 200,000 N/A19 5,000,000 4,000,000 40 36 4 200,000 N/AN/A—Not applicablewww.standardandpoors.com47
Cross Sector <strong>Criteria</strong>designed to provide assistance and technical supportto their members—that are typically local governments.Examples of such organizations includestate-level chapters of the League of Cities, theAssociation of Counties, and the Rural WaterAssociation. While these programs often have a certainamount of technical expertise, they may alsorely on outside financial consultants to administermost of the financial responsibilities associated withthe pool program. Because these organizations areusually nonprofits with limited liquidity, fundsavailable to be pledged as over-collateralization areusually also limited. While these factors often limitratings on these entities’ pooled loan programs relativeto state revolving funds, they may still attainhigh investment grade ratings if managed effectivelywith sufficient diversity and support.Economic development pool programs differfrom other municipal pool programs in that, whilethe program sponsor and administrator is usually astate or local government agency, pool participantsare often private entities, and the credit quality ofthese participants is generally lower. Accordingly,these programs typically have some percentage ofpledged loans in default at any given time, in contrastto most government-based pools where few ifany defaults occur over the entire life of the program.Although corporate loan defaults are morelikely, this does not pose a real threat to bondrepayment if policies and provisions exist to ensurethat default rates remain manageable given creditsupport under the program. Standard & Poor’sdefault model accounts for the higher risk associatedwith private sector borrowers, resulting in higherrequired over-collateralization levels being requiredfor a given rating level. Nevertheless, this lowerparticipant credit quality, coupled with limited stateor federal equity contributions, often limits the ratingson pool programs designed to promote economicdevelopment through private lending.Lease PoolsStandard & Poor’s rates lease pools typically sponsoredby nongovernmental entities. Assets securingthese transactions are usually equipment ratherthan buildings, therefore the useful life of the equipmentrelative to bond maturity and the likelihoodthat the lessee will otherwise remain current on thelease due to their desire to maintain possession ofthe equipment are of paramount importance.Because of their typically short duration, leasepools rated to date generally enjoy lower requireddefault tolerances than do long-term debt obligations,reflecting the direct relationship betweendefault risk and maturity. <strong>The</strong> risk of nonappropriationwill lead to lower assumptions of credit qualityand recovery, however, somewhat offsetting thebenefit of the short maturity. Unlike SRFs and statebond bank pools, lease pools may also be backedby assets in different states, and the model givescredit for this additional diversification.Standard & Poor’s will discuss with the programsponsor the key criteria used in underwritingcredit risk. Staffing levels, experience of the originator’scredit personnel, and any areas of creditspecialization may also be discussed. A criticalaspect of underwriting is a review of the essentialityof the leased equipment. Standard & Poor’sconsiders the following types of equipment,among others, to be essential:■ Police and fire vehicles■ Communications equipment■ Energy management systems■ Computer hardware and software■ School busesCredit approval policies should be well documented,highlighting internal credit authorities andtransaction approval procedures. Verification ofequipment acceptance, lessee review, documentationrequirements and internal auditing are also componentsof a sound underwriting policy.<strong>The</strong> obligation of the servicer to bill and to collectis critical and can directly affect pool performance.When evaluating the strength of anequipment lease servicing operation, it is necessaryto examine the billing and collecting procedures,when and how delinquent obligors are notified, andif staffing and systems adequately handle thedemands of compliance and reporting.<strong>The</strong> substance of Standard & Poor’s legal analysisdepends on the structure of the transaction presented,but is typically akin to that for a syntheticfloater structure (see <strong>Public</strong> <strong>Finance</strong>—Structuredcriteria for more information).Municipal Collateralized Debt ObligationsCollateralized debt obligations, or CDOs, are structuredvehicles that are similar to leveraged closedend funds. A majority of CDOs are actively managedand invested in different classes. Over the lastseveral years, municipal assets have been used as aportion of the assets securing some CDOs, and afew transactions have contained only municipalsecurities as collateral. At the core of the CDO is abankruptcy-remote, special purpose entity (SPE) thatissues securities to investors in the form of severalclasses that are tranched into differently rated andsome unrated securities. Each class of securities representsa different level of risk and reward associatedwith the asset pool. <strong>The</strong> most senior securitieshave credit ratings higher than the average ratings ofthe collateral pool, with lower tranches being ratedbelow the seniors. <strong>The</strong> first-loss tranche is equity (orpreferred shares) that is typically not rated.48 Standard & Poor’s <strong>Public</strong> <strong>Finance</strong> <strong>Criteria</strong> <strong>2007</strong>
- Page 1 and 2: 2007Public FinanceCriteria
- Page 3 and 4: Published by Standard & Poor’s, a
- Page 5 and 6: ContentsI. IntroductionIntroduction
- Page 7 and 8: IntroductionIntroduction To Public
- Page 10 and 11: Introduction To Public Finance Crit
- Page 12 and 13: Cross Sector CriteriaShort-Term Deb
- Page 14 and 15: Short-Term Debtissue in the event o
- Page 16 and 17: Short-Term DebtCash Flow Note Pools
- Page 18 and 19: Commercial Paper, VRDO, And Self-Li
- Page 20 and 21: Commercial Paper, VRDO, And Self-Li
- Page 22 and 23: Commercial Paper, VRDO, And Self-Li
- Page 24 and 25: Commercial Paper, VRDO, And Self-Li
- Page 26 and 27: Commercial Paper, VRDO, And Self-Li
- Page 28 and 29: Bank Liquidity Facilitiesthat immed
- Page 30 and 31: Municipal Swapsoccurrence of the au
- Page 32 and 33: Municipal Swapspurchased a swaption
- Page 34 and 35: Municipal Swapsrisk, but gives the
- Page 36 and 37: Municipal Swapscharges. An issuer t
- Page 38 and 39: Municipal Swapsmeasures the potenti
- Page 40 and 41: Debt Derivative Profile ScoresDue t
- Page 42 and 43: Debt Derivative Profile ScoresOf th
- Page 44 and 45: Long-Term Municipal Poolsexposure,
- Page 46 and 47: Long-Term Municipal Poolsthe progra
- Page 50 and 51: Investment GuidelinesThe proceeds f
- Page 52 and 53: Investment GuidelinesEligible Inves
- Page 54 and 55: Investment Agreements For Municipal
- Page 56 and 57: Joint Support To Investment Agreeme
- Page 58 and 59: DefeasanceDefeasanceStandard & Poor
- Page 60 and 61: Defeasanceexisting rating on the ob
- Page 62 and 63: GO Debtkey role in economic develop
- Page 64 and 65: GO Debtchanging. Increases in net a
- Page 66 and 67: GO Debtthe Financial management Ass
- Page 68 and 69: Debt Statement AnalysisWith this ag
- Page 70 and 71: Debt Statement AnalysisHowever, swa
- Page 72 and 73: Special Tax Bondsis dedicated only
- Page 74 and 75: Special Tax BondsAdditional bonds t
- Page 76 and 77: Non Ad Valorem BondsNon Ad Valorem
- Page 78 and 79: Lottery Revenue BondsLottery Manage
- Page 80 and 81: Special-Purpose DistrictsTax Increm
- Page 82 and 83: Special-Purpose DistrictsQuestions
- Page 84 and 85: Special-Purpose Districtsatical in
- Page 86 and 87: Special-Purpose Districts■ Cash f
- Page 88 and 89: State Credit Enhancement Programsce
- Page 90 and 91: State Credit Enhancement Programsfi
- Page 92 and 93: State Credit Enhancement ProgramsPu
- Page 94 and 95: State Credit Enhancement Programsde
- Page 96 and 97: State Credit Enhancement Programsth
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State Credit Enhancement ProgramsNe
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State Credit Enhancement Programsan
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State Credit Enhancement Programstr
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Appropriation-Backed Obligationscie
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Appropriation-Backed Obligationsand
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Federal LeasesFederal LeasesPrivate
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Federal Leasesis important to make
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Moral Obligation BondsMoral Obligat
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General Government UtilitiesWater A
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Water And Sewer RatingsLastly, Stan
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Water And Sewer Ratings■■also r
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Water And Sewer Ratingsdebt service
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Electric Utility Ratingstherefore c
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Electric Utility Ratingsits viabili
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Electric Utility Ratingsfor systems
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Solid Waste System Financingsyears.
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Solid Waste System Financingsmitiga
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TransportationAirport Revenue Bonds
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Airport Revenue Bondsports can be v
- Page 136 and 137:
Airport Revenue BondsDemand informa
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Stand-Alone Passenger Facility Char
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Airport Multi-Tenant Special Facili
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Airport Multi-Tenant Special Facili
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Port Facilities Revenue Bondsincrea
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Toll Road And Bridge Revenue BondsT
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Toll Road And Bridge Revenue BondsN
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Mass Transit Bonds Secured By Fareb
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Parking Revenue BondsParking Revenu
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Health CareNot-For-Profit Health Ca
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Not-For-Profit Health Careconcerns.
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Not-For-Profit Health Caregroup, St
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Not-For-Profit Health CareLegal Rev
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Not-For-Profit Health CareStandard
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Senior Livingsystem’s credit stan
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Senior LivingLegal CriteriaStandard
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Senior Livinging” criteria may ap
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Physician Groups And Faculty Practi
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Physician Groups And Faculty Practi
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Human Service Providerswhich can di
- Page 176 and 177:
Education And Non-Traditional Not-F
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Higher EducationProgram offerings.
- Page 180 and 181:
Higher EducationRisk managementStan
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Higher Educationa general obligatio
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Higher EducationSelected Public Col
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Higher EducationThe revenue pledgeT
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Higher Educationtial demand for hou
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Higher Education■■The project i
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Private Elementary And Secondary Sc
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Private Elementary And Secondary Sc
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Charter Schoolsan impartial legal f
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Charter Schoolsstates are not alway
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Charter Schoolsauthorizer have guid
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Non-Traditional Not-For-Profitsconv
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Non-Traditional Not-For-ProfitsCult
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Non-Traditional Not-For-Profitspara
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Municipal Structured FinanceIntrodu
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Introduction To Structured Financea
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Introduction To Structured FinanceC
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Introduction To Structured Financei
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Introduction To Structured FinanceL
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Municipal Applications For Joint Su
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Municipal Applications For Joint Su
- Page 222 and 223:
Municipal Applications For Joint Su
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Forward Purchase Contracts And ‘A
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Secondary Market Derivative Product
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Secondary Market Derivative Product
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Secondary Market Derivative Product
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Single-Family Whole Loan Programsth
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Single-Family Whole Loan ProgramsTh
- Page 236 and 237:
Single-Family Whole Loan Programspo
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Single-Family Whole Loan ProgramsA3
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Single-Family Whole Loan ProgramsTa
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Single-Family Whole Loan ProgramsRe
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Single-Family Second Mortgage Loans
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Single-Family Mortgage-Backed Secur
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Property Improvement LoansCertain o
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Property Improvement Loansunder a s
- Page 252 and 253:
FHA Insured Multifamily MortgagesMo
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FHA Insured Multifamily Mortgagesth
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FHA Insured Multifamily Mortgagesda
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FHA Insured Multifamily MortgagesHF
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Ginnie Mae, Fannie Mae, And Freddie
- Page 262 and 263:
Ginnie Mae, Fannie Mae, And Freddie
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Unenhanced Affordable Housing Proje
- Page 266 and 267:
Unenhanced Affordable Housing Proje
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Unenhanced Affordable Housing Proje
- Page 270 and 271:
Unenhanced Affordable Housing Proje
- Page 272 and 273:
Affordable Multifamily Housing Pool
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Affordable Multifamily Housing Pool
- Page 276 and 277:
Affordable Multifamily Housing Pool
- Page 278 and 279:
Military Housing Privatizations■
- Page 280 and 281:
Military Housing Privatizationsimpa
- Page 282 and 283:
Federally Subsidized Housing Progra
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Federally Subsidized Housing Progra
- Page 286 and 287:
Public Housing Authority Debtinvest
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Public Housing Authority Debtthe PH
- Page 290 and 291:
Public Housing Authority Debtto pay
- Page 292 and 293:
Housing Finance AgenciesKey financi
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Housing Finance AgenciesIn many ins
- Page 296 and 297:
Bond Insurancenet losses will occur
- Page 298 and 299:
Bond Insuranceing; the durability o
- Page 300 and 301:
Bond Insurancereinsurance as descri
- Page 302 and 303:
Bond Insurancepaying resources. The
- Page 304 and 305:
Bond Insurancethe terms of the enga
- Page 306 and 307:
Bond InsuranceTable 6 U.S. Municipa
- Page 308 and 309:
Bond Insuranceinvolves a formal bus
- Page 310 and 311:
Bond Insuranceyears of the modeling
- Page 312 and 313:
Bond Insurancemargin of safety meas
- Page 314 and 315:
Government Investment Pool(NAV) to
- Page 316 and 317:
Government Investment Poolon an ove
- Page 318 and 319:
Government Investment Pooland $1.00
- Page 320 and 321:
Government Investment Poolsevere in
- Page 322 and 323:
Government Investment PoolVariable
- Page 324 and 325:
Assessing Construction RiskInterest
- Page 326 and 327:
Assessing Construction Riskelect to
- Page 328 and 329:
Pension Fund Credit Enhancement And
- Page 330 and 331:
Public Pension FundsPublic Pension
- Page 332 and 333:
Public Pension Funds■■Operating
- Page 334 and 335:
Public Pension Fundscompensation ag