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

Tax-Secured DebtIntroduction To Tax-Secured DebtGO bonds generally are regarded as the broadestsecurity among tax-secured debt instruments.GO bonds effectively create a link between publicand personal debt: a homeowner unable to pay hisproperty taxes will forfeit his house just as surely asif he could not pay his mortgage, and an unlimitedtaxGO pledge would enable a trustee to invokemandamus to force the issuer to raise the tax rateas much as necessary to pay off the bonds. GObonds have other strengths as well: the property taxtends to be a steady and predictable revenue sourcefor municipalities, and when a vote is required toissue them, bondholders have some indication oftaxpayers’ willingness to pay.There is a broad range of security pledges amongtax-secured bonds. For example, there are unlimited-andlimited-tax GOs. Moral obligation bondsfall short of a full-faith and credit obligation, offeringa best efforts pledge of the issuer (generally astate) to seek appropriations when needed. Leasesare another form of obligation, whereby timelypayment of principal and interest depends onannual appropriations by the issuer. Municipalnote issues are divided into two major categories,bond anticipation notes (BANs) and cash flownotes, requiring different rating approaches. BANsare issued for capital purposes and generallyrequire the issuer to access the capital markets tosell long-term bonds to retire them. Tax and revenueanticipation notes (TRANs) are short-termobligations of an issuer, due within one to threeyears of the date of issuance, and often used forannual cash flow borrowing.Special tax and special districts come in a widevariety of forms and powers. Obligations are generally“tax-secured,” but special tax and special districts’ability to raise taxes is often restricted, and isoften reliant on future tax-receipts growth. Specialtax debt includes security types such as sales, gas,or hotel taxes; while special districts are oftensecured by special assessments, tax increment, orother types of revenue pledges. In the followingpages, Standard & Poor’s examines in detail thesecurity features, rating approach, and documentationrequirements for these various types of taxsecureddebt. ■GO DebtWhen a state or municipal issuer sells a generalobligation (GO) bond, the issuer pledges itsfull faith and credit to repay the financial obligation.Unless certain tax revenue streams are specificallyrestricted, the GO issuer frequently pledges allof its tax-raising powers. Typically, local governmentssecure the obligation with their ability to levyan unlimited ad valorem property tax; state governments,which have different tax structures, usuallypledge unrestricted revenue streams.GO bonds remain essential financing instrumentsof tax-supported capital projects. Examining fourbasic analytical areas enables Standard & Poor’sRatings Services to assess the capacity and willingnessof municipal governments to repay tax-secureddebt. Those areas are:■■■■Economy,Financial performance and flexibility,Debt burden; andManagement.Economic BaseThe economic base is one of the most critical elementsin determining an issuer’s rating. It incorporateslocal and national economic factors andtrends. The foundation of an entity’s fiscal health isits economy. Financial growth prospects andvolatility of major revenue sources depend on theperformance of the local economy, as do the affordabilityand range of services delivered by a government.An issuer’s geography and proximity totransportation networks, cities, and markets play a60 Standard & Poor’s Public Finance Criteria 2007