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

GO Debtchanging. Increases in net assets may indicate animproved overall financial position while decreasesin net assets may reflect a changing manner inwhich a government may have used previouslyaccumulated funds.The analysis of financial performance also takesinto account the role of short-term financing and itsimplications. As available cash balances decrease,cash flow difficulties can become more prominent.Nevertheless, conservative financial strategies andmanagement practices can enable an issuer to minimizecash flow difficulties.In reviewing an issuer’s cash management andinvestment practice, Standard & Poor’s considersthe types of investments, security precautions, anduses of investment income.Debt Factors And Long-Term LiabilitiesThe analysis of debt focuses on the nature of thepledged security, the debt repayment structure,the current debt-service burden, and the futurecapital needs of an issuer. Manageable debt levelsare an important consideration, since accelerateddebt issuance can overburden a municipalitywhile low debt levels may indicate under-investmentin capital facilities.Investment in public infrastructure is believed toenhance the growth prospects of the private sector.Neglecting critical capital needs may impede economicgrowth and endanger future revenue generation.Although some capital projects arediscretionary and can be deferred in difficult economicperiods, the failure to maintain existing facilitiescan create a backlog of projects. Eventually,when the backlogged projects are funded, the costmay prove burdensome to future taxpayers.In difficult fiscal situations where municipalitiesface operating deficits, some entities choose long-termfinancing of accumulated deficits as a solution.Standard & Poor’s believes that the “bonding out” offinancial problems is not a permanent cure and maycomplicate the ultimate resolution of the fiscal strain.The specific security pledged is analyzed. A GOpledge takes various forms that provide differentdegrees of strength. Unlimited ad valorem propertytaxdebt, secured by a full faith and credit pledge,usually carries the strongest security. However, inall ad valorem pledges, during a period of fiscalstress, debt service competes with essential services.Limited ad valorem tax debt, or a limited-taxpledge, carries legal limits on tax rates that can belevied for debt service. Standard & Poor’s viewsthis type of security more as a means to limit debtissuance than as a strict cap on revenues availableto retire debt.In a limited-tax situation, the tax base’s growth,the economy’s health, and the entity’s fiscal balanceposition are often more significant credit factorsthan the limited source of payment. In fact, a limited-taxbond can be rated on par with unlimited-taxbonds if there is enough margin within the tax limitto raise the levy, or if other available balances ortax revenues are available for debt service. Anenterprise system’s revenues, such as water or seweruser charges, as well as a full faith and creditpledge, secure double-barreled bonds. Taxing poweris used only if the enterprise’s revenues are insufficient.Standard & Poor’s approach is to reviewboth security pledges.GO bonds are considered self-supporting whenthe enterprise can pay debt service and operatingexpenses from its own operating revenues. Such aself-supporting enterprise could use the full faithand credit support of a municipal government withoutdiminishing the credit quality of the government’sGO debt.The debt maturity schedule can become importantin certain circumstances. Prudent use of debtdictates that the debt’s term matches the usefuleconomic life of the financed assets. An averagematurity schedule for capital projects is one inwhich 25% of the debt rolls off in five years and50% is retired in 10 years. A faster maturity schedulemay be desired to avoid increased interestcosts; however, it can place undue strain on anoperating budget. Statutory provisions governingdebt retirement are also important considerationsin evaluating payout.Standard & Poor’s looks for realistic debt limitationsthat permit an issuer to meet ongoing financingneeds. A city near its debt limit has less flexibility tomeet future capital needs, but more importantly, maybe unable to borrow money in the event of an emergency.Restrictive debt limitations often necessitatethe creation of financing mechanisms that do notrequire GO bond authorization or voter approval.Standard & Poor’s examines the community’sfuture financing needs; a capital improvement planindicating both funding needs and anticipatedfunding sources is a useful planning tool for determiningfuture borrowing needs. Municipalitiesshould regularly review their critical capital needsand schedule capital improvements for assets’ life.The history of past bond referendums is one indicationof the community’s willingness to pay forsuch improvements.Standard & Poor’s also measures the debt burdenagainst a community’s ability to repay. Three indicatorsof this ability are:■ The tax base;■ The wealth and income of the community; and■ Total budget resources.Ratios used by Standard & Poor’s to measuredebt burden include:www.standardandpoors.com63