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

Tax-Secured Debtschools, and in turn placed significant pressure onstate budgets. Conversely shifting responsibilities tolocal government units can ease a state’s financialburden, but will pressure credit ratings of local governmentsunless accompanied by new local revenuesor mandate relief.Special GO SituationsIn addition to traditional general obligation ratings,Standard & Poor’s rates a number of GO securitiesthat carry many of the characteristics of general obligationanalysis but may also have their own nuances.For example, in certain parts of the country, library,park, fire, forest preserve, municipal utility, andwater and sewer districts issue bonds backed bysome form of general obligation taxing powers.Analysis for this type of debt follows the same basicprincipals of GO tax backed analysis including thefour factors (economy, debt, management andfinances) but also factors in the uniqueness of theindividual districts. These may include the limitedservice functions, and in some cases the limited revenueraising capabilities or specific millage limitations.Since service functions are often limited (suchas providing library services or fire services), budgetsare often smaller in size and capital intensive. Oftentimes the fixed portion of the budget dedicated todebt service is a much larger component than wouldbe typical for a larger, full service operating budgetof municipality.Many of these types of districts are often coterminouswith the municipality or county they liewithin. In some cases they lie within more than onemunicipal boundary. In those cases where they arecoterminous and share the same economic base, itdoesn’t necessarily mean the rating will be thesame. While the economic factors may be the same,management practices, financial position and debtprofiles may be very different and could result inhigher or lower ratings. In particular, financial positionwill be an important determinant in assigningthe rating.Certain districts also carry, in addition to theirfull faith pledge, the ability to levy rates and chargesfor specific services provided. In the case where usercharges are also used, Standard & Poor’s evaluatesthe GO factors while also looking at the revenuestream of the user charge and factors that into therating. In some instances, the history of using usercharges that translate into strong financial positionhas contributed to higher ratings. ■Debt Statement AnalysisDebt analysis is a critical component of the ratingprocess at Standard & Poor’s RatingsServices. Debt analysis focuses on the nature of thepledge offered on various securities, the debt repaymentstructure, current and forecasted debt serviceburden and the magnitude of an issuer’s capitalneeds. Debt position is measured in several ways,but analytic construction of the basic debt statementis critical to the evaluation. Differences oftenarise between the analytic approach to indebtednessand the statutory approach represented by issuers.There has also been much debate about the inclusionof pension liabilities and other post employmentliabilities on an issuer’s debt statement. In terms ofdebt statement analysis, pensions and OPEB will notbe included unless the municipality has issued debtto fund its liability. However, Standard & Poor’s willanalyze various measures of an entity’s pension systemand OPEB liability and in order to perform comparableanalysis will show debt ratios both with andwithout debt incurred for pensions and OPEB.Debt Statement AnalysisWhen Standard & Poor’s examines the debt burdenof a municipality it starts by looking at all directdebt, and any other analytic obligations of the entity.Debt types included in gross direct debt include:■ General obligation bonds;■ Any short term debt or commercial paper;■ Other tax secured obligations such as sales, gasor excise tax obligations;■ Authority, certificate or other capital lease obligationsthat are secured by lease rental or contractpayments subject to appropriation;■ Moral obligation secured debt;■ Tax increment and special assessment securedobligations;■ Pension obligation bonds; and■ Any enterprise or revenue—based debt.Operating leases, tobacco and GARVEE bonds(supported by federal revenues) will not be includedin the debt statement analysis.66 Standard & Poor’s Public Finance Criteria 2007