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

Debt Statement AnalysisWith this aggregation of direct debt, Standard &Poor’s measures the full burden of debt on the populationin relation to wealth. After this evaluation,deductions are made from the debt statement forself-support of certain types of debt. Once a netdirect debt figure is determined, various ratios areagain calculatedSelf-support is an analytic judgment and will notnecessarily match statutory calculation of self-support.The following are typically deducted:■ TANs, RANS, and TRANs;■ State aid reimbursements for well defined, longstandingprograms;■ Federally supported GARVEE revenues;■ Enterprise debt secured by revenues only;■ Moral obligation debt that has not required anycontribution to the debt service reserve fund fromthe morally obligated party; and■ Tax secured enterprise debt that is fully or partiallyself-supporting from the enterprise.Self-Supporting DebtAlthough a debt obligation may be exempt from alegal debt limitation, Standard & Poor’s does notnecessarily treat the obligation as self-supporting.Standard & Poor’s will assume revenue secureddebt for enterprise bonds (water, sewer, solid wasteand electric revenue bonds), GO backed revenuebonds that have passed the coverage test, and stateaid supported bonds are self-supporting.If tax-secured bonds are paid from an enterprisefund, Standard & Poor’s will give credit to partialself-support, and will factor that level of supportinto the overall debt burden. For example, if anissuer’s GO backed water and sewer debt wasbelow 1x, but managed to have 0.7x for the lastthree fiscal years, then Standard & Poor’s wouldgive self-support to 70% of the GO water andsewer debt. If the coverage tends to change fromyear to year; from 0.7x in fiscal 2003 to 0.5x in fiscal2004, and 0.6x in fiscal 2005, Standard &Poor’s will use the lowest percentage of the lastthree years.In this case, Standard & Poor’s would assumethat 50% of the GO backed revenue bonds isself-supporting. Partial self-support does notapply to revenue bonds because they would be incovenant default. Standard & Poor’s analyzes thesystem to make sure that system revenues areable to cover both revenue and GO backed revenuedebt. Coverage from the enterprise fundrevenues must provide at least 1x support for thelast three fiscal years to be considered fully selfsupportingand to be factored out of the directdebt of the municipality.Bonds that are supported by special assessments,sales tax, gas tax, or tax increment financing(TIF) revenues will not be consideredself-supporting, and will be included in the directdebt of the issuer. If these bonds have a dedicatedmillage to pay debt service, this will be taken intoaccount and explained in the debt section of theissuer’s credit commentary, but it will not be consideredself-supporting.Pensions And Other Postemployment BenefitsStandard & Poor’s will continue to analyze anissuer’s pension system(s) and the funding of itsactuarial accrued liabilities (AAL). For informationon pension and other postemployment benefits(OPEB) criteria please refer to the Public FinanceCriteria: GO bonds.In terms of the debt statement, if the issuer hassold pension obligation bonds then the bonds willbe included in the debt statement and debt ratioswill be calculated both with and without the pensionobligation bonds. The same holds true forOPEB obligation bonds. However, Standard &Poor’s will recognize in its analysis the comparisonbetween an employer that has issued POBs and as aresult has higher debt ratios but lower unfundedpension liabilities versus one that has not issuedPOBs and thus has lower debt ratios but higherunfunded pension liabilities. The analysis will takeinto account that the increased debt ratios are offsetby the entity’s improved funding ratio.Debt Statement PresentationFor Standard & Poor’s to achieve a thorough analysisof a community’s debt levels, it is imperativethat the issuer provides a comprehensive debt statement.Although debt statements will never be uniformdue to the unique circumstances of themunicipalities, there are certain essentials that makeup a good debt statement.From an analytic standpoint, a good debt presentationwill communicate the nature of the pledgedsecurity, the debt repayment structure, the currentdebt service burden and the future capital needs ofan issuer.The debt statement should include a listing ofobligations of both long-and short-term debt andmaturity dates should be provided. Furthermore,the nature of the security should be concisely, butaccurately defined. If the entity paying the debtservice is different from the security, that should bedefined as well. In terms of lease obligation, there isoften a conduit authority set up to issue the debtfor the obligor, therefore the debt statement shouldinclude this debt and indicate the appropriateauthority for debt issuance.www.standardandpoors.com67