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

Tax-Secured Debtmillion in tax increment financing bonds and $27million in capital leases. Of the $253 million generalobligation debt, the city proved that the $25 millionGO water and sewer obligation wasself-supporting, having more than 1x coverage formore than three consecutive fiscal years, and thisportion of general obligation debt was not includedin table 1. The city’s total net direct debt was$282.2 million.Although not included in the debt statement, thecity has $31.5 million in water and sewer, and$15.97 million in solid waste debt outstanding. Thecoverage of water and sewer debt has been morethan 3x for the last three fiscal years, and the coverageof solid waste was 1.25x for the last three fiscalyears. Therefore, Standard & Poor’s is assuredthat operating revenues are not supplementing theenterprise funds, and the enterprise fund is not incovenant default. The city’s enterprise debt presentationis shown in Table 3. ■Special Tax BondsThe key feature of the special tax criteria, whichcenters on those bonds that are secured by alien against a non-property tax, is that the tax rateis generally fixed. Pledged tax revenues will rise andfall based only on the economic activity beingtaxed. In many cases, the use of special tax bondproceeds may also be unrelated to the economicactivity that is taxed.The four most prevalent taxes used to supportspecial tax bonds are:■ Sales tax■ Highway user tax (including gas tax)■ Hotel tax, and■ Income taxMany other variations are also included in specialtax revenues, from cigarette taxes to rental cartaxes. Pledged revenue streams will be evaluatedbased on their unique merits, but all special taxbonds share common characteristics. In general,bond credit quality will depend on:■ The size and depth of the economic base;■ The stability, diversity, and magnitude of thepledged special tax revenue stream;■ The level of debt service coverage—both coverageof annual debt service and coverage of futuremaximum annual debt service; and■ Bond covenants, such as funding a debt servicereserve; restrictions on additional parity debtissuance; or whether excess revenues after paymentof debt service flow back to the bond issueror are retained under a closed flow of fundsexclusively for early debt retirement.Standard & Poor’s is refining its special tax criteriaas it relates to sales tax, income tax, and gas taxrevenue bonds to place greater emphasis on fundamentaleconomic factors and less on legal featuresregarding additional debt issuance and reserve fundswhen, from a practical perspective, prospects aregood that debt service coverage will remain highregardless of the legal provisions in bond covenants.Enhanced recognition of fundamental economicactivity for sales tax revenue bonds is supported byretail sales data collected over past recessions,which has generally reaffirmed the stability of salestax revenues during adverse economic cycles, particularlyfor large economic bases. As such, higherrating levels can be sustained at lower coverage levelsfor certain municipalities.Likewise, the stability of fuel sales during recentand previous price spikes support the relativeinelasticity of fuel demand even during periods ofhigh fuel prices. Highway user tax ratings are alsobuoyed by the fact that a large portion of pledgedrevenues are typically derived from stable transportationrelated sources, such as motor vehicleregistration fees and motor vehicle license fees, andusually cover a large statewide population base.In particular, legal tests for additional sales taxparity debt will be weighed less heavily wheremunicipalities rely on excess sales tax revenues tofund general fund operations. In such cases, there isa disincentive to issue significant amounts of additionalsales tax borrowing, regardless of legal protections.For these issuers, heavy sales tax bondingcould have the effect of crowding out funding foressential ongoing municipal operations.Analytically, this unlikelihood allows us to placeless emphasis on the additional bonds test.The additional bonds test is also less significantfor municipal issuers with a long history of debtrestraint and little potential future financing needs.In contrast, additional bonds tests may retain theirtraditional importance when an authorized sales tax70 Standard & Poor’s Public Finance Criteria 2007