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

Special Tax Bondsis dedicated only to capital funding or when capitalneeds are large. Debt service reserves also take onless importance in cases where debt service coveragewill be maintained at very high levels, such as2x maximum annual debt service or higher. In thesecases, debt service reserves equal to half of maximumannual debt service, ones only funded whencoverage falls below a specified level, or in somecases not funded at all, may be sufficient.Special Tax Ratings Can Exceed A GO RatingA special tax bond rating can exceed that of amunicipality’s GO rating in certain circumstances—when an issuer’s base shows broad economic diversity,revenues show good stability in economicdownturns, debt service coverage levels are strong,and legal covenants provide strong protection orare analytically less relevant. Special tax ratingsmay rise above an issuer’s GO rating, since as apractical matter, the pledge of special tax revenuesmay place bondholders ahead of unsecured GObondholders. Chapter 9 of the U.S. BankruptcyCode specifically provides that a municipal bankruptcyfiling, “does not operate as a stay of applicationof pledged special revenues, which includesspecial excise taxes, to payment of indebtednesssecured by such revenues”. Although case law islimited by the small number of municipal bankruptcyfilings, it would appear sales tax bondholderswould have a strong priority interest in the event ofmunicipal distress, allowing sales and special taxratings to exceed a GO rating. However, heavysales tax bond issuance could potentially weighdown a GO rating. Special tax supported debt isincluded in Standard & Poor’s calculation of anissuer’s direct GO debt burden ratio, and couldresult, in unusual cases, in a downgrade of a GOrating when high debt service costs hamper the abilityto balance a general fund budget.Economic ConcernsThe health of the local economy is central to therating process. As it does when rating other typesof municipal issues, Standard & Poor’s initiallyevaluates the diversity and growth potential of aneconomy. A poorly performing or concentratedeconomy may limit the upside potential of a bondrating, despite high debt service coverage. The mainemphasis is on the breadth of the tax base, both bydiversity of retailer, and on the items taxed.Generally, levies on the widest range of items earnhigher ratings than those on limited categories ofgoods and services, (for example, a tax only onrestaurant sales may somewhat narrow the taxbase, as might a sales tax jurisdiction dependent ona limited number of auto retailers, while inclusionof retail grocery sales may provide greater tax stability).Standard & Poor’s reviews cyclical factors,such as tourism, that could cause fluctuations in taxreceipts. A large and diverse employment base willprovide some protection against swings in retailpurchases of area residents. A larger geographicjurisdiction also mean less likelihood that a residentwill visit a retailer outside an issuer’s taxing jurisdictionif a retailer closes down.Under certain conditions, the diversity of retailerscan be another rating factor, particularly for narrowretail bases. For instance, in a very small town,a large portion of revenues may come from oneshopping mall or an auto dealership that may facefuture out-of-town competition, or whose proprietormay fold. Standard & Poor’s may ask for a listof the top 10 retail outlets as a percentage of totalsales to help allay concerns of retail concentration,or provide retail sales by economic sectors. As anexample, a concentration in auto dealerships mayindicate especially cyclical retail sales.Confidentiality laws may preclude the release ofactual names of the largest retail generators. In suchcases, Standard & Poor’s can review retail figureswithout the release of the specific name of theretailers. Large population bases may be assumedto contain a diverse retail base, while smallermunicipalities may be deemed to carry some risk ofconcentration when precise retail concentration figuresare unavailable.One positive factor regarding sales taxes is thatrevenues continue to be remitted when a sales taxvendor declares bankruptcy, but remains in operation;conversely, however, tax revenue will come toa halt if the retail store closes or relocates outside ajurisdiction. In such cases, it is helpful that nearbyalternative shopping outlets are still in town.Sometimes, even major cities can suffer when alarge retail mall opens in a suburb, drawing offshoppers. For this reason, high retail sales per capitaare closely analyzed.Implications Of Growth TrendsGrowth trends may depend on the type of taxes.One of the strongest credit features of sales-tax revenuesis that they are inflation driven. Revenuesand debt service coverage will increase in inflationaryperiods, even when a local economy does notgrow in real terms. On the other hand, gas taxesare usually derived from a per gallon tax that doesnot grow with inflation. Nevertheless, gas taxesalso tend to remain relatively stable in recessionsand depend more on population growth. Incometax receipts also show general stability over time,especially for large economic bases, due to thebroad-based nature of the tax. Each type of specialtax will be examined on its own merits for possiblefuture growth and cyclicality.www.standardandpoors.com71