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

Tax-Secured Debtcoverage increase during inflationary periods evenif the source of the revenue stream exhibits noreal growth.Highway User Tax BondsHighway user tax bonds are issued primarily bystates to fund statewide highway and road construction,although local bonds are sometimessecured by state distributions of highway user taxrevenues to local municipalities. A state constitutionmay limit the spending of transportation relatedfees to transportation uses, which typically tend tobe very capital intensive. The broad statewide collectionof revenues for most of these bonds oftenaffords strong credit quality.Highway user revenues collected by states aretypically motor-fuel taxes, vehicle-registration fees,license fees, penalties and fines, and in some casesmotor vehicle ad valorem fees. Some states add federalgrant monies to the pledged revenue stream,which may make the revenue stream vulnerable tochanges in federal programs, especially since federalgrant programs must be periodically reauthorized.Higher debt service coverage may be needed to offsetsome of this increased vulnerability.An examination by Standard & Poor’s of pledgedfuel taxes during periods of rapid increases in theprice of gasoline has indicated that sales of fuel arerelatively insensitive to price in the short run,although they may vary somewhat over a long periodof years by causing a gradual shift to more orless fuel efficient vehicles as consumers trade invehicles. Another difference with sales tax revenuelies in the nature of fuel taxes. Unlike sales taxbonds, whose revenues increase with inflation, fueltax bonds are generally based on per gallon sales,and do not increase with inflation.The relative importance that a state governmentplaces on highway construction, and its commitmentto such programs, can be significant factors in therating process. States that have established highwayprograms by statute and the ability and willingnessof state administrations and legislatures to increasehighway user tax rates as a means to fully fund perceivedrequirements are important considerations.Generally, statewide revenue sources are consideredmore stable than revenues based on point ofsale within a small locality. Those states that distributehighway user tax revenues to localities on a percapita basis, instead of actual local sales, can serveto enhance a rating by providing stability. Otherstate revenue distribution formulas that are morecomplicated could serve to enhance or weaken apledge of state distributed revenues. If states havefrequently changed their distribution formulas in away that could reduce local revenues that arepledged to bonds, it may become a credit concern.Standard & Poor’s examines the revenue-distributionformula, historical changes to highway user taxallocations, and the frequency of tax rate increasesas a factor in determining revenue stability.Because highway user taxes are generally dedicatedfor the purpose of future infrastructure needs,there may be a greater presumption that a statewould issue significant amounts of future highwayuser tax debt, and the additional bonds test may insome cases take on greater significance than forsales tax debt where an issuer needs to use excesssales taxes for general operations.Income Tax BondsIncome tax bonds are primarily found in the stateof Indiana, although there are a few prominentexamples in other parts of the country. Statisticsshow that the gross personal income of a municipality’spopulace is generally very stable over time,most likely due to the broad based nature of thetax, and also goes up with inflation, as do salestaxes. Standard & Poor’s evaluates the size anddepth of a municipality’s economic base and its previousincome tax fluctuations. Local income taxestend to have a narrow range of tax rates, whilestate income taxes may be based on a more progressivetax rate schedule that could potentiallyfluctuate more in a downturn, although this may beoffset by a larger and more diverse state economy.A distribution of statewide income taxes to localitiesdetermined by population would usually beconsidered a more stable source of pledged revenuethan income taxes collected purely locally.However, both sources of income taxes may be consideredvery stable when the municipality covers abroad economy. ■74 Standard & Poor’s Public Finance Criteria 2007