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

Special-Purpose DistrictsTax Increment Information RequirementsTo rate tax increment debt, the following standardized informationis usually required:A preliminary official statement, including:■ Number of project area acres and a description of the land uses within theproject area.■ Five year project area assessed valuation history, if available.■ Project area tax rates and underlying taxing entities.■ Base year assessed valuation.■ Debt service schedule.■ Ten largest taxpayers and each of their assessed values.■ Tax collection rates.■ Major pending assessment appeals.■ When sub-areas of a project area, if any, might expire before bond maturity.■ Cumulative project area tax limit, if any, and how much has been collectedunder it to date.■ Description of tax-sharing agreements with underlying taxing entities, if anyis senior to debt service. If they are, disclosure of any that could cause anincrease in prior payments in a future year.■ Additional bonds tests and other legal covenants.■ Bond Indenture.■ If there is a consultant’s report, a copy should be provided.top taxpayers to project area incremental value—not project area total value—because revenues riseor fall based on incremental valuation. It is notuncommon to see each of the top taxpayers representingmore than 100% of incremental projectarea valuation in newly formed project areas, eventhough top taxpayers may appear deceptivelydiverse when compared to total project areaassessed valuation.Generally, Standard & Poor’s requests theassessed valuations of the top 10 taxpayers. It istypical for 40% or more of the incremental taxbase to be held by the top five taxpayers, based onthe relatively small size of most project areas.Taxpayers may also not appear overly concentratedwhen considered individually, yet they may stillcomprise just one shopping mall or condominiumdevelopment. Market factors can swing the value ofsuch shops and homes together as a result of theircommon location and function, apart from fire ornatural hazard risks of adjacent buildings. Districtsconcentrated in a particular type of property, suchas aircraft or computer equipment capable of beingmoved to other locations, may also have other vulnerabilities,even if they are diverse by taxpayer. Ifpayment of debt service is essentially dependent onjust a few taxpayers making their tax payments, itmay be difficult to achieve an investment-grade ratingunless those taxpayers demonstrate creditworthiness,and the property is essential to its operations.Even in the case of a rated taxpayer, however,the property should be highly essential to the taxpayerto get the benefit of the credit rating assignedto the taxpayer. An example would be an importantgenerating plant of a rated investor owned utility.Assessment practices that may at first appear to“guarantee” tax collections have been shownthrough experience to not always be reliable. Afinancially strong company can still remit smallerthan-expectedtax payments by appealing its assessment(which can take three years or longer toresolve), not rebuilding after a fire, or delaying initialconstruction. Taxpayer bankruptcy proceedingscan also temporarily forestall legal foreclosure ortax assessment sales, since federal bankruptcy lawsupercedes local law.Historical assessed valuation growthStandard & Poor’s prefers to examine at least fouryears of project area assessed values, when available.One of the virtues of tax allocation bonds is the typicallyhigh growth rate of assessed valuation withinmost new project areas. However, a recent base yearmay cause deceptive percentage rises in incrementalassessed valuation because of the comparison to smallearly-year incremental values (see the tax volatilityratio chart). Total project area assessed valuation maybe a more meaningful indicator of growth trends. In afew states, fire, demolition, or conversion to taxexemptproperty may be used to decrease the frozenbase assessment—increasing incremental assessedvalue—without new construction.Future assessment growthAn important indicator of future assessmentgrowth is the acreage available for new development.A fully developed area, with no redevelopmentpotential, effectively limits the possibility ofassessed valuation growth. However, projectareas with large undeveloped land areas are notassured of attaining growth. Constructionstrikes, changes in market conditions, or higherinterest rates can suddenly cancel or delay eventhe most promising development.Construction risk, when present, is such a riskfactor that most investment grade-rated tax allocationbonds already demonstrate coverage of maximumannual debt service by historical tax revenues(Standard & Poor’s will consider next year’s taxlevy an “historical” revenue if it is based on thecurrent assessor’s assessment roll and the currenttax levy), although exceptions have been madewhen debt service could be covered with only limitedamount of future growth that seems especiallylikely. Historical coverage of debt service alone,however, does not necessarily guarantee an investment-graderating.www.standardandpoors.com79