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

Tax-Secured Debtdelinquency of any other taxpayer, credit analysismust focus on the exposure to the weakest properties,even if overall average property value to debtratios are strong districtwide.In particular, special assessments on undevelopedland may create burdensome tax payments for thoseproperties. Undeveloped land typically carries propertyvalue-to-debt ratios of 3:1 or less, while developedproperties are generally closer to 20:1. Standard &Poor’s expects investment grade special assessmentbonds to be able to at least withstand two separatesensitivity analyses: (1) a multi-year tax delinquencyby the 2-5 largest special assessment taxpayers; and(2) a permanent delinquency by all special assessmenttaxpayers with under a 5:1 value-to-overlapping debtratio, absent special circumstances.Sources of money to cover potential delinquenciesmay come from reserve funds, an ability to raisetaxes to a limited degree, over-collateralization oftax payments, back-up support from a city’s generalfund (often found in Arizona), cross-collateralizationwith other special districts, a senior/subordinatebond structure, or other revenue sources.Special assessment bonds have proven very popularin growing areas such as California and Florida,where existing residents may be reluctant to pay forinfrastructure improvements in new housing developments.However, special assessment financing isused throughout many areas of the country.Examples of projects funded by special assessmentbonds include water and sewer lines, lightingimprovements, roadways, and sidewalks.Financing special assessment projectsThe special assessment process is often quite simple.In most cases, property owners in a limited area, ortheir local representatives, petition for the creationof a special assessment district. A project is specifiedthat will directly benefit property owners withinthe district and be paid for by fees or assessmentsbased on a measurement related to the benefit, suchas street frontage or square footage owned. Bondsare sold to finance the project(s), and security isprovided by the assessments.Most improvements provided by special assessmentbond financing are related to local infrastructure,although bonds have been sold to financeparking lots, landscaping, and public parks. Theseimprovements benefit district property owners byimproving the quality of their neighborhood andcontributing to greater property values.Usually, bonds are used only for the constructionof the project and not for maintenance. Often, themunicipality will absorb the maintenance cost, sincethe project generally is tied into a citywide system,such as water and sewer services.Standard & Poor’s believes that the lack of excesscash flow coverage typical for most special assessmentbonds may create risks, particularly for undevelopeddistricts. However, potentially speculativeelements can be mitigated through such factors as:■ An ability to raise assessment tax rates to alimited degree;■ The existence of excess cash flow from reserveearnings, refunding savings, or a senior subordinatecash flow structure;■ Strong taxpayer diversity, and a debt servicereserve that can cover simultaneous delinquenciesof at least the top two taxpayers;■ The ability to sell tax liens to cover delinquencies,although this is restricted under federal lawif a taxpayer declares bankruptcy;■ Particularly strong value-to-lien ratios;■ A lien on parity with or ahead of ad valoremtaxes;■ Legal protections within the bond structure;■ Economic incentives for timely payment of specialassessment obligations; and■ Low risk associated with the particular project.Major criteria considerationsDistrict makeup and economic base—A districtlargely undeveloped or concentrated in one type ofindustry is viewed negatively. A special assessmentdistrict tied to a stable and diversified economicbase is desirable. The effects of employment levels,wealth indicators, and regional trends on paymentof assessments are evaluated. A wholly residentialdistrict usually exhibits little taxpayer concentration,a very favorable situation if fully developed.Method of assessment collection. Special assessmentscollected at the same time and with the sameforeclosure methods of ad valorem taxes are preferred.Standard & Poor’s also may regard incentivesfor early payment and disincentives for latepayment as positive features. For example, penaltiesfor late payment and discounts for early paymentmay be worthwhile, depending on their effect oncash flows.Value-to-debt ratios. High property value-to-debtratios, preferably above 7:1 for investment-graderatings, increase the likelihood of making assessmentpayments on a timely basis. Also, the marketabilityof property in the district points to addedsecurity if properties must be sold as a result offoreclosure or bankruptcy. Value to lien ratios mustbe examined on a parcel-by-parcel basis for toptaxpayers, since tax levies cannot typically be raisedon the strong taxpayers to pay for the weak, renderingoverall district value to lien ratios problem-82 Standard & Poor’s Public Finance Criteria 2007