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

Special-Purpose Districtsatical in many cases. Standard & Poor’s prefersvalue to lien ratios using county or city assessedvaluation, although independent appraisal reportsmay be evaluated also if deemed reasonable.Lien position. A lien on parity with or aheadof ad valorem taxes is desirable. Preferably, thegeneral property tax bill should be combined on thesame statement as the special assessment tax bill tohelp collection rates.Treatment of property sales. Liens should remainin place upon transfer of property or be extinguishedby an immediate acceleration of all outstanding,current, and future special assessments onthe property.Foreclosure/bankruptcy provisions. Assessmentcollections should not be hindered by foreclosure,bankruptcy, or sales of tax certificates or taxdeeds. Action should be taken on a timely basis toensure that sufficient funds are available to makescheduled debt service payments. The marketabilityof property is also a concern here; propertyshould have sufficient value that bids will appearfor foreclosed property. Requirements allowingand requiring foreclosures to proceed on an acceleratedbasis compared to that for general propertytaxes is considered favorable.Clear right to issue. Public hearings and a deadlinefor discussion are necessary, within legalrequirements, so that there are no legal challengespossible once bonds are offered.Term and redemption of bonds. The debt serviceschedule is usually flat or declining over timeand should be within the useful life of the projectand improvements.Special Assessment and Mello-Roos Information RequirementsTo rate a Special Assessment or Mello-Roos bond the following information isusually required:A preliminary official statement, including:■ Size of district.■ General description of the district with estimated build out dates.■ Land use within the district broken out by percent of the tax from taxpayerswith less than a 5:1 value to lien ratio, less than 10:1, and greater than 20:1.■ Largest 10 district taxpayers with their assessed values and share of thepledged tax.■ Description of the formula used for generating the pledged tax.■ Debt service schedule.■ Tax collection rates.■ Overlapping tax rates and overlapping debt.■ Median home values in the district.■ Bond Indenture, Bond Resolution, or Fiscal Agent’s Agreement.■ Consultant’s or Appraiser’s report, if any.Debt service reserve. A reserve fund or othersecurity feature that provides for payment of debtservice is essential in the event that assessments arenot received on a timely basis. The amount of thedebt service reserve and the way that it is fundedare important, because funds to cover any revenueshortfall are expected to be available at all times.Cash flow runs. Sensitivity tests that demonstratethe bond structure’s strength in the event of delinquencyof the largest taxpayers are necessary inevaluating the ability of the bond structure to withstandunexpected events. Standard & Poor’s normallyexpects some excess cash, either in a debtservice reserve or through excess cash flow, beavailable to cover a delinquency by at least the toptwo to five taxpayers, unless the top taxpayer hasitself been rated by Standard & Poor’s.In some cases, Standard & Poor’s commercialmortgage group can evaluate the credit quality ofan individual development for assessment bondpurposes and the rating can be based on a singletaxpayer or retail development. Usually, however,Standard & Poor’s requests information determiningthe maximum number of taxpayer delinquenciesa district can handle before defaulting and comparesthis to the concentration of the top taxpayers.Where extremely high taxpayer diversity exists,such as in fully developed residential districts, thedebt service reserve alone may be able to cover thepermanent loss of the top five taxpayers for a numberof years, mitigating excess cash flow needs.California’s Mello-Roos DistrictsMello-Roos bonds, also known as CommunityFacilities District bonds, are specific to California.They are similar to special assessment bonds in thatthey levy a charge that is not based on propertyvalue, but dissimilar in that they usually have theability to raise the tax rate up to a maximum levelto cover taxpayer delinquencies. Most Mello-Roosdistricts levy a tax per dwelling unit or per acre,based on development status, but there is no realrestriction on the type of tax, other than it cannotbe based on property value.The different types of taxes allowed under theMello-Roos Act raise varying credit quality considerations,but certain key concerns are common toall Mello-Roos bonds. Probably the greatest creditrisks occur in the district’s initial phases, when thetaxpayer base is concentrated and debt-to-assessedvalue (loan-to-value) ratios are high because landmay be owned by a few developers and largelyundeveloped (see Undeveloped Special Districts). Asdevelopment occurs, credit quality should improveto the extent that ownership becomes more diverse,and loan-to-value ratios decrease. Upon a refunding,several years after a district’s creation, creditwww.standardandpoors.com83