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

Tax-Secured Debtthe flexibility to raise tax rates to cover a taxpayerforeclosure loss. This is a key strength of specialdistrict and Mello-Roos debt over special assessmentbonds. Special assessment bonds usually havejust 1x coverage of annual debt service by yearlyspecial assessments and lack any ability to raise taxrates. In such cases, the bond may be only as strongas the ability to receive ultimate repayment fromthe weakest property taxed.Exceptions exist. Sometimes debt service reserveearnings can cover foreclosure losses of the top taxpayersif the top taxpayers are small, comparedwith the total tax base. Another exception occurs inFlorida, where the state allows the special assessmenttax rate to be raised in some cases, up to alimited amount. This feature makes these Floridaspecial assessment bonds resemble California’sMello-Roos bonds—a positive feature.Land appraisalsAppraisals of vacant land by private consultants maybe problematic. The difficulty is that they are basedonly on a value at a point in time, and built on a setof assumptions that developers will follow the expecteduse of the land. If plans do not materialize as anticipated,or new landowners change their expected useof the land, actual values for vacant land could changeappreciably. For this reason, private appraisals of rawland can often be considered unreliable. Standard &Poor’s looks at the reasonableness of appraisalassumptions and sometimes may discount appraisalconclusions. There are wide distinctions between differenttypes of development districts, and investorsmore than ever need to distinguish the strong creditsfrom the weak. In particular, investors may want todetermine if legal features could preclude a bond fromever moving into the investment-grade categories. Theaccompanying table, while it does not cover everycase, should provide helpful guidelines. Some positivefactors, such as debt service coverage, can offset othernegative factors, such as taxpayer concentration.District SizeStandard & Poor’s does not have a minimum sizelimit for an investment-grade rated special district;rather size affects a special district in that a smallsize may increase taxpayer concentration. A largedistrict concentrated in a few taxpayers may not beas creditworthy as a small district with little taxbase concentration in the top taxpayer. A specialdistrict consisting only of a 500-unit single-familyhousing development, for example, may achieve aninvestment-grade category rating, depending on theparticulars of local real estate conditions. ■State Credit Enhancement ProgramsState Enhancement ProgramsState credit enhancement programs generally fallinto four categories or program structures.Those categories are:■ Intercept/Withholding■ Standing or Annual Appropriation■ State Guarantee■ State Permanent FundThe type of program and the contractual relationshipbetween the state and the program participantdictates whether a program rating or outlookwill change due to a related state rating action. Notall programs fit neatly into the four categories mentionedabove. In these cases, whenever there is astate rating change, a program review will also takeplace to determine if there is a need to adjust theprogram rating or outlook.In general, credit enhancement programs aredesigned to give bondholders additional security forparticular general obligation and lease bonds.While the criteria differ depending on the program’sstructure and the specifics of a state’s statutes andconstitutional provisions, all programs typicallyinclude the following features:■ An independent paying agent, which acts asthe state’s notification agent in the event of apotential default;■ Sufficient coverage and liquidity of a revenuestream to be used for a debt service deficiencythat is independent of the issuer; and■ State oversight of program participants to ensurea well-managed program.Intercept/Withholding ProgramsIntercept or withholding programs operate on thestrength and availability of state aid, which can bediverted to a paying agent in the event a local governmentcannot make its full and timely debt servicepayment. Standard & Poor’s Ratings Servicesrates intercept or withholding programs that meet86 Standard & Poor’s Public Finance Criteria 2007