G
O bonds generally are regarded as the broadest
security among tax-secured debt instruments.
GO bonds effectively create a link between public
and personal debt: a homeowner unable to pay his
property taxes will forfeit his house just as surely as
if he could not pay his mortgage, and an unlimited-
tax GO pledge would enable a trustee to invoke
mandamus to force the issuer to raise the tax rate
as much as necessary to pay off the bonds. GO
bonds have other strengths as well: the property tax
tends to be a steady and predictable revenue source
for municipalities, and when a vote is required to
issue them, bondholders have some indication of
taxpayers’ willingness to pay.
There is a broad range of security pledges among
tax-secured bonds. For example, there are unlimit-
ed-and limited-tax GOs. Moral obligation bonds
fall short of a full-faith and credit obligation, offer-
ing a best efforts pledge of the issuer (generally a
state) to seek appropriations when needed. Leases
are another form of obligation, whereby timely
payment of principal and interest depends on
annual appropriations by the issuer. Municipalnote issues are divided into two major categories,
bond anticipation notes (BANs) and cash flow
notes, requiring different rating approaches. BANs
are issued for capital purposes and generally
require the issuer to access the capital markets to
sell long-term bonds to retire them. Tax and rev-
enue anticipation notes (TRANs) are short-term
obligations of an issuer, due within one to three
years of the date of issuance, and often used for
annual cash flow borrowing.
Special tax and special districts come in a wide
variety of forms and powers. Obligations are gener-
ally “tax-secured,” but special tax and special dis-
tricts’ ability to raise taxes is often restricted, and is
often reliant on future tax-receipts growth. Special
tax debt includes security types such as sales, gas,
or hotel taxes; while special districts are often
secured by special assessments, tax increment, or
other types of revenue pledges. In the following
pages, Standard & Poor’s examines in detail the
security features, rating approach, and documenta-
tion requirements for these various types of tax-
secured debt.■Introduction To Tax-Secured Debt
60 Standard & Poor’s Public Finance Criteria 2007W
hen a state or municipal issuer sells a general
obligation (GO) bond, the issuer pledges its
full faith and credit to repay the financial obliga-
tion. Unless certain tax revenue streams are specifi-
cally restricted, the GO issuer frequently pledges all
of its tax-raising powers. Typically, local govern-
ments secure the obligation with their ability to levy
an unlimited ad valorem property tax; state govern-
ments, which have different tax structures, usually
pledge unrestricted revenue streams.
GO bonds remain essential financing instruments
of tax-supported capital projects. Examining four
basic analytical areas enables Standard & Poor’s
Ratings Services to assess the capacity and willing-
ness of municipal governments to repay tax-secured
debt. Those areas are:■Economy,
■Financial performance and flexibility,
■Debt burden; and
■Management.Economic Base
The economic base is one of the most critical ele-
ments in determining an issuer’s rating. It incorpo-
rates local and national economic factors and
trends. The foundation of an entity’s fiscal health is
its economy. Financial growth prospects and
volatility of major revenue sources depend on the
performance of the local economy, as do the afford-
ability and range of services delivered by a govern-
ment. An issuer’s geography and proximity to
transportation networks, cities, and markets play aGO Debt ............................................................................................................................
Tax-Secured Debt