PubFinCriteria_2006_part1_final1.qxp

schools, and in turn placed significant pressure on

state budgets. Conversely shifting responsibilities to

local government units can ease a state’s financial

burden, but will pressure credit ratings of local gov-

ernments unless accompanied by new local revenues

or mandate relief.

Special GO Situations

In addition to traditional general obligation ratings,

Standard & Poor’s rates a number of GO securities

that carry many of the characteristics of general obli-

gation analysis but may also have their own nuances.

For example, in certain parts of the country, library,

park, fire, forest preserve, municipal utility, and

water and sewer districts issue bonds backed by

some form of general obligation taxing powers.

Analysis for this type of debt follows the same basic

principals of GO tax backed analysis including the

four factors (economy, debt, management and

finances) but also factors in the uniqueness of the

individual districts. These may include the limited

service functions, and in some cases the limited rev-

enue raising capabilities or specific millage limita-

tions. Since service functions are often limited (such

as providing library services or fire services), budgets

are often smaller in size and capital intensive. Often

times the fixed portion of the budget dedicated to

debt service is a much larger component than would

be typical for a larger, full service operating budget

of municipality.

Many of these types of districts are often coter-

minous with the municipality or county they lie

within. In some cases they lie within more than one

municipal boundary. In those cases where they are

coterminous and share the same economic base, it

doesn’t necessarily mean the rating will be the

same. While the economic factors may be the same,

management practices, financial position and debt

profiles may be very different and could result in

higher or lower ratings. In particular, financial posi-

tion will be an important determinant in assigning

the rating.

Certain districts also carry, in addition to their

full faith pledge, the ability to levy rates and charges

for specific services provided. In the case where user

charges are also used, Standard & Poor’s evaluates

the GO factors while also looking at the revenue

stream of the user charge and factors that into the

rating. In some instances, the history of using user

charges that translate into strong financial position

has contributed to higher ratings.■

Tax-Secured Debt

66 Standard & Poor’s Public Finance Criteria 2007

D

ebt analysis is a critical component of the rat-

ing process at Standard & Poor’s Ratings

Services. Debt analysis focuses on the nature of the

pledge offered on various securities, the debt repay-

ment structure, current and forecasted debt service

burden and the magnitude of an issuer’s capital

needs. Debt position is measured in several ways,

but analytic construction of the basic debt state-

ment is critical to the evaluation. Differences often

arise between the analytic approach to indebtedness

and the statutory approach represented by issuers.

There has also been much debate about the inclu-

sion of pension liabilities and other post employment

liabilities on an issuer’s debt statement. In terms of

debt statement analysis, pensions and OPEB will not

be included unless the municipality has issued debt

to fund its liability. However, Standard & Poor’s will

analyze various measures of an entity’s pension sys-

tem and OPEB liability and in order to perform com-

parable analysis will show debt ratios both with and

without debt incurred for pensions and OPEB.

Debt Statement Analysis ....................................................................................................

When Standard & Poor’s examines the debt burden

of a municipality it starts by looking at all direct

debt, and any other analytic obligations of the enti-

ty. Debt types included in gross direct debt include:

■General obligation bonds;

■Any short term debt or commercial paper;

■Other tax secured obligations such as sales, gas

or excise tax obligations;

■Authority, certificate or other capital lease obliga-

tions that are secured by lease rental or contract

payments subject to appropriation;

■Moral obligation secured debt;

■Tax increment and special assessment secured

obligations;

■Pension obligation bonds; and

■Any enterprise or revenue—based debt.

Operating leases, tobacco and GARVEE bonds

(supported by federal revenues) will not be included

in the debt statement analysis.

Debt Statement Analysis