million in tax increment financing bonds and $27
million in capital leases. Of the $253 million gener-
al obligation debt, the city proved that the $25 mil-
lion GO water and sewer obligation was
self-supporting, having more than 1x coverage for
more than three consecutive fiscal years, and this
portion of general obligation debt was not included
in table 1. The city’s total net direct debt was
$282.2 million.
Although not included in the debt statement, the
city has $31.5 million in water and sewer, and$15.97 million in solid waste debt outstanding. The
coverage of water and sewer debt has been more
than 3x for the last three fiscal years, and the cov-
erage of solid waste was 1.25x for the last three fis-
cal years. Therefore, Standard & Poor’s is assured
that operating revenues are not supplementing the
enterprise funds, and the enterprise fund is not in
covenant default. The city’s enterprise debt presen-
tation is shown in Table 3.■Tax-Secured Debt70 Standard & Poor’s Public Finance Criteria 2007
T
he key feature of the special tax criteria, which
centers on those bonds that are secured by a
lien against a non-property tax, is that the tax rate
is generally fixed. Pledged tax revenues will rise and
fall based only on the economic activity being
taxed. In many cases, the use of special tax bond
proceeds may also be unrelated to the economic
activity that is taxed.
The four most prevalent taxes used to support
special tax bonds are:
■Sales tax
■Highway user tax (including gas tax)
■Hotel tax, and
■Income tax
Many other variations are also included in spe-
cial tax revenues, from cigarette taxes to rental car
taxes. Pledged revenue streams will be evaluated
based on their unique merits, but all special tax
bonds share common characteristics. In general,
bond credit quality will depend on:
■The size and depth of the economic base;
■The stability, diversity, and magnitude of the
pledged special tax revenue stream;
■The level of debt service coverage—both coverage
of annual debt service and coverage of future
maximum annual debt service; and
■Bond covenants, such as funding a debt service
reserve; restrictions on additional parity debt
issuance; or whether excess revenues after pay-
ment of debt service flow back to the bond issuer
or are retained under a closed flow of funds
exclusively for early debt retirement.
Standard & Poor’s is refining its special tax crite-
ria as it relates to sales tax, income tax, and gas tax
revenue bonds to place greater emphasis on funda-
mental economic factors and less on legal featuresregarding additional debt issuance and reserve funds
when, from a practical perspective, prospects are
good that debt service coverage will remain high
regardless of the legal provisions in bond covenants.
Enhanced recognition of fundamental economic
activity for sales tax revenue bonds is supported by
retail sales data collected over past recessions,
which has generally reaffirmed the stability of sales
tax revenues during adverse economic cycles, par-
ticularly for large economic bases. As such, higher
rating levels can be sustained at lower coverage lev-
els for certain municipalities.
Likewise, the stability of fuel sales during recent
and previous price spikes support the relative
inelasticity of fuel demand even during periods of
high fuel prices. Highway user tax ratings are also
buoyed by the fact that a large portion of pledged
revenues are typically derived from stable trans-
portation related sources, such as motor vehicle
registration fees and motor vehicle license fees, and
usually cover a large statewide population base.
In particular, legal tests for additional sales tax
parity debt will be weighed less heavily where
municipalities rely on excess sales tax revenues to
fund general fund operations. In such cases, there is
a disincentive to issue significant amounts of addi-
tional sales tax borrowing, regardless of legal pro-
tections. For these issuers, heavy sales tax bonding
could have the effect of crowding out funding for
essential ongoing municipal operations.
Analytically, this unlikelihood allows us to place
less emphasis on the additional bonds test.
The additional bonds test is also less significant
for municipal issuers with a long history of debt
restraint and little potential future financing needs.
In contrast, additional bonds tests may retain their
traditional importance when an authorized sales tax