coverage increase during inflationary periods even
if the source of the revenue stream exhibits no
real growth.Highway User Tax Bonds
Highway user tax bonds are issued primarily by
states to fund statewide highway and road con-
struction, although local bonds are sometimes
secured by state distributions of highway user tax
revenues to local municipalities. A state constitution
may limit the spending of transportation related
fees to transportation uses, which typically tend to
be very capital intensive. The broad statewide col-
lection of revenues for most of these bonds often
affords strong credit quality.
Highway user revenues collected by states are
typically motor-fuel taxes, vehicle-registration fees,
license fees, penalties and fines, and in some cases
motor vehicle ad valorem fees. Some states add fed-
eral grant monies to the pledged revenue stream,
which may make the revenue stream vulnerable to
changes in federal programs, especially since federal
grant programs must be periodically reauthorized.
Higher debt service coverage may be needed to off-
set some of this increased vulnerability.
An examination by Standard & Poor’s of pledged
fuel taxes during periods of rapid increases in the
price of gasoline has indicated that sales of fuel are
relatively insensitive to price in the short run,
although they may vary somewhat over a long peri-
od of years by causing a gradual shift to more or
less fuel efficient vehicles as consumers trade in
vehicles. Another difference with sales tax revenue
lies in the nature of fuel taxes. Unlike sales tax
bonds, whose revenues increase with inflation, fuel
tax bonds are generally based on per gallon sales,
and do not increase with inflation.
The relative importance that a state government
places on highway construction, and its commitment
to such programs, can be significant factors in the
rating process. States that have established highway
programs by statute and the ability and willingness
of state administrations and legislatures to increase
highway user tax rates as a means to fully fund per-
ceived requirements are important considerations.
Generally, statewide revenue sources are consid-
ered more stable than revenues based on point ofsale within a small locality. Those states that distrib-
ute highway user tax revenues to localities on a per
capita basis, instead of actual local sales, can serve
to enhance a rating by providing stability. Other
state revenue distribution formulas that are more
complicated could serve to enhance or weaken a
pledge of state distributed revenues. If states have
frequently changed their distribution formulas in a
way that could reduce local revenues that are
pledged to bonds, it may become a credit concern.
Standard & Poor’s examines the revenue-distribu-
tion formula, historical changes to highway user tax
allocations, and the frequency of tax rate increases
as a factor in determining revenue stability.
Because highway user taxes are generally dedicat-
ed for the purpose of future infrastructure needs,
there may be a greater presumption that a state
would issue significant amounts of future highway
user tax debt, and the additional bonds test may in
some cases take on greater significance than for
sales tax debt where an issuer needs to use excess
sales taxes for general operations.Income Tax Bonds
Income tax bonds are primarily found in the state
of Indiana, although there are a few prominent
examples in other parts of the country. Statistics
show that the gross personal income of a munici-
pality’s populace is generally very stable over time,
most likely due to the broad based nature of the
tax, and also goes up with inflation, as do sales
taxes. Standard & Poor’s evaluates the size and
depth of a municipality’s economic base and its pre-
vious income tax fluctuations. Local income taxes
tend to have a narrow range of tax rates, while
state income taxes may be based on a more pro-
gressive tax rate schedule that could potentially
fluctuate more in a downturn, although this may be
offset by a larger and more diverse state economy.
A distribution of statewide income taxes to locali-
ties determined by population would usually be
considered a more stable source of pledged revenue
than income taxes collected purely locally.
However, both sources of income taxes may be con-
sidered very stable when the municipality covers a
broad economy.■Tax-Secured Debt74 Standard & Poor’s Public Finance Criteria 2007