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Evaluations of Local Government Bond Issuance Market Presentation to the Florida Government Finance Officers Association May 2012 John Incorvaia, SVP.

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Presentation on theme: "Evaluations of Local Government Bond Issuance Market Presentation to the Florida Government Finance Officers Association May 2012 John Incorvaia, SVP."— Presentation transcript:

1 Evaluations of Local Government Bond Issuance Market Presentation to the Florida Government Finance Officers Association May 2012 John Incorvaia, SVP

2 2 Outline 1.Introduction: National Trends 2.Florida Economy 3.Florida Debt Securities 4.Florida Sector Issues 5.What We’re Watching 6.Special Tax Methodology 7.Looking Ahead

3 3 Introduction: National Trends

4 4 Themes in U.S. Municipal Finance »Significant changes in market dynamics since 2008: –Bond insurers mostly gone –Build America Bonds came and went –Borrowing for capital spending is much reduced as public scrutiny rises –Still strong demand for tax-exempt paper, but retail investors more skittish –Absolute rates remain very low, in lock step with Treasuries –Despite changes, tax exempt market functions very smoothly »Credit pressures persist, with negative outlooks on most sectors »Downgrades have outnumbered upgrades for 12 consecutive quarters »Credit fundamentals continue to support high ratings in many sectors »Municipal default rates remain low, in line with our expectations »Defaults expected to rise, but still remain few in number

5 5 Unprecedented Financial Stress Across Municipal Sectors » Municipal market is broad and has diversity of credit risks » State and local governments continue to be stressed through the weak recovery » End of federal stimulus made 2011 an even more stressful year for state and local governments » Moody’s has had negative outlooks on state and local governments for 4 years » Downgrades have outpaced upgrades for 13 consecutive quarters Source: Moody’s Investors Service

6 6 The Revenue Downturn Was Severe and Recovery Remains Uncertain Year-Over-Year % Change Total State Tax Revenue Year-Over-Year % Change Local Government Tax Revenue Source: Rockefeller Institute of Government, Bureau of the Census »Both state and local tax collections were hard hit during the downturn »Some positive signs, but governments are not out of the woods yet »State government taxes are more economically sensitive and face challenging environment »Local governments entered the downturn later, but property taxes will continue to be weak amid listless housing market 5

7 7 Total Tax Revenues Recovered, but Still Lag Prior Peak National Totals of State and Local Tax Revenue, by Type of Tax—Percentage Change on a Year Ago

8 8 Spending and Debt Have Outpaced Tax Revenue Growth Year-Over-Year Percentage Change in Debt and General Fund Spending Source: U.S. Census Bureau

9 9 Medicaid Costs Continue to Strain State Budgets Actual and Projected Medicaid Spending, 1970-2013 ($ billion) Source: Congressional Budget Office; Federal Funds Information for States; National Association of State Budget Officers; Centers for Medicare and Medicaid

10 10 Local Governments Strained by Weak Property Tax Year-Over-Year Quarterly Percentage Change in Local Tax Revenue Source: U.S. Census Bureau Change data

11 11 Local Government Revenue Sources Source: U.S. Census Bureau

12 12 Weak National Economic Recovery is Primary Drag on Local Government Credit Quality Source: U.S. Bureau of Labor Statistics

13 13 Defaults Most Significant In 1800s Depressions 1840s: nine of 26 states defaulted; four states repudiated debt (5%+ total par) Led to new state constitutions or debt limitation amendments 1870s, 1890s: city, county, special district defaults; no reliable recovery data 1930s: 0.5% loss, quick recovery for larger issuers Defaults likely triggered by bank failures, liquidity shocks Period State, Local Gov't Debt* (millions) Percent Par Defaulted 1837-43$24551% 1873-79$1,00025% 1893-99$1,30010% 1929-37$18,50016% (0.5% loss) *average par outstanding in period Municipal defaults significant in four previous depressions

14 14 Recent History Shows Few Defaults Post WW II period was benign 1970-2011 »5 general government defaults, 2 lease defaults among Moody’s rated issuers »Mostly project and enterprise credits: hospitals, housing projects, real estate-related »11 rated defaults in 2010 and 2011 Great Depression often regarded as worse-case stress scenario for municipals »Government is now much larger and more complex »Pensions, municipal unions, entitlements, interconnected markets did not exist in scale in 1930s »Federal government significantly less leveraged »Neither Depression nor the post WWII experience may be relevant to current situation

15 15 Moody’s 2012 Default Study Signaled Potential Shifts »Spotlight on general government default risk »Non-debt obligations – pensions, entitlements, salaries – have grown faster than the resources to pay them »Tax and revenue shortfalls and rising pension and retiree health care obligations are creating new stresses for many local governments »Deep recession or US government debt crisis would likely result in substantially higher default rates for municipal bonds »The effects of the financial crisis and recession are not over: most states, cities and non-profit organizations have adjusted to the new economic reality, but some have not »Municipal defaults may exceed the historical average, although still likely to remain rare and isolated events

16 16 Recent U.S. Municipal Defaults Issuers (#)2008200920102011 Rated by Moody’s5274 Unrated and Rated by Moody’s*162259169107 Volume ($millions)2008200920102011 Rated by Moody’s$ 3,678$ 287$ 609$ 259 Unrated and Rated by Moody’s*$ 8,150$ 8,952$ 5,031$ 24,616 Defaults are Higher Among Unrated Municipal Bonds *Unrated data includes tobacco settlement bonds Source: Moody‘s, Income Securities Advisor, Inc.

17 17 Municipal Bankruptcy: Only Secured Bondholders Protected »Municipal bankruptcies are rare events »Municipalities in 28 states can file, but many hurdles »Bankruptcy and default are not synonymous –Bankruptcy filing does not always result in a debt default, and a payment default can occur outside of and without leading to bankruptcy »“Automatic stay” may result in a payment default –Special revenue bondholders are better protected from stay than GO bondholders »Unsecured GO debt is more likely to suffer losses in a restructuring than secured debt and debt secured by special revenues »Predicting levels of recovery for unsecured debt in a municipal bankruptcy is still uncertain due to the limited number of actual examples

18 18 Are New Patterns Emerging? »Declaration of fiscal urgency/emergency –Many cities have invoked fiscal urgency/emergency to tackle spending cuts –Not guaranteed effective »Bondholders may not be as well protected as once assumed –Vallejo CA (unrated) defaulted on bonds, reconfigured labor contracts, but left pensions untouched –Harrisburg, PA bankruptcy presents risks for GO bondholders –Victor Valley, CA defaulted on tax increment bonds, following massive loss of housing values –Stockton, CA pursues AB 506 mediation process, voted to suspend debt payments for 2012 and taps bond insurance for debt service –Central Falls, RI continues to pay debt while renegotiating pensions in bankruptcy court

19 19 Pension Analysis Has Long Been Part of G.O. Rating Approach »Moody’s has long considered pension liabilities and required annual contributions in our rating analysis … but recent large growth in unfunded liabilities increases their importance »What has caused the recent growth of unfunded liabilities? »Asset losses due to real estate and stock market weakness »Granting of benefit increases at the peak of asset values »Downsizing via early retirement incentives shifted costs from payroll to retirement systems »Demographics – retirement of the “baby boomers” »Moody’s ratings address repayment of government issued debt » We are not rating the pension fund or it’s ability to pay retirees »Pension liabilities and associated operating burden are one factor in our G.O. rating analysis

20 20 Pensions Continue to Pressure Public Sector »Aggregate unfunded liabilities reported by a sample of 126 state and local plans have doubled since 2005 »Combined state and local debt + pension liabilities are approx 23% of GDP

21 21 Pension Liabilities are Understated.... o Public pensions use 7%-8% discount rates / investment return assumptions that can understate liabilities o Increased benefits, poor market returns and low annual contributions contribute to weak funding positions o GASB has proposed two major changes for reporting purposes: - Assets would be valued at market rather than smoothed - Liabilities would be discounted by a blended rate o Impact: - Increases Liability - Reduced funded ratio - Increased annual required contributions

22 22 Florida Economy

23 23 Florida Economy According to Moody’s Florida will recover faster than the region or the nation in the next couple years as its in-migration engine re-engages and procyclical industries rebound. In the long term, robust population growth and strong economic fundamentals will enable FL to outperform the national economy. March 2012 According to State Office of Economic and Demographic Research Florida growth rates are slowly returning to more typical levels. But, drags are more persistent than past events, and it will take several years to climb completely out of the hole left by the recession. April 2012

24 24 Recovery expected to be protracted in Florida It will be a slow recovery,...mostly due in part to the “large wealth that was lost and the poor labor market, both of which are applying downward forces on consumer spending.” Home Equity is the one area that still hasn’t recovered to pre-recession levels, or even started improving yet, and it won’t recover like the financial markets. That is the main thing that will hold consumers back. UCF Economist Sean Snaith (Feb. 2012) Nearly half the mortgages in Florida are underwater – owe more than home is worth

25 25 Data from RealtyTrac Foreclosure Filings Remain Daunting “Optimists point to declining home inventories in relation to sales, but they are looking at an illusion. Those supposed inventories do not include about 5m housing units with delinquent mortgages or those in foreclosure, which will soon be added to the pile. Nor do they include approximately 3m housing units that stand vacant – foreclosed upon but not yet listed for sale, or vacant homes that owners have pulled off the market because they can’t get a decent price for them.” Financial Times Foreclosure Process (once begun; Q4: 2011) 806 Days - 2.2 yrs - in Florida (3rd Longest Period in Nation) At the beginning of 2007, 169 days. February 2012 2 nd Highest # of Filings 5 th Highest Foreclosure Rate Calendar Year 2011 2 nd Highest # of Filings 6 th Highest Foreclosure Rate

26 26 High Unemployment Rates Across the State 17 of 67 counties with double-digit unemployment rates

27 27 Historical state unemployment rate State Unemployment Rate is at a Historic High Relative to U.S.

28 28 Florida’s Job Market in Deep Hole Although unemployment down from peak levels, the job market will take a long time to recover – about 766,900 jobs have been lost since the most recent peak. Rehiring, while necessary, will not be enough. Florida’s prime working-age population (aged 25-54) is forecast to add over 2,600 people per month, so the hole is deeper than it looks. It would take the creation of about 1 million jobs for the same percentage of the total population to be working as was the case before the recession. Source: FL Office of Economic and Demographic Research

29 29 Fewer Jobs Means Less In-Migration Besides Tourism and Retirement, people come to Florida primarily for Jobs. Thus in- migration is an important factor in the state’s growth. Nearly one million jobs lost in the state between 2007 and 2010. Net in-migration as a % of Florida’s Population Growth: 92.0% - 1970 to 1980 86.8% - 1980 to 1990 85.3% - 1990 to 2000 81.3%* - 2000 to 2010 * Estimate Growth has slowed to the lowest level in more than 60 years.

30 30 Less In-Migration Means Slower Economic Growth Population growth is the state’s primary engine of economic growth, fueling both employment and income growth. And in-migration is the driver of population growth. Florida’s long-term growth rate between 1970 and 1995 was over 3%. But going forward expected to average 1.1% between 2025 and 2030 with 86% of the growth coming from net migration. Florida is on track to break the 20 million mark during 2016, becoming the third most populous state sometime before then – surpassing New York. Source: FL Office of Economic and Demographic Research

31 31 Population is Aging In 2000, Florida’s working age population (ages 25-54) represented 41.5 percent of the total population. With the aging Baby Boom generation, this population now represents 39.7 percent of Florida’s total population and is expected to represent 36.0 percent by 2030. Population aged 65 and over is forecast to represent 24.1 percent in 2030. Source: FL Office of Economic and Demographic Research

32 32 Florida Debt/Securities

33 33 Florida FLORIDA – The Rules are different here.

34 34 Debt by Rated Security

35 35 Types of Debt Securities General Obligation: Unlimited Tax and Limited Ad Valorem Non-Ad Valorem: Trade-off of specific revenue pledge for “pool” of revenues Tax Increment COPs/Lease Rental – Primarily school districts (under Master Lease concept) Enterprise: Airports; Ports; Toll Roads; Landfills; Resource Recovery; Electric; Gas; Water and Sewer; Storm Water; Parking, etc. Special Taxes: Sales tax (dedicated and state-shared); utilities taxes; CST; Franchise Fees; Documentary Stamp taxes; Occupational (business) license taxes; Tourist Development Taxes; Gas taxes; Professional Sports Franchise taxes; Motor Vehicle license taxes; Car Rental taxes; Lottery, Liquor and Cigarette taxes; Guaranteed (and Second Guaranteed) entitlement revenue; 50% of prior year SRS; etc. While Florida issues nearly all the above classes of debt, Special tax and enterprise debt represent the most significant proportion of debt – anomaly to rest of the country

36 36 Pressures on Certain Classes of Florida Debt General Obligation (ULT & LT), Tax Increment and COPs– Declines in taxable values associated with tax base declines related to housing market correction and property tax reform limitations Non-Ad Valorem – All of the above, plus rising fixed costs (operating and debt related) Special Taxes – CST – Elimination of land lines, state tweaking of taxing bundled services Sales Taxes – Declines in consumer spending associated with weak economy, employment loses, and rising gas prices State withholding Medicaid current payments from Counties Sales Tax Distributions Gas Taxes – Uneven trend, dependent on pricing and discretionary travel State Revenue Sharing - Declining Documentary Stamp Taxes – Weak but recovering real estate transfers; state taking excess amounts over debt service from WMD’s for own needs Bright spot remains Tourist taxes which have been strong for nearly two years now.


38 38 Documentary Stamp Tax Source: FL Revenue Estimating Conference

39 39 Sales Taxes Have Remained Relatively Stable

40 40 Medicaid Costs Continue to Strain State Budgets Actual and Projected Medicaid Spending, 1970-2013 ($ billion) Source: Congressional Budget Office; Federal Funds Information for States; National Association of State Budget Officers; Centers for Medicare and Medicaid

41 41 Coffee Break

42 42 Florida Sector Issues

43 43 Cities and Counties o Rising health care, pension and OPEB costs pressuring operations o Structural balance and improved liquidity not yet achieved o Stabilizing tax bases and home prices with reduction in housing inventory o Political decisions/platforms appear set to dominate FY 2013 budgets o Impact of HB 5301 (Medicaid payments) on counties sales tax bonds and capacity o Management’s ability to influence/expand the taxable base will be key – can’t cut your way to fiscal health, must have growth as well

44 44 School Districts o Reductions both in capital millage and property taxes have drastically reduced capital spending and fund available for regular maintenance. o Majority of capital millage used to pay significant amount of lease obligations outstanding. o “75% Rule” no longer applicable to COPs issued prior to June 30, 2009. o Uneven annual state funding, now potentially impacted by: o Adverse ruling on employee pension contributions (3%) to state plan o November referendum on capping state spending o Growing Medicaid expense and Medicare cuts Surpluses generated in FY 2011, due largely to Jobs Bill and other one-time funds, have expected givebacks in FY 2012. Lack of recent employee raises and position cutbacks could impact Class Size mandates as enrollment starts increasing – potential penalties could be sizable.

45 45 Water and Sewer Utilities Many fared OK basically due to timely rate increases and/or surcharges automatically implemented with drought declarations Anti-tax/fee issuers have seen narrowing coverage, erosion of liquidity and increases in accounts payable State weakening of Water Management Districts (capping property taxes and reducing reserves) affects amount of available grants and larger planned projects Alternate water supplies are needed as demand will again increase as the economy improves especially in central and southern Florida; State encouraging regional solutions Regulatory requirements related to TMDL and other Nutrient Removal requirements could be potentially costly Treatment and disposal of Biosolids – regional solutions? Aging infrastructure needs to be addressed – leaks, broken pipes, etc. Political appetite for rate increases? WATER WILL COST MORE

46 46 Signs of Credit Stress Continual declines in major revenue sources Declining tax base and state sales tax receipts Increasing property tax delinquencies Continued funding cuts, uncertainties, irregularities Lack of spending discipline (non structurally-balanced budgets) and declining financial flexibility Continued decreased/deferred capital spending Declining flexibility – reserves and liquidity Debt restructuring which increases risk profile Payment deferrals Self-insurance deficits

47 47 What We’re Watching

48 48 What are we watching? What could change? »States: Revenues have returned to pre-recession levels, but spending pressures remain. »Most states continue to manage by adjusting revenues and spending. –Risks: » Entitlement spending for pension, OPEBs, Medicaid continues to grow (although Medicaid spending as % of budget has been kept stable) » Economic recovery is fragile » Impact of federal deficit reduction plans » Material shift in market confidence »U.S. Local Governments: Small, weaker issuers will be most stressed, some distressed –Risks: » Further state aid cuts » Some have exposure to enterprise risk with outsized debt levels » Exposure to financial institutions, liquidity and credit facilities expiring » Breakdown in political process that results in failure to pay debt, bankruptcy filing » Impact of federal debt ceiling and deficit reduction plans 48

49 49 Things We’re Watching in Florida o Rebuilding or continued erosion of equity and liquidity o Debt restructuring and replacing expiring facilities, bank loans and private placements o Impacts of continual cuts (furlough days, layoffs, etc.) on service delivery and flexibility o Rising health care costs – who absorbs these increases? Plan changes. o Pensions – Defined benefit vs. defined contribution; funding of ARC; outdated assumptions; increase funding requirements with updated assumptions and recouping of market losses o How will November 2012 ballot questions on property tax reform and TABOR-like state spending caps affect local issuers?

50 50 Special Tax Methodology

51 51 Special Tax Bonds – Sector Overview  Tax-exempt bonds secured by a variety of dedicated tax revenues, excluding those secured by property taxes, with a legal structure securitizing the tax revenue stream  Debt structures are typically fixed rate fully amortizing bonds, but a handful have used variable rate debt and swaps  General Characteristics:  More volatile than property tax revenues, though historic performance shows rare for revenues to decline by more than 10% in any one year  Passive in nature – once they are set only in rare cases can the rate be raised  Demand based revenues – related to consumer behavior mostly  Legal Structure – defined revenue pledge (secured bonds), flow of funds administered by trustee, debt service reserve funds, additional bonds test, and usual “events of default” and “remedies”  Bankruptcy – Special taxes that are dedicated for a specific project or system may not be subject to the automatic stay during bankruptcy, regardless of the pledge type (i.e. property vs. sales tax) 51

52 52 Special Tax Bonds Defined – Rated Universe Dedicated Special Taxes (i.e. Special Revenues in bankruptcy code)  Rated primarily on the tax pledged, the legal structure, and debt service coverage. Pledged revenues are usually dedicated for capital, passive in nature, and likely to be highly leveraged given the dedicated nature. The non- dedicated special taxes included in this methodology, typically are not a major operating revenue source. Primary Operating Special Tax  Secured by a special tax that is a significant revenue source for the issuer, usually a sales, income, or utility tax. Thus, they have high coverage ratios yielding material excess revenues to support operations after debt service is paid in an open loop flow of funds. The analytical approach for these bonds was historically similar to that used for General Obligation Bonds and the rating was notched down or on par with the issuer’s General Obligation rating Excludes ALL Property Tax Pledges and GO Related Bonds  NO Florida Fixed Millage Property Tax bonds & CA School property tax bonds Special Tax Ratings have GO ceiling on their rating unless legal separation exists 52

53 53 Special Tax Bonds – Rated Universe  Wide variety of pledged special taxes (580 ratings)  Local Governments: 411 rated issuer/security/lien combinations  Sales Tax most common (63% of portfolio)  Gas, Hotel, Utility, Income, Car Rental, Meals, License and Fees, Fixed State Aid  States: 169 rated issuer/security/lien combinations  Transit sales tax, Highway gas tax, and Others (Lottery, Rum, Document Stamp, Deed, Sales, Cigarettes, Income)  Ratings range from Caa1 to Aaa and sector median is A1 with 94% rated A3 and above  Local Government ratings are more prevalent in states with property tax limits or voter authorized taxes and pledges (FL, TX, LA, OH, NM, IA, CO, AL)  No history of default among rated special tax bonds  Proposed Scorecard derived ratings are typically within one notch of current actual ratings 53

54 54 Special Tax Bonds Portfolio – Local Government Ratings 54  411 rated unique issuer/security/lien combinations of U.S. Local Government Special Tax credits (We are finalizing an estimate of total rated debt outstanding)  Ratings range from Caa1 to Aaa and the median rating is A1 and 72% are A2, A1, or Aa3  94% of ratings are A3 or higher and 98% are Investment Grade  Global Scale Recalibration of special tax credits resulted in a one notch rating increase across the portfolio, except for Baa2 and below ratings, which migrated in place  Many special tax ratings migrated as “notched” ratings off the GO rating, consistent with a GO ceiling limitation for this methodology unless legally enhanced Rating Distribution 411 Special Tax Local Government Ratings

55 55 Special Tax Bonds Portfolio – Local Government Ratings by Location 55 50% of ratings are in FL (28%), TX (12%), and NM (10%) due to the historical approach to debt financing in those states 80% of ratings are located in the top 10 states listed below, with ratings in 38 states and Washington DC

56 56 Special Tax Bonds Portfolio - Local Government Ratings by Security 56 Primarily Sales, Gas, Hotel, and Utility Tax bonds (92% combined) The Hotel bonds listed below also include combined tax pledges like “Hotel/Car Rental” or “Hotel/Parking” or “Hotel/Meals/Beverage” “State Aid” are the State Revenue Sharing Bonds in FL

57 57 Special Tax Bonds – Scorecard and Methodology Main Credit Factors 57 Rating Grid: Factor 1: Taxing Base and Pledge (30%) » Metrics used to evaluate strength of economic base generating taxes and the quality of the pledge Factor 2: Debt and Legal Structure (30%) » Metrics used to evaluate additional bonds test and debt service reserve fund Factor 3: Financial Metrics (40%) » Metrics used to evaluate MADs debt service coverage, revenue trend and revenue volatility Notching Factors (up or down in increments of ½ notches): Uplift » EX: legal enhancements, active management, institutional presence Down Drag » EX: potential state impairment of pledged revenue, complex debt structure, lack of monthly segregation, prospective additional bonds test, appropriation risk, weak debt service coverage, reserve draws, etc.

58 58 Scorecard 58 FactorsSub-Factors Very Strong (1)Strong (2)Average (3)Weak (4)Very Weak (5) 1. TAXABLE BASE AND PLEDGE - 30% Economic Strength 15% Very strong and very well diversified economic base with solid growth OR PCI/MFI is 200% or greater of national median for primarily residential bases Strong and well diversified economic base with solid growth OR PCI/MFI is 125% - 200% of national median for primarily residential bases Developed and reasonably diversified economic base with average growth OR PCI/MFI is 75% - 125% of national median for primarily residential bases Small to evolving economy with modest diversification and some concentration with slow to declining growth OR PCI/MFI is 50% to 75% of national median for primarily residential bases Deteriorating economic base with very little diversification or signficant concentration with declining growth OR PCI/MFI is 50% or below of national median for primarily residential bases Nature of the Special Tax Pledge 15% Very Broad (e.g. Sales, Utility, Income, and Gas Taxes, Motor Vehicle Registration Fees; Fixed Payments from the State depending on State's Rating) Broad (e.g. Sales, Utility, Income, and Gas Taxes, Motor Vehicle Registration Fees; Fixed Payments from the State depending on State's Rating) Average (e.g. Sales, Utility, Income, and Gas Taxes, Motor Vehicle Registration Fees) Narrow (e.g. Hotel, Car Rental, Meals, Lottery, Liquor, and Cigarette Taxes) Very Narrow (e.g. Document Stamp, Hotel, Car Rental, Meals, Lottery, Liquor, and Cigarette Taxes) FactorsSub-Factors Very Strong (1)Strong (2)Average (3)Weak (4)Very Weak (5) 2. DEBT AND LEGAL STRUCTURE - 30% Additional Bonds Test (ABT) 20% 3.0x and above OR a closed lien 1.76x to 2.99x1.26x to 1.75x1.0x to 1.25xNO LIMIT Debt Service Reserve Fund Requirement 10% DSRF funded at level greater than 1-year of MADS DSRF funded at 1-year of MADS DSRF funded at traditional 3-prong test DSRF funded at level less than 3-prong test or a springing DSRF NO DSRF (or DSRF funded with low rated to below investment grade surety provider) FactorsSub-Factors Very Strong (1)Strong (2)Average (3)Weak (4)Very Weak (5) 3.FINANCIAL METRICS - 40% MADS Coverage 20%Over 4.5xOver 2.51x to 4.5xOver 1.51x to 2.5xOver 1.1x to 1.5xLess than 1.1x Revenue Trend 10% Significantly improving with one to no historic decline Generally improving with few historic declines Stable with some historic declines DecliningRapidly Declining Revenue Volatility 10%Has never declined Negative fluctuations generally within 0% to 5% Negative fluctuations generally within 5% to 10% Negative fluctuations generally within 10% to 15% Negative fluctuations greater than 15%

59 59 Scorecard – Notching Factors 59 Uplift 1) Structural Enhancement - (1) Revenue diverted to trustee/external entity/lockbox and used to pay debt service with first in dollars before being distributed; (2) additional dedicated reserve funds with stable balances 2) Active management: (1) ability to raise pledged revenues; (2) demonstrated willingness/likelihood of parent to utilize non- pledged revenues to pay bonds 3) Additional Tax Base Strength: Tourist or regional service/shopping hub or other stable institutional presence (i.e. military/university) 4) Other - Specify the reason: Down drag 1) Structural Complexities or Weaknesses: (1) Complex debt structure with notable swap and VRDO exposure; (2) Appropriation Risk; (3) Lack of Monthly Segregation; (4) State collects revenue and has the ability to lower the distribution to the underlying municipality below their debt service requirement. 2) Debt Service Coverage below key thresholds - Additional Bonds Test or 1.0x coverage 3) Additional leverage 4) Other - Specify the reason: (i.e. (1) Tax expires/sunsets prior to bond maturity; (2) major concentration; (3) using other reserves to pay debt service (not DSRF); (4) weakening competitive position; (5) Subordinate Lien; (6) GARVEE reauthorization; (7) Mass Transit Operating risk

60 60 Looking Ahead

61 61 Looking Ahead Finally seeing employment and tax base declines starting to stabilize as well as housing prices, although high sustained foreclosures with significant inventory to absorb, as well as Global uncertainties pose risk elements to recovery. Protracted and modest recovery expected. Operational stress will continue for the intermediate term – low lying fruit has been picked; three years of operational and department cuts have been made; capital spending greatly reduced; last fall’s political promises of no new taxes or fees come to roost in 2013; anti-tax sentiment has not diminished. Reserves tending toward minimum required levels and liquidity (and flexibility) has declined. Will focus be on stabilizing budgets or political expediencies? Continuing voter anti-tax sentiment and state “business” or budget actions continue to muddy the waters. At some point in near future – return to voters for separate voted bond securities?

62 62 John Incorvaia Senior Vice-President Moody’s Investors Service 7 WTC at 250 Greenwich Street New York, NY 10007 Email: john.incorvaia@moody’s.comjohn.incorvaia@moody’ Phone: 212-553-0501 Fax: 212-553-1390

63 63 © 2011 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (“MIS”) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Except as expressly stated otherwise, MOODY’S has not verified, audited or validated independently any information received in the rating process, nor will it do so. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” Any publication into Australia of this document is by MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001.

64 64 Schedule at a Glance Monday, May 6, 2012 3:30 p.m. - 5:10 p.m. Accounting Complexities for Local Governments – Andrew Laflin 3:30 p.m. - 5:10 p.m. Budget Efficiency – Thinking Long-Term, Sustainable Planning, Being a Leader – Shayne Kavanagh 3:30 p.m. - 5:10 p.m. Are You Prepared? – Christopher Ghosio and Daniel O’Keefe 3:30 p.m. - 5:10 p.m. Stiffed On the Billing! – Harve Platig

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