1. PHOENIX PUBLIC FINANCE William C. Davis Managing Director (602) 808-5428 William.c.davis@pjc.com Peter J. Phillippi Managing Director (602) 808-5427 Peter.j.phillippi@pjc.com James B. Sult, Jr., VP (602) 808-5425 James.b.sult@pjc.com Greg G. Swartz, VP (602) 808-5426 Greg.g.swartz@pjc.com Logan K. McKenzie, Associate (602) 808-5422 Logan.k.mckenzie@pjc.com Helen Cregger, VP (303) 820-5856 helen.x.cregger@pjc.com PUBLIC FINANCE BOND RATING BASICS May 11, 2007

2. 1 OVERVIEW  Understanding Bond Ratings  Understanding the Rating Process  What to Expect from your Banker  A Look at Arizona Ratings  A Surprise

3. 2 BOND RATINGS  A relative measure of risk to bondholders that reflects an issuer’s willingness and ability to repay debt on time and in full.  Measure of financial strength that takes into account all of the resources of an issuer within given security provisions.  A measure of both what is known and unknown – a measure of uncertainty.  Ratings are comparative and relative.  Ratings are highly definitional – Anything Baa and above signifies essentially no probability of default; not just Aaa.

4. 3 BOND RATINGS  While sound financial management is always a positive, rating criteria don’t necessarily correspond with your management priorities or the concerns of your community.  Ratings are certainly not intended to encapsulate all of the qualities of your community.  Ratings are larger than any particular individual, administration or legislative body.

5. 4 BOND RATINGS Public Finance Ratings Ratings:Long TermQuality Investment Grade Aaa/AAAHighest Aa1/Aa2/Aa3 AA+/AA/AA- High A1/A2/A3 A+/A/A- Upper Medium Baa1/Baa2/Baa3 BBB+/BBB/BBB- Medium Below Investment Grade Ba1/Ba2/Ba3/ BB+/BB/BB- B1/B2/B3 B+/B/B- Speculative Elements Caa1/Caa2/Caa3 CCC+/CCC/CCC- Danger of/in Default

6. 5 GENERAL OBLIGATION BONDS  Full faith and credit of issuer with a pledge of either unlimited or limited property tax revenues  Generally the safest form of bond issue  Implied G.O. Rating = Issuer Rating

7. 6 GENERAL OBLIGATION BONDS  Economy/Taxbase/Socio-economic factors  Management  Debt  Financial Performance

8. 7 LEASE OBLIGATIONS  Typically secured by some form of general fund pledge to make lease payments for an asset  Issuing “shell” corporations  Specific asset lease vs. master lease  Value of asset(s) vs. par amount

9. 8 LEASE OBLIGATIONS  Essentiality  Fixed asset vs. equipment  Rating typically “notched” off the GO/IR  General fund lease payment burden  Other Legal Covenants Insurance Reserve Funds

10. 9 EXCISE TAX REVENUE BONDS A gross or specific pledge of excise tax revenues  Excise tax revenue bonds Moody’s – rating “notched” off GO/IR These are typically general fund revenues Operations typically highly dependent upon these revenues for operations S&P – strength and consistency of revenue stream more important Evaluated separately from GO rating  Dedicated sales tax revenue bonds Not typically general fund revenues Often voter-approved for specific uses/projects

11. 10 EXCISE TAX REVENUE BONDS  Historical Trend of Revenue Growth  Debt Service Coverage  Additional bonds tests and reserve funds  Non-impairment clauses and other legislative issues

12. 11 ENTERPRISE REVENUE BONDS  Water & Sewer Bonds  Electric Revenue Bonds  Combined System Pledges  Other

13. 12 REVENUE ENTERPRISES – AREAS OF ANALYSIS  Type of System  Economy/Service Area  Financial Performance (Including Key Measures and Ratios)  Management  Capital Needs  Covenants and Other Security Provisions

14. 13 TAX INCREMENT FINANCING  Secured by property tax revenues generated by incremental growth  Redevelopment project areas  Taxpayer concentration and tax appeals  Plan limits Sunset date Debt limits Limits on amounts of incremental revenues which may be collected

15. 14 TAX INCREMENT FINANCING  Additional bonds test  Multiple liens  Pass-through agreements, and housing set-asides  Often a passive revenue stream unless rates can be adjusted  Sometimes backed by broader pledge – other project areas or issuer/parent organization  Legislative issues

16. 15 IMPROVEMENT DISTRICTS  Growing acceptance and activity by rating agencies  Municipal oversight enhances credit quality  Development agreements and step-up provisions can overcome risks  Concentration risks  High debt burden  Competitive tax rates and favorable location also strengthen credit evaluation

17. 16 MMD YIELD CURVE COMPARISON

18. 17 MMD YIELD CURVE COMPARISON $100 Million Amortized over 30 Years

19. 18 SELECTED ARIZONA RATINGS* * Ratings are given in the following order: Moody’s, S&P and Fitch

20. 19 ARIZONA CITY MOODY’S RATINGS

21. 20 ARIZONA MOODY’S RATINGS CREDIT CHARACTERISTICS OF ARIZONA CITIES VERSUS NATIONAL MEDIANS Credits General Fund Balance Debt Ratio Full ValuationPopulatio n FV Per Capita Per Capita Income Arizona Aa Credits 57.0%3.6%$8,703,087167,603$56,583$22,406 National Aa Credits 24.8%2.4%$3,010,54827,324$108,323$29,477 Arizona A Credits 51.2%3.0%$1,846,44433,854$42,038$19,019 National A Credits 24.0%2.7%$968,01813,080$72,090$22,488

22. 21 THE RATING PROCESS  Rating committee is not intended to be a mysterious black hole. Rather, its intent is designed to: Maintain objectivity Maintain consistency among ratings nationally Ensure a broad perspective Leverage functional expertise of individual analysts Ensure quality control

23. 22 THE RATING PROCESS continued  What’s not Fair: Asking an analyst what rating he or she is recommending. Asking which individuals will comprise the committee. Asking how the votes were placed.

24. 23 THE RATING PROCESS continued  What is Fair: Asking the analyst for anticipated outcome of committee. Asking what credit strengths and weaknesses the analyst intends to highlight to committee. Asking the analyst what credits will be presented as comparables to committee. Requesting that specific comparables are presented to committee. Providing a list of credit strengths to be presented to committee. Requesting that a specific individual with unique knowledge of your credit represent at least one member of committee. Requesting a site visit or in-person meeting (acknowledging the limits of individual schedules).

25. 24 WHAT TO EXPECT FROM YOUR BANKER  Their assessment of your credit.  Provision of comparable credits.  Benchmarking to enhance decision making.  Assistance in structuring transactions to ensure and maintain credit quality.  An advocate and cheerleader even outside of specific transactions.  Effective intermediary in communications.

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