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Bond Rating and Fiscal Capacity

Bond Rating and Fiscal Capacity
I.                    Introduction

Different jurisdictions have different credit liabilities. Various evaluations of municipal bonds. Large spread of interest rates for individuals (0-25%) but for municipal bonds its NOT So

1.      Frank’s law of big numbers

80,000,000 city of Miami bond to clean up roads
1% of that is 800,000 (80k)
average maturity is 15 years
15x80k=1,200,000 over life time of bond

2.      S&P/Moody’s/Finch people listen big operations

They are nonpartisan/ when speak, people pay attention. Lower rating on an a government makes increase cost of borrowing money/ with high interest rates

3.      Bond Evaluators look at:
a.       Economic base
b.      Management practices
c.       Political climate
d.      Better side of capitalism—look for objection of credit worthiness
e.       Databases with/between jurisdictions

4.      Fiscal capacity—to receive a bond/how to rate it
a.       Linear programming, regression approach, point system, overlap and GO vs. other
b.      Most municipalities have  “toolbox of taxes”

Property taxes
Utility taxes
User fees (fire, selective services, etc. Garbage)
Misc. (cell phone taxes, light, water, gas)

Fiscal Capacity

City A (Miami)
City B (Adventura)

Property taxes
Utility taxes
User fees


Mill is 1$/? For what?
Every jurisdiction can draw on political systems
Some areas can draw move on these than other
So bond ratings change with the age of a city.  Miami is older and has more debt than Adventura which is younger and has lower ratings…

5.      socio-physiological/look at how much poverty relates to economic base
20/30% below poverty line
how much can a county’s dept accrue?

Depends on the property tax base-met 1 to 10% of property value or the per capita income
In FL—cities and counties increase % per capita debt comparison states and cities

Ratings System
Junk Bonds
D –bond is not paying on interest or principal
6.      Per Capita Debt
In FL-slightly below median income
Biotec company hub sets up in Dade county 2 times and still will not move in, why? Politics

So S&P/Moody/Finch looks at per capta income
Not just dept in absolute terms but who can pay

Aviation bonds=A ratings on Revenue Bonds
Dade County have General Obligation bonds=A/or AA

II. Municipal bonds is a “generic term” issued by state, local, governments, aviation, world trade center, port authority, school boards, etc

·         ** Interest on these Bonds is free from Federal income tax or interest

·         Example: MDS (Miami Dade Expressway) bond interest income free of federal income tax or interest (this is a Revenue bond because it uses user fees to pay for the loan)

·         **Government borrow at a discounted interest rate

·         1986 LAW/regulation? Efforts to chip away at this subsidy. Over used and some wanted it to be more regulated.

·         Local government needs to decide if the pay as you go system or how much you go into debt with pay as you use system

·         Most county and states are in debt
·         Keep debt service over time makes it level and therefore you don’t see hikes in your taxes if there is a new bond set.
·         So then you pay interest over larger periods of time (which makes it cost more)
·         Yet says Americas are Mobile and so you should pay fir it as you use the item. Average American moves 7/8 times during their life
·         Pay as you use -1% cent sales taxes to pay for jail and pay out of the pocked

7.      Huge divides-- General Obligations Debt Vs. Revenue Bonds

General Obligations Debt
Revenue Bonds
Public schools
City halls

Must have public referendum

Life insurances companies hold lost of municipal bonds, they love to keep payments strong for their future claims
75% bonds today are RB
government subsidize principal and interest, which are paid with user fees
landing paying feeds for MIA
tolls for roads/bridges or
ports fees for docking

should use discounted cash flow analysis.
Mostly rated as AAA because they will have $ to pay off the loan

8.      COPS Certificate of Participation

Cities go to private banks to get loan so they don’t have to go through private referendum

Interest rates at the GO bonds—not high enough more risky
Why? School boards culture will not let them default/ default taint is bad so it is rare and atypical
Payback with special tax revenue/ $ coming out of general revenues
Bond for schools, super markets? EPA clean up/superfrund?
Which types are okay?

9.      Tax Reform Act of 1986- when taxes are too much benefit to the private sector
1.      decreasing federal revenues
2.      fiscal debt availability too much competition for government borrowing rates where increasing

people interest rates limited and credited other types of bonds with state port tax free
tax rates by broadly defined tax base.

10.  Tax increment financing

Development districts—create districts to do its own improvements in a community development districts, they pay taxes not in theory don’t pay??
Subdivisions of cities to pay its own repairs, then after the “turn around” it goes back to parent/city
City may think they are loosing part of tax rate, but with quasi government and a concentrated effort to do economic development for a subdivision of a city

11.  Make a buck become a bond underwriter

How are they paid?
General obligation must go to management of funds sources and auctioned off
Revenue bonds are negotiated
Bids 5to10,000 or more

GO put an add in the bond bidder though a public journal
Revenue bonds most sold directly with bidders (insurance agencies)

Underwriters take 1to4 cents to everything sold. Wachovia /Merrill Lich /City Group
They accept the risk from cities and turn it into profits from reliable individual investors

12.  Municipal bond insurance --Good Stocks to have

AMBAC/ MBIA are municipal bond insurance which are good stocks to have because they are very secure with steady stream of principal being paid back by cities. Insurance to make sure they get money in a timely manner


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