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HomeMy WebLinkAbout2.a. Key Financial StrategiesCITY OF ROSEMOUNT EXECUTIVE SUMMARY FOR DISCUSSION COMMITTEE OF THE WHOLE: MAY 15, 2003 AGENDA: KEY FINANCIAL STRATEGIES AGENDA SECTION: DISCUSSION PREPARED BY: JAMIE VERBRUGGE, CITY ADMWSTRATOR 4 �. AGEN D,4ft. 2 A ATTACHMENTS: Key Financial Strategies Information Packet APPROVED BY: Jim Prosser, Executive Vice President of Ehlers & Associates, and Todd Gerhardt, City Manager of Chanhassen, will be present to discuss Key Financial Strategies (KFS). The purpose of the Key Financial Strategies is to provide an iterative and participative process for the City Council and staff to strategically chart the course for a city. The KFS process is intended to identify current financial conditions and resources, analyze future conditions, and tie the decision making process on fiscal planning to the goal- setting process for community visioning. Mr. Prosser has led a number of communities through the KFS process during his time at Ehlers & Associates. Prior to his work at Ehlers, Mr. Prosser served as a city manager in Illinois and Minnesota. Mr. Gerhardt is the city manager in Chanhassen, where the City Council and staff have recently concluded the KFS process. He will share his experience with the process and discuss how Chanhassen intends to use it in the future. This item is informational only. If the City Council is interested in pursuing the KFS approach, staff will work with Ehlers & Associates to prepare a program outline and budget. RECOMMENDED ACTION: There is no action requested. COUNCIL ACTION: FREERS & ASSOCIATES I N C Key Financial Strategies Process Outline Session Objectives Exhibits Outcomes One 1. Explain KFS process. I . KFS process guide. 1. Document areas of concern 2. Review KFS objectives. 2. KFS objectives. as identified by council >. Identify and discuss financial 3. Financial checklist. and staff. foundation items. 4. Overview. 2. Identify foundation areas 4. Provide financial status 5. Comparison. (Tax base which required overview. mix /growth/ development or updating. 5. Compare and contrast with other allocation/growth cities. factors/population /socio- 6. Review financing /revenue economic mix/housing type options. age) 7. Opportunity to discuss 6,:Budget comparison for last community infrastructure and 5 -10 years.:' financial strengths and 7. Bond rating agen &y criteria. weaknesses. 8. Debt ratios.. 9. Comparable cities typical residential tax bill /mix of tax capacity. ^ 'o Two 1. Review costing of foundation 1. Foundation items cost. 1. Agreement on foundation items. 2. Schedule of capital costs. 2. Review scheduling of improvements. 2. Agreement on capital investment/capital improvement 3. Gap financing options. improvements and items. 4. List of revenue options. schedule. 3. Discuss gap financing options. 5. Community strengths and 3. Direction regarding gap weaknesses. financing options. 4. Identify any remaining potential funding needs or revenues. Three 1. Review preliminary plan 1. Preliminary plan. 1. Agreement on financing including expenditures, schedule 2. Alternative impact analysis. options, schedule and and revenues. 3. Revenue forecast model costs. 2. Review funding alternative 4. Sources and uses summary. impacts. 3. Provide financial revenue forecast model. 4. Review preliminary gap analysis. Four 1. Review final plan. 1. Final plan. 1. Final action plan. 2. Review policies and schedule 2. Schedule. 2. Schedule. required to implement final plan. 3. Policies. 3. Policies. N: \GENERAL\Key Financial Strateeies\KFS.outline.wpd FREERS & ASSOCIATES I N C Key Financial Strategies Staff Outline 1. Review results from session three. 1. Agreement on draft 2. Review draft recommendations and recommendations and implementation plan. implementation plan. 3. Review agenda for session four. N: \GENERAL\Key Financial Strategies \KFS.staffotrtline.wpd 1. Explain KFS process. 1. Plan and schedule for filling gaps (Prior to Session E 2. Develop draft KFS objectives. in foundations. on' -With CC) 3. Identify and discuss financial 2. Copies of policies. foundation items including need for 3. Copies of financials. new materials. 4. Draft master schedule. 4. Review financial status. 5. Agreement on comparison cities. 5. Identify comparison cities. 6. Review financing /revenue options. 7. Develop master schedule. 8. Review financial policies. ,Two " 1. Review outcomes of session one. 1. Presentation format. (Prior to Session 2. Review objectives established by 2. Agreement on financial foundation two with CC) council. materials. 3. Review financial foundation 3. Agreement on agenda for session materials. three. 4. Reach consensus on presentation format. 5. Review budget funds and structure. 6. Review agenda for session two. 7. Review strengths and weaknesses. 1. Review outcomes of session two. 1. Agreement on revenue forecast (Prior to.. Session" ", 2. Review revenue forecast model. model. three with CC)""' ""'' 3. Review gap analysis. 2. Agreement on gap analysis. Four, 1. Review draft plan. 1. Agreement on draft plan. ":(Prior: #o SeSSion" 2. Review agenda for session three. 1. Review results from session three. 1. Agreement on draft 2. Review draft recommendations and recommendations and implementation plan. implementation plan. 3. Review agenda for session four. N: \GENERAL\Key Financial Strategies \KFS.staffotrtline.wpd FREERS ASSOCIATES INC Ehlers & Associates Key Financial Strategies Financial Policies Policy Description Z .... k. S..a.,..,- Debt Management Establishes appropriate debt levels and debt instruments. Defines how debt will be paid. Risk Management Describes use of insurance versus risk retention. Establishes policy regarding funding of reserves. Provides for allocation of risk management charges. Special Assessment Establishes policy regarding public benefit versus assessed share. Describes when special assessment financing will be used. Establishes policy regarding financing cost. User Charges Establishes standards regarding recovery of actual costs to provide service or product. Utility Charges Establishes standards regarding recovery of actual costs to provide service or product. Establishes standards regarding allocation of fixed and variable costs. Investment Policy Establishes standards for the type of acceptable investments. Establishes collateralization standards. Establishes liquidity standards. Annexation Policy Describes when and how annexation will be considered. Business Subsidies Describes when assistance such as tax increment financing, abatement and other assistance will be provided. Fund Balance Policy Provides guidelines for targeted fund balances based upon cash flows, emergency needs, contingencies and management policies. Budget and Financial Control Describes how the budget will be developed, implemented and revised as needed. Describes how revenue and expenditure variances will be managed. N \GENERALVCey Financial Strategies \KFS.financial.policies.wpd FREERS & ASSOCIATES I N C Key Financial Strategies Financial Foundation Descriptions Item Descri tion p U. i Capital Improvement Plan A five to ten year projection of anticipated capital expenditures. The plan should cover all funds of the city and should be updated at least once every two years. Plan should include revenue sources. Growth Impacts On Operations And A review of different growth and development scenarios on the City's Capital Needs operation and capital needs. Will be done in conjunction with the City's capital improvement plan and other facets of this study. Pavement Management System A long term maintenance and capital improvement plan detailing the techniques (seal coating, crack filling, routing, resurfacing and replacement and annual cost for maintaining and replacing roadway systems (pavement, curb, gutter and impacted utilities as required). Ideally this plan is incorporated into the CIP. Storm Sewer Management Plan A five to ten year projection of storm sewer related expenditures. The plan should include revenue sources and expenditures by project area and should be updated periodically. Non - Annual Recurring Maintenance The periodic cost to maintain physical facilities such as HVAC, roof systems and parking lots. Facility Replacement The cost to upgrade or replace major facilities such as city hall, public work facilities, public safety, fire stations, water plants, wastewater treatment plants, recreation buildings Information Technologies The cost to purchase, support and maintain computers, telephones, radios etc. Economic Development City /HRA /EDA cost to retain and attract residential and commercial tax base to community. Housing Development The cost to replace or upgrade substandard housing and to develop new types of housing. Debt Management A summary of existing debt service commitments and impact of future debt. Budget Option Analysis An analysis of the impact of potential budget reductions at specified levels and future staffing needs. Council Goals and Objectives The cost and schedule assigned to council goals and objectives. Vehicle /Equipment Replacement An inventory of vehicles and equipment for all departments and proposed Plan replacement schedule including net cost to replace. An option to this plan is a vehicle enterprise fund which "leases" vehicles to departments. Lease cost may include maintenance costs. Five Year Budget Projection A projection of revenues and expenditures for major funds including new or previously deferred programs and services. Credit Rating Report Credit rating reports may provide a basis for changes in financial operations that will improve the city' ability to fund capital improvements. 1 now= smam follam Allimm, mmmm"'' f 1 � EHLERS& ASSOCIATES 1 �: r Key Financial Strategies Objectives • Confirm and Prioritize community goals /vision • Review your community's current financial position • Develop an inventory of Capital needs beyond traditional Capital Improvement Plans • Identify future capital funding requirements and operating needs Key Financial Strategies Objectives (continued) ■ Develop an inventory of financial resources ■ Present options ■ Analyze the financial impact of each option ■ Prepare an affordable, comprehensive financial plan ■ Develop a framework to review future capital projects r Key Financial Strategies Process Outline - Session One ■ Explain Key Financial Strategies Process ■ Review Objectives ■ Identify /Discuss Financial Foundation Items • Provide Financial Status Overview • Compare /Contrast with other Cities • Review Financing/Revenue Options Key Financial Strategies Outcomes - Session One • Identify areas of concern as identified by council and staff • Identify foundation areas which requires development or updating 2 r Key Financial Strategies Process Outline - Session Two • Review costs of foundation items • Review scheduling of investment /capital improvement items • Discuss gap financing options Key Financial Strategies Outcomes - Session Two • Agreement on foundation costs • Agreement on capital improvements and schedule • Direction regarding gap financing options • Identify any remaining potential funding needs or revenues Key Financial Strategies Process Outline - Session Three • Review preliminary plan including expenditures, schedule and revenues • Review funding alternative impacts • Provide financial revenue forecast model • Review preliminary gap analysis Key Financial Strategies Outcomes - Session Three ■ Agreement on financing options, schedule and costs 4 Key Financial Strategies Process Outline - Session Four • Review final plan • Review policies and schedule required to implement final plan Key Financial Strategies Outcomes - Session Four ■ Final Action Plan ■ Schedule ■ Policies Financial Foundation Descriptions Capital Improvement Plan A five to ten year projection of anticipated capital expenditures. The plan should cover all funds of the city and should be updated at least once every two years. The plan should include revenue sources. Financial Foundation Descriptions Pavement Management System A long term maintenance and capital improvement plan detailing the techniques (seal coating, crack filling, routing, resurfacing and replacement), and annual cost for maintaining and replacing roadway systems (pavement, curb, gutter, and impacted utilities as required). Ideally this plan is incorporated into the CIP. G Financial Foundation Descriptions Non - Annual Recurring Maintenance The periodic cost to maintain physical facilities such as HVAC, roof systems and parking lots. Financial Foundation Descriptions Facility Replacement The cost to upgrade or replace major facilities such as city hall, public works facilities, fire stations, water plants, wastewater treatment plants, and recreational buildings. 7 r Financial Foundation Descriptions Information Technologies The cost to purchase, support, and maintain computers, telephones, archiving systems, radios, etc. Financial Foundation Descriptions Economic Development City /HRA/EDA cost to retain and attract residential and commercial tax base to the community. Financial Foundation Descriptions Housing Development The cost to replace or upgrade substandard housing and to develop new types of housing. Financial Foundation Descriptions Debt Management A summary of existing debt service commitments. Projection of future debt and impact on tax levy Financial Foundation Descriptions Budget Option Analysis An analysis of the impact of potential budget reductions at specific levels. An analysis of revenues. Analysis of future staffing needs. Financial Foundation Descriptions Council Goals and Objectives The cost and schedule assigned to council goals and objectives. 10 Financial Foundation Descriptions Vehicle/Equipment Replacement Plan An inventory of vehicles and equipment for all departments and proposed replacement schedule including net cost to replace. An option to this plan is a vehicle enterprise fund which "leases" vehicles to departments. Lease cost may include maintenance costs. Financial Foundation Descriptions Five Year Budget Projection A projection of revenues and expenditures for major funds including new or previously deferred programs and services. Financial Foundation Descriptions -Last Credit Report ■ Factors affecting rating within and outside Sample Strategies • Prepare Pavement Management System • Develop Facilities Management Plan • Develop Non - annual recurring maintenance budget for each facility • Prepare information technology plan • Adjust utility fees annually 12 EHLERS & ASSOCIATES INC Ehlers cti Associates DR KEY FINANCIAL STRATEGIES OVERVIEW Ehlers & Associates was engaged by the City of Metropolis, Minnesota (the "City ") to assist in the preparation of the City's Key Financial Strategies. The need to create a comprehensive financial management plan was identified by the City Mayor, Council, Manager and Staff due to growing demands for financial resources. This strategic financial plan is the result of four workshops with the Council and many hours of staff consultation. One of the workshops (November 7, 2002) focused on identifying potential financial needs of the City. The results from that session have been incorporated into this plan document. OBJECTIVES FOR THE FINANCIAL PLANNING PROCESS A financial plan is a necessary element of a City strategy to remain competitive in today's demanding environment. Other objectives of the City's Key Financial Strategies are: • Establishing a common understanding among the elected officials and staff of the City's needs and financial capacity. • Developing a comprehensive view of financial resources and options. • Identifying City issues and opportunities. • Creating a framework in which elected officials and staff can make immediate and long -term investment decisions. • Developing a consensus among the elected officials and staff on key actions the City will take to remain competitive. • Meeting the new standard presented in the Governmental Accounting Standards Board Regulation 34 including its capital planning provisions. Through this workshop process we have examined the current and future ability to meet these objectives to answer the question "How do we get there ?" The City's Key Financial Strategies will provide a road map into the future and a framework for future decision - making. City of Metropolis — Key Financial Strategies 030403 a Ehlers & ,Associates. FINANCIAL ASSESSMENT — FINDINGS The financial assessment conducted of the City was divided into seven areas: 1. Community goals /initiatives 2. Local tax base considerations I Financial Position 4. City owned infrastructure 5. Competitiveness 6. Credit position 7. Enterprise funds As part of the financial assessment, a number of findings were presented within the workshops. These findings are outlined in more detail within this report. A summary of these findings is as follows: 1) COMMUNITY GOALS/INITIATIVES - Establishing a strategic profile including community vision (purpose), goals (means to achieve the purpose), strategies (directed at accomplishing goals) are essential to the efficient and effective use of scarce City resources. A) Important Initiatives -- City Officials have identified several initiatives as part of this financial planning process. Key issues include: • Maintain city infrastructure. This includes: o Pavement Management System o Sewer and Water Infrastructure o Park Pavement Maintenance • Vehicle and Major Equipment Replacement • Water System Improvements • Public Facility Maintenance. • Enhance and protect city environment. This includes: • Update SWMP • Watershed Improvements • NPDES Phase II compliance • Lake Monitoring/Improvements • 2007 Environmental Fund Solvency Issues • Bluff Creek Improvement. • Managing growth. This includes: • Future staffing issues • 2005 MUSA • City Trails • Comprehensive Plan Update • Establishing an Affordable Housing Land Trust and Expansion of Public Works Facility. • Improve City Services City of Metropolis — Key Financial Strategies 030403 P a a, e 2 Ehlers & Associates .. R` > . • Quality Assurance for Law Enforcement/Public Safety • City Archives and E -City Hall. • Explore support for new City facilities. This includes: • Community Center /Ice Arena • City Commons Park • Metropolis High School Campus. Implication: The City has identified a significant agenda for future needs. Developing a mechanism to regularly prioritize needs, develop implementation programs (including resource requirements) and evaluate the City's capacity to implement the programs should be a high priority. Financial strategies should also include direction regarding the nature of activities to be undertaken for each issue including: • Assessing need for service or facility. • Studying alternatives, methods and cost and funding sources for implementation. • Implementation. B) Facility Options -- City Officials are looking at options for public facilities including a water treatment system, Department of Public Works expansion, a Community Center and land purchase for a high school. Implication: Involving the public with this process will be key to progressing this issue to the implementation phase. Careful consideration should be given to the funding options and impacts (including operating costs). While there are some issues impacting the timing of these decisions, it is essential that public understanding and support be developed. C) Technology -- Ever growing demands for staff services and the need for City Departments to work together require ongoing investments in computers and technology. Implication: Further enhancements to the City's information technology systems may require financial support from the City's General Fund. There will be more and better technology products available to cities. Residents, customers and employees will likely create pressure to invest in improved and new technology. This will require the City to develop a disciplined approach to reviewing the requests and needs for technology investments. That approach should address cost and benefits (not limited to financial), productivity, training, support and potential obsolescence. City of Metropolis — Key Financial Strategies 030403 Pa 3 .Ehlers & Associates 1)11,>- _ J 2) :LOCAL TAXBASE CONSIDERATIONS - Structure, quality and size of a community's tax base impact its ability to fund services and investments. A) Development -- City land area is approximately 54% developed and has reached 65% of projected population. How the community completes development will impact its future. Implication: The City will add additional residents and businesses to its population and, in addition, will face new and additional requests for future services as demographics and resident interests change as well as the need to address reinvestment in existing facilities. Understanding the dual impact of new service requests of existing residents and the impact of additional new residents will be a key to future planning. B) Market Value — City market value of $1.79 billion has been increasing an average 10% per year for the past 5 years. The City has a high per capita market value of $88,000. Implication: The high per capita market value and strong commercial base provides good opportunity for revenue diversification. The tax rate should be evaluated in terms of what rate creates the outcomes that the City seeks for itself. The tax rate should be set in conjunction with both the budget and the yearly costs identified in the capital plan. C) Tax Increment Districts — Changes in State property tax law have adversely impacted the City's ability to cover debt service related to development. A plan has been prepared to cover potential shortfalls. Implication: The City should continue to implement the plan prepared to work out the debt service issues. This plan should be carefully monitored for the next two years. D) Diverse tax base -- The City has a diverse tax base with 69% residential and 28 % commercial. The balance includes a variety of open space and institutional uses. Implication: Tax base diversification is a positive trend for stability in City services requirements and .property tax production. Continued effort to maintain a ratio of residential to commercial base within a range of 67% to 75% residential and 33% to 25% commercial would benefit the community. E) Economic Development Policy — The City has provided economic development incentives in the form of tax increment. Implication: Previously the City used economic development incentives to attract targeted development. This strategy is clearly responsible for the level of tax base diversification that exists today. To encourage continued balanced community growth the City will consider appropriate strategies. City of Metropolis — Key Financial Strategies Page 4 Ehlers cY associates DRA - 3) FINANCIAL POSITION. Availability of funds to meet current and future needs, adequate fund balances for cash flow purposes and to meet emergency needs requires planning and discipline. A) Effective past financial management practices has left the City with a moderate undesignated, unreserved fund balance within the General Fund, Water and Sewer Fund and Storm Sewer Fund. Implication: The City's General Fund Balance remains adequate. Changes in state tax structure and potential capital projects costs indicate the need to continue to carefully monitor the fund balance. B) The City faces growing demand and cost to provide services with limited ability to increase short-term tax base. Implication: State levy limits will impact the City's ability to increase operating expenses without an offsetting increase in non - property tax revenues. C)The City has developed effective loss reduction strategies (accident review, safety committee). Additional risk management efforts including review of risk retention levels, deductibles, funding of loss reserves may be warranted. Implication: Additional development of risk management policies will help reduce exposure to financial risks. 4.) CITY INFRASTRUCTURE - Communities need to regularly invest and reinvest in their infrastructure (roads, buildings, parks, etc.). Regular deferral of investment can lead to fiscal stress and community disinvestments. A) The City has maintained a street reconstruction program since 2002. Implication: Overall the streets are in acceptable condition, continued annual investment will be needed. Progress on maintenance should be carefully monitored. B) The City is reviewing Public Works facility needs. It is intended that facility needs will be addressed at the same time as water treatment facilities are addressed. Implication: The City has not initiated a plan to review the need for reinvestment in this facility. City of Metropolis — Key Financial Strategies Page 5 .Ehlers & Associates t; C) Potential need for reinvestment in public facilities infrastructure needs may increase the property tax above the normal inflationary increase. The City has major investments in buildings, utility systems, streets, paths, lighting systems and related improvements. Implication: Community involvement will be key to addressing need for major investments. The City should undertake a public participation process (see attached) to involve the community in understanding and then selecting options. Preparing plans and schedules for anticipated required maintenance and replacement will provide information need for financial planning purposes. D) The City has extensive vehicle replacement requirements for Public Works and Fire equipment. The City does not currently have a schedule of equipment replacement that forecasts these needs for the expected life of the equipment. Implication: Equipment replacement is often deferred as part of budget balancing efforts. In the long term this may increase maintenance costs, increased downtime of equipment and staff and lead to a funding problem in future years. Developing an equipment replacement schedule and funding source will help remedy this problem and provide a more accurate measure of services. E) The City faces potential major expenditures in its Water Fund for water infrastructure improvement for water treatment improvement in order to meet required Federal water quality standards and distribution systems. Implication: Enterprise funds are generally expected to support system needs. The City should continue to identify future major enterprise expenditures within the next five to ten years. This will permit the development of a utility rate plan to facilitate the required improvements. Water rates are currently subsidizing sewer operations. 5) COMPETITIVENESS - Communities compete for people to live, work and do business. Understanding and responding to the elements of competition is an important role for the City. A) The City's overall City tax rate remains competitive with other comparable communities in the metro area. (52 out of 108 metro communities) Implication: Given the competitive tax rate and the high level of services, the City would be in position to increase tax rates when conditions permit. However, this increase should come only upon completion of a comprehensive analysis of competing demands and priorities with community involvement in setting and funding these priorities. B) The City offers a full complement of services to residents and businesses. Implication: Services offered by the City appear to be consistent or superior to surrounding communities. City of Metropolis — Key Financial Strategies Page 6 Ehlers & Associates DRA FT C) Metropolis appears to be well maintained with no typical signs of disinvestments or deterioration. Implication: Careful attention should be paid to monitoring the condition of public and private property. D) Metropolis's open space and trail system appear to be equal or greater than many other communities in the metropolitan area. A new state of art library is currently under construction. The City does not have some amenities typical for comparable communities including a Community Center and may face community interest in developing this facility. There is not a funding source in place for maintenance of the extensive trail system. Implication: Planning and investments in these areas has provided a sound foundation for creating a community with amenities that will attract and retain residents, visitors and businesses. Careful attention should be paid to the operating costs of recreation and cultural amenities. Community involvement in discussions regarding the cost to build and maintain new facilities will be a key factor for future considerations. 6) CREDIT POSITION Maintaining a strong credit rating helps reduce the cost of borrowing required to develop and maintain the community. A) The City is rated "A" by Standard & Poor's Investors Service. This an above average rating reflecting the City's strong property value growth and maintenance of a strong financial position while making progress in mitigating the impact of a tax increment district negatively impacted by tax rate changes. Implication: This strong credit rating has helped the City successfully issue debt at very competitive interest rates in the commercial marketplace. B) The City's debt burden is high at $4,000+ per capita and 4.7 %, but reflects community growth needs and overlapping debt of other governmental units. These burden ratios have been falling due to community growth and value increases. About 2/3 of this debt is supported by tax increment, assessment and enterprise revenues. Eighty -three per cent (83 %) of the City's debt will be paid off in ten years. Implication: The City has successfully implemented a plan to address tax increment debt issues. Careful attention should be paid to "mapping" out future debt issues for the next five to ten years. The aggressive debt repayment schedule will enable the City to continue to invest as needed. C) The City currently has a moderate undesignated fund balance. Implication: This strong fund reserve helps the City to maintain its current rating. The City should be careful to maintain this strong fund balance. City of Metropolis — Key Financial Strategies Page 7 Ehlers X Associates DRAFT 7) ENTERPRISE- Operating enterprise funds as businesses is key to avoiding transferring the burden of operations to general taxpayers. In addition some enterprise operations can help reduce the cost of general government. A) The City has improved cost recovery for water and sewer services but rates are still not covering all operating costs. The City has not increased rates since 1998. The City recently completed a rate study related to the evaluation of a water treatment investment. The study recommended the establishment of minimum reserves for operating and capital costs. Implication: Fluctuations in water demand due to weather has provided challenges in establishing water and sewer rates. However, rates should be established to assure recovery of operating costs and adjusted annually. City of Metropolis — Key Financial Strategies Page 8 Ehlers & Associates DR"A F RECOMMENDATIONS Based on the findings and analysis conducted in the workshops, Ehlers developed a list of recommendations for the City -- their Key Financial Strategies -- listed in the seven categories below. 1.0 COMMUNITY GOALS/INITIATIVES 1.1 GOAL SETTING: The Mayor and City Council should continue annual goal setting session, prior to budget preparation. The goal setting session should prioritize needs. This information should be used by staff to develop programs, service options and resource requirements, for consideration within the budget process. The goals should specifically address the major issue categories. Financial strategies should be incorporated into the annual goal setting program. 1.2 FACILITY NEEDS: The City should continue the deliberate and careful approach to addressing facility needs for future growth, reinvestment and quality of life services and capital investments. The Mayor and City Council should consider authorizing a study to address future facility needs. 1.3 COMMUNICATION PLAN: A communications plan should be developed in order to inform and seek community feedback on important financial issues including future needs and financial constraints. The plan should also forecast the process that will be used to seek community participation for significant community investment decisions. Conducting a community survey will help identify the types of services vital to attract and retain residents. Consideration should be given to expanding the survey to collect information regarding improving the City's competitive position, economic development, quality of life, school funding inequity and possible intergovernmental / tax sharing solutions. Consideration should be given to continuing the use of the "Funding Public Facilities Public Participation Process" model in City facilities planning (see attached). 1.4 TECHNOLOGY PLAN: A technology plan has been prepared with projected needs for the next five -year period. The plan should also include a basis for evaluating the requests for technology investments that address cost and benefits (not limited to financial), productivity, training, support and potential obsolescence and funding source 1.5 IMPLEMENTATION PLAN: Annual budgets should be prepared with budget options of at least 10% of total budget expenditures. Budget presentations should be supported with a balance of input and resources and outcome materials. City of Metropolis — Key Financial Strategies Page 9 Ehlers &, Associates DRAFT 2.0 Local Tax Base 2.1 Growth planning should address continued attention to balancing commercial and residential development. Special attention should be paid to assessing housing types to reflect life cycle, financial ranges and life style choices. 2.2 The use of public subsidies to assist with encouraging the type of development needed to maintain community competitiveness and balanced tax base should be continued. The public assistance policy should be reviewed to assure flexibility to meet broad based community needs. 3.0 FINANCIAL POSITION 3.1 FINANCIAL POLICIES: The Mayor and City Council should consider a Fund Balance Policy for the Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, and Internal Service Funds. 3.2 City staff should prepare an alternative revenue source report for the City Council. These options should be reviewed annually as part of the Key Financial Strategies update. 3.3 The City should adjust all user fees and utility rates on an annual basis to reflect changes in the cost of services. 3.4 The City should revise assessment practice to include pavement management cost recovery through special assessments to benefiting property owners (i.e. increasing assessments to property owners and including street maintenance such as crack sealing) and to address increased cost of pavement management projects. 3.5 The City should establish a schedule for increasing developer fees that is determined annually. The current method of tying fees to increases in construction cost index does not accurately reflect the City's cost of services. 3.6 The City should use this report as part of its annual goal setting framework. 4.0 CITY OWNED INFRASTRUCTURE / CAPITAL EQUIPMENT 4.1 CAPITAL EQUIPMENT: The Manager and Finance Director should review the final list of items which were recommended as part of the vehicle /equipment replacement program and develop a funding program to provide a more level annual replacement contribution. The City could establish an internally funded equipment rental program to level out annual replacement costs. 4.2 INFRASTRUCTURE: The City staff should enact each annual capital improvement program based on review of the multi -year capital improvement needs. The City staff should coordinate development of the capital improvement budget with the development of the operating budget. Future operating costs associated with new capital improvements will be projected and included in operating budget forecasts. The City should prepare a non - annual recurring maintenance schedule for City facilities. City of Metropolis — Key Financial Strategies Page 10 Ehlers & Assoc:iole,s ACTION PLAN This section describes the actions needed to implement the City's Key Financial Strategies. Actions fall into two categories: Tasks for immediate action, and tasks that reflect on -going financial management actions. The following is a recommendation on the tasks that require attention over the next five -year period. Implementation of these Key Financial Strategies requires annual review and updating the Plan and revision of the schedule prior to initiating the budget process. Careful attention should be paid to developing realistic time frames and work plans. Activity Projected Start Date Level/Status Projected Completion Date 1.0 Community Goals/Initiatives 1.1 Goal setting Bi- annual 1/I N/A 1.2 Facility needs study 2006 2/S 2007 1.3 Conduct community survey to assess community knowledge of and support for new initiatives, facilities services and fees. 2005 I/S 2006 1.4 Prepare financial strategies communication plan 2004 2005 1.5 Annual CIP Annual 1/I Annual 1.6 Expand e -city hall services —phase 1 2003 1/1 2004 1.7 City Commons Park 2003 4/1 2005 1.8 Develop funding options and plan for Affordable Housing Land Trust 2003 2/S 2004 1.9 Identify options for replacing 2007 Environmental Fund 2004 1/S 2005 2.0 Local Tax Base 2.1 Prepare plan for 2005 MUSA expansion including capital and operating needs to accommodate growth. 2003 I/S 2004 2.2 Prepare plan to accommodate growth (in addition to MUSA) including projected revenues and expenses. 2003 2/S Annual 2.3 Update Comprehensive Plan 2007 2/S 2008 2.4 Identify and fund future staffing requirement to match growth Annual I/S April 2004 2.5 Update public subsidy policy 2004 4/A 2004 3.0 Financial Position 3.1 Establish/Update User Charge Policy 2004 2/A 2004 3.2 Explore franchise fee in context of financing needs 2003 I/S 2004 33 Update debt management plan 2005 1/S 2006 City of Metropolis — Key Financial Strategies Page 13 City of Metropolis — Key Financial Strategies Page 14 Projected Start Projected Activity Date Level/Status Completion Date 3.4 Establish/Update Investment Policy 2004 2/S 2004 3.5 Establish/Update Risk Management Policy 2003 2/S 2004 3.6 Establish/Update Budget Control and 2004 2/S 2004 Financial Control Policy 3.7 Update fund balance policies. 2004 2/S 2005 4.0 Infrastructure /Capital Equipment 4.1 Identify options for funding Pavement 2004 1/I 2005 Management System 4.2 Revise assessment practice to address Annual 1/S Annual pavement management and consider increasing assessed portions and interest rate. 4.3 Prepare non - annual recurring maintenance 2004 1 /S 2005 schedule 4.4 Prepare funding options for major equipment 2006 1/S 2007 sources 4.5 Identify funding sources for Park Pavement 2004 1 /S 2005 Maintenance 4.6 Construct trail additions Ongoing 1/1 N/A 4.7 Expand Public Works Facility Coordinate with 2/A N/A water treatment project 4.8 Develop digitized document archives 2003 3/I Ongoing 4.9 Identify funding options for High School land 2003 3/A 2004 4.10 Develop estimates for public facilities 2005 2/S 2006 maintenance 5.0 Competitiveness 5.1 Property tax need review Annual 1 /S 2005 5.2 Review budget option analysis as part of Annual 2/S Annual budget process 5.3 Prepare three year budget forecasts including Annual 2/S Annual revenue forecasts 5.4 Identify a limited number (1 -3) of selected Annual 2/S Annual services for potential competitive pricing on annual basis 5.5 Prepare alternate revenue analysis 2004 1/S 2005 5.6 Develop customer service feedback systems 2004 2/S 2005 for key City services 5.7 Community Center / Ice Arena 2005 3/A 2007 5.8 Quality assurance for law enforcement /public 2003 I /S 2004 safety City of Metropolis — Key Financial Strategies Page 14 PRIORITY DEFINITIONS: LEVEL 1 Critical to continued operation of city baseline services at present levels. This includes restoration of services identified as baseline. LEVEL 2 Provides opportunity for increased efficiency in baseline level of services. This includes ability to continue to serve existing level of services without staff increases. LEVEL 3 Provides opportunity for expansion of services to meet existing demand as evidenced by Council direction or staff analysis. LEVEL 4 Provides opportunity to increase services that improve quality of life within City. I Implementation S Study Need A Assess Need City of Metropolis —Key Financial Strategies Page 15 Projected Start Projected Activity Date Level/Status Completion Date 6.0 Credit 6.1 Accept Key Financial Strategies 2003 2/I 2003 6.2 Adopt debt policies as outlined in Credit 2003 2/1 2003 gection of report. 6.3 Establish/Update Fund Balance Policy 2004 2/S 2004 7.0 Enterprise 7.1 Update Storm Water Management Plan Underway 1/I Ongoing 1. Watershed improvement impacts 2. Bluff Creek improvements 3. Lake Monitoring /Improvement 7.2 Evaluate /initiate Water Treatment 2003 1/S 2004 Improvements 7.3 Identify funding source for sewer and water 2003 1/1 2004 infrastructure replacement 7.4 NPDES Plan II compliance Underway 1/A 2007 7.5 Review general fund cost for enterprise 2004 2/S 2004 services for rate consideration 7.6 Adjust user fees on annual basis to reflect Annual 1/S Annual changes in cost of services. 7.7 Develop utility rate policy 2003 1/1 2004 PRIORITY DEFINITIONS: LEVEL 1 Critical to continued operation of city baseline services at present levels. This includes restoration of services identified as baseline. LEVEL 2 Provides opportunity for increased efficiency in baseline level of services. This includes ability to continue to serve existing level of services without staff increases. LEVEL 3 Provides opportunity for expansion of services to meet existing demand as evidenced by Council direction or staff analysis. LEVEL 4 Provides opportunity to increase services that improve quality of life within City. I Implementation S Study Need A Assess Need City of Metropolis —Key Financial Strategies Page 15 Ehlers Advisor • Fall 2002 Moody's Upgrades Credit Ratings of Many Minnesota School Districts There have been a lot of fiscal dark clouds for school districts lately, but finally here's some good news — Moody's Investors Service has upgraded many Minnesota school districts' credit ratings. In a recently released report, Moody's cited two primary positive factors for the credit ratings change: • Strong State oversight programs that bolster local management and financial accountability, and • Favorable population and enroll- ment trends in many districts. In preparation for the report, Moody's analysts reviewed the credit of all 109 Minnesota school districts for which they had a current rating. Of these 109 districts, Moody's upgraded the ratings of 36 districts and downgraded none. The box on this page lists the 36 districts with upgraded ratings. The news is especially welcome for Minnesota school districts that have been facing budget cuts and seeking voter support for additional funding. With an expected large State budget shortfall in the coming biennium, many expect that school districts and other local governments are headed for several years of additional fiscal stress. "While Moody's expects short-term financial pressures, we believe there are sector -wide credit strengths to mitigate the potential pressures," said Jonathan North, Assistant Vice Presi- dent at Moody's. "Despite the up- grades, the median rating on Minne- sota school districts remains Baal, compared to A2 nationally." In a sense, credit ratings of individual Minnesota school districts have become less important in the past ten years, according to Joel Sutter of Ehlers. In the early `90s, the State implemented a program (the Minne- sota School District Credit Enhance- ment Program, or MSDCEP) in which it pledged that, if necessary, it will make bond payments on behalf of school districts. Because of this pledge, all Minnesota school district bonds that are part of this program are guaran- teed relatively high ratings (currently Aal from Moody's Investors Service and AA+ from Standard and Poor's). The rating agencies also, however, maintain "underlying" ratings on many school districts; the underlying ratings apply to bonds that were issued prior to the inception of the MSDCEP. These underlying ratings are important for two reasons. First, they are a general indication of the underlying fiscal health of the district. Second, a strong underly- ing rating may have a limited positive effect on the market- ability of a district's bonds. The Moody's "Special Com- ment" report, released in August, makes note of the State's ongoing budget short- falls, as well as recent shifts in timing of school district receipts that have worsened districts' cash flow problems. However, the report's authors cite the State's "strong oversight and enforcement mechanisms" as ti e factor requires districts to file reports regarding the impact of new labor agreements on their budgets. The "statutory operating debt (SOD)" statute, enacted in the mid - 1970s. This statute establishes criteria for identifying districts in SOD, requires that they prepare plans for elimination of the debt, and subjects them to closer State scrutiny and oversight until the debt is eliminated. The Moody's report also cites popula- tion growth and slight enrollment growth — especially in the Twin Cities area — as positive factors for many school districts. Minnesota Upgraded in Moody's Annandale i A2 i i Districts of North St. Paul- Maplewood II A2 Anoka - Hennepin Al Norwood -Young America Baal Chaska A3 Osakis Baa2 Detroit Lakes Duluth A3 A3 Osseo Parkers Prairie Aa3 Baa2 Eden Prairie Edina Faribault Aa3 Aal Baal Pine Island Princeton Prior Lake Baal A3 Baa2 Hastings Baal Robbinsdale A2 Hermantown A3 Rocori A3 Hibbing Baal Roseau Baa2 Hopkins Al Rosemount -Apple Valley Aa3 Hutchinson Kasson - Mantorville Menahga A3 Baal Baa2 South Washington County Southland Spring Grove Al Baa2 Baa2 Montgomery- Lonsdale Moose Lake A2 Baa2 Spring Lake Park St. Cloud Baa2 A2 North Branch A3 Willow River Baa2 a pose v that will help to stabilize credit quality. They specifi- cally mention the following two state programs. • The "structural balance" statute, enacted in 2001. This statute For a complete copy of the Moody's report, send a request by e -mail to Jonathan North at northj @moodys.com and ask for a copy of the Special Comment on Minnesota School Districts. -2- Ehlers Advisor • Fall 2002 "ER CASE STUDY Osseo is an attractive, historic community northwest of Minneapolis. However, the City faced a frustrating problem — its gateway on County Road 81 was marred by an auto salvage yard. "There are 25,000 cars a day that go by there on County Road 81," said Mayor Dan Sadler. The decision to make a change at the intersection and develop an attractive gateway was coupled with the recognition that fully developed communities like Osseo need to redevelop, he said. "We're landlocked and the only way to grow is from within, eliminate blight, and grow the taxbase," Sadler said. "We have no undeveloped land. It is very important for us to make use of existing land and parcels." City Administrator Dave Callister applied for and the City received grants to help pay to acquire and clean up the site. The next challenge was to find the right type of development to not only serve as a new community gateway but also to bolster the city's limited commercial tax base. Osseo retained Ehlers & Associates to provide Redevelop- ment Management services. Ehlers advisors, partnered with City staff to move the project from an idea to project construction in just nine months. Ehlers services included: • Preparation of a development concept consistent with city economic and planning goals. • Identification of qualified developers. • Preparation of a request for development proposals. • Review of development proposals. • Developer selection. (OSSEO continued on page 4) Market Update: Bond Interes Rates at Historic Lows by.joel Sutter Good news for local governments that need to finance new projects by issuing debt — bond interest rates this Fall have been at historic lows. The Bond Buyer 20 -Bond Index (or BBI) dropped down to 4.66 percent on October 11, the lowest that this index has been since November of 1968 - nearly 34 years ago. The BBI is a weekly index published by The Bond Buyer newspaper, showing the national average of yields for selected bonds maturing in 20 years. Until September of 2002, the lowest this index had been in the past 25 years was 4.82 percent in October of 1998. The actual average interest rate on any bond issue will depend on the length of the issue, the amount of principal, the rating and credit quality of the issuer, and other factors. The following table (upper right), however, shows examples of rates we have seen in recent weeks. Rates have increased since October 11, but still are very low by historical standards. Year of Maturity "A" 2003 Rated :o 1.68% Bonds 1.48% 2007 2.76% 2.54% 2012 3.71% 3.48% 2017 4.38% 4.15% 2022 4.79% 4.63% •3• Osseo Redefines its Community Gateway Ehlers Advisor • Fall 2002 Legislature Gives New Street Bonding Authority to Local Governments The 2002 Minnesota Legislature authorized local governments to issue bonds without a referendum under street reconstruction programs, a change welcomed by city officials. "This is a good change for cities because it will free up cities in terms of financing options for street recon- struction," said Todd Hagen, Financial Advisor, Ehlers & Associates. Granting municipalities the authority to issue bonds for street reconstruction without regard to election require- ments enables cities to finance street reconstruction without having to specially assess at least 20 percent of the project costs. Conditions on the authority include: Ehlers & Ass o name of Juran & Moody, a division of Miller Johnson Steichen Kinnard Investment Securities, Inc. (MJSK), located in Minneapolis. The acquisition follows the departure of key staff people involved in servicing MJSK's municipal clients. Those departures impacted the ability of MJSK to provide financial advisory services to its municipal clients. MJSK will con- tinue to provide its investment services to Juran & Moody clients as well as other Minnesota municipalities. Ehlers will provide these municipalities with • approval of the issuance by unanimous council vote; • that the project is part of the reconstruction plan; • that public notice is provided; • it is subject to reverse referendum provisions; and, • it is subject to the municipalities net debt limit, even if they would be exempt under another law. The law authorizes issuance of obliga- tions without an election for recon- struction of streets, if the bonds are issued under a five -year street recon- struction plan. For more information on this new law and how it will impact your commu- nity, contact Todd Hagen, 651 -697- 8608, or Rebecca Kurtz, 651 -697 -8516. "This is an opportunity for Ehlers to offer Juran and Moody clients a wider range of independent financial advisory services including our debt management, financial planning, and economic development products, in addition to our debt issuance ser- vices," said Steve Apfelbacher, President of Ehlers. "Ehlers has the experience and resources to offer practical and creative solutions to help municipalities build better communities." Osseo Property Valued at $500,000 Now Worth $10 Million (OSSEO continued from page 3) The success has also encouraged a • Preparation of tax increment plan. number of other redevelopment projects • Developer negotiations. within the community, Sadler said. The project was completed in 2001. Now instead of an auto salvage yard, the site consists of a three -story office building with underground parking and an office- warehouse facility. "The difference is phenomenal. The community has reacted very positively. We took a piece of property that was valued at about $500,000 and today it's worth $10 million," Sadler said. "Ehlers has helped us make redevelop- ment a reality for our community. Their hands -on approach and exten- sive development experience was a perfect complement to our staff," Sadler said. Ehlers is currently providing redevel- opment services for nine projects in seven cities with a total estimated value in excess of $500 million. I► QTIE Melissa Stirn is joining Ehlers in November as an Associate Financial Advisor on the Minnesota Education Team. Melissa comes to Ehlers from the Minnesota Department of Revenue, where she has worked as a Research Analyst in the Property Tax Division. Melissa's projects there included revenue forecasts for special taxes, analysis of proposed legislation, a study on property assessment practices, and an evaluation of local government aids. She also served as an intern and research assistant with the Minnesota House Research Department, Scott County, and the Center for Urban and Regional Affairs, At Ehlers, Melissa will assist the other financial advisors on the education team in providing a variety of services to Minnesota school districts, including assistance with school building bonds, operating referen- dums, cash flow borrowing, and lease purchases. Melissa holds a Master's degree in Public Policy from the University of Minnesota and a Bachelor of Arts in Political Science from Gustavus Adolphus College. She grew up in an education - focused family (her father has been a superintendent and school business manager in several Wisconsin school districts) and has long had an interest in school finance and school management. She looks forward to pursuing those interests by working with school districts throughout Minnesota. Brookfield, WI Office: 375 Bishops Way, Suite 225 Brookfield, WI 53005 -6202 262 - 785 -1520 Naperville, IL Office: 1001 East Chicago Avenue, Suite 135 Naperville, IL 60540 630 - 355 -6100 www.ehlers-inc.com EHLERS Ehlers & Associates, Inc. — Leaders in Public Finance Since 1955 Service Credit ratings upgrades to many Minnesota school districts. —Page 2 Ehlers Case Study New community gateway in Osseo is catalyst for redevelop- ment to eliminate blight and increase taxbase. —Page 3 Market Update Good news – bond interest rates are at historic lows. —Page 3 New Street Bonding Authority Local governments may issue bonds without a referendum under street recon- struction programs. —Page 4 Ehlers Acquires Juran & Moody Name Will help to better serve Minnesota municipal clients. —Page 4 Ehlers Welcomes Melissa Stirn Former Property Tax Research Analyst joins the MN Education Team as Associate Financial Advisor —Page 4 St. Anthony Adopts Effective Key Financial Strategies Anyone reading the news in the metro area is probably aware of the major redevelopment project underway in St. Anthony – the Apache Plaza Mall. "This is an exciting in St. Anthony," sai Mayor Randy Hods the elected head of community of 8500 located 10 minutes northeast of downtown Minneapolis. "Our Council under- stands the need to be progressive, to plan for the future, and to use the resources we have wisely to keep our community moving forward." In light of that vision, the St. Anthony City Council took an important step in September, adopting Key Financial Strategies. Key Financial Strategies are a unique financial framework designed to guide the financial policies and practices of a city and assure its ability to meet future operating and capital needs. "We felt it was important to focus on two general areas," Hodson said. "The first was developing and refining information regarding the capital and operating costs facing us in future years. The second was identifying alternatives to the current type and level of services we offer and funding options for those services." The strategies were developed through a series of four workshops with the City Council and facilitated by Ehlers & Associates. The four workshops focused on: "In St. Anthony we realized that you can't afford to rely upon the annual budget and capital improvement plan as the sole means of financial management," Hodson said. "We have to antici- pate what our needs will be in five to ten years and develop strategies and options to meet those needs." Another important benefit to this type of plan- ning is the ability "to communicate opportunities to the public and seek their guidance as we plan for the future," Hodson said. Hodson gave credit to the City Council members and staff for their hard work and thoughtfulness in developing a realistic, practical blueprint for St. Anthony's future. "We were elected to make sure St. Anthony is a good place for people to live, work and learn now and in the future, and that is what we are doing," Hodson said. -4- Ehlers & Associates Acquires Juran & Moody Name ciates has acquired the financial advisory services. Moody's Investors Service Municipal Credit Research November 1999 New York Linda Hird Lipnick 1.212.553.1617 Yaffa Rattner 1.212.553.4429 Linda Ebrahim 1.212.553.4132 Steve Levine 1.212.553.4097 The Determinants of Credit Quality A FOCUS ON MOODY'S METHODOLOGY FOR RATING GENERAL OBLIGATION, LEASE- BACKED AND REVENUE BONDS Issuers, investors and intermediaries often ask Moody's the same thought provoking questions. These questions generally focus on which factors will be predominant in assigning a Moody's credit rating, which credit factors will most likely drive a future rating upgrade or downgrade, and how rating levels on proposed Certificates of Participation (COPS) and revenue secured transac- tions can be gauged. This article is a response to these questions and - " , ill focus on four key issues: 1.The rating factors that support a General Obligation (GO) rating assignment 2. Rating levels for leases and COPS 3. Factors that drive rating upgrades or downgrades 4. Credit fundamentals used to assign ratings on municipal water, wastewater, and stormwa- ter systems continued on page 3 Authors Linda Hird Lipnick Yaffa Rattner Linda Ebrahim Production Associate Alba Ruiz ,0 Copyright 1999 by Moo ly's Investors Service, Inc., 99 Church Street, New York, New York 10007. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS COPYRIGHTED IN THE NAME OF MOODY'S INVESTORS SERVICE, INC. ( "MOODY'S "), 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, such information is provided "as is" without warranty of any kind and MOODY'S. in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. 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 credit ratings, 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. 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. Each rating or other opinion roust be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. Pursuant to Section 17(b) of the Securities Act of 1933, MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY'S have, prior to assignment of any rating, agreed to pay to MOODY'S for appraisal and rating services rendered by it fees ranging from $1,000 to $1,500,000. PRINTED IN U.S.A. Moody's Special Comment Municipal entities raise funds for a variety of capital purposes, such as the building and maintenance of roads and bridges; affordable housing; facilities for health care and social services; courts and correctional facilities; and water and sewer systems. The types and scope of capital needs that municipal governments are responsible for vary widely, depending on the governmental unit (county, city, school district, etc.) involved and the state in which the entity is located. Therefore, there is always some variation in credit factors evaluated; but in general, factors considered by Moody's in assigning a credit rating cover four pri- mary areas: economy; debt; finances; and administration/ management strategies. STATISTICS MUST BE VIEWED IN CONTEXT Although the various statistics discussed throughout this article play a significant role in Moody's evalua- tion of credit risk, data and ratio analysis is certainly not the sole determinant of a rating. As a result, there is no algebraic formula by which a rating can be determined. At the start of the analysis, each of the four credit - categories carry equal weight and many qualitative factors are considered including administration/ management strategies (discussed in the section below). As analysis of an issue proceeds, however, one fac- tor may become more important because it represents a particular strength or weakness for the credit or is more likely to have a significant impact on credit quality in the near -term. In our view, the most useful tool for evaluating credit risk is through examining the way that the four credit analysis areas interact. The economy, while probably the least controllable of the four credit factors, remains critical to Moody's analysis because the economic base is what ultimately generates the resources to repay municipal debt. During the economic evaluation, Moody's analysts assess the current economic profile, as well gauge spe- cific economic strengths and weaknesses, to better understand and set expectations for future perfor- mance. Ultimately, a clear vision of an issuer's current economic profile coupled with anticipated future economic trends is a key credit measure. Our analysts consider the credit quality and market position of a region's largest employers, and the strength as well as diversity of its largest taxpayers. Moody's Public Finance Group (PFG) analysts consult regularly with analysts in Moody's Corporate Finance Group (CFG) for information on the performance of an issuer's largest corporate employers or taxpayers, and /or for an overview of a particularly dominant industry. Especially critical in this evaluation are indicators of economic growth, such as retail sales, building permits, employment data, and other indicators that measure various aspects of economic activity. The economic statistics that Moody's examines for any credit will vary, depending upon the forces that drive the area's economy. Our analysts also evaluate demographic and other economic statistics in order to assess the vitality of a given area's economy. A diverse economic base (one that is not highly concentrated in a single employer or type of industry) will be more likely to steadily expand and keep pace (or even exceed) that of the national economy. An economy that is highly dependent on a cyclical industry may periodically surge, stagnate, or even experience declines. Unemployment rates are perhaps the most cur- rent measure of an area's economic health. Equally important are the unemployment trends over a period of time, which illustrate a municipality's demonstrated ability to withstand changes in national or regional economic fortunes and may provide an indication of future employment performance. When examining an issuer's ability to tap resources to support debt and pay for services, we also evalu- ate the extent of a community's overall wealth. Although no single aggregate measure fully quantifies a community's wealth, the full value per capita — which is the full valuation of taxable property divided by a given population — is an important indicator. In addition to these figures, Moody's examines trends in full value as well as full value relative to such factors as a community's population and debt outstanding to bet- ter gauge leveraging of the local tax base and of the residents and businesses paying the tax bills. Moody's Special Comment 3 In addition to examining overall measures of the economic base, Moody's also evaluates the resident population's socioeconomic characteristics. Moody's relies on a variety of data, some of which is provided by the U.S. Census Bureau. Additional information is also provided on behalf of local jurisdictions by vari- ous state agencies. One of the most useful statistics for determining an area's economic well -being is per capita and median family income. In our opinion, because significant variations in state and regional cost - of- living exist, it is important to compare these figures with state as well as national averages. With every new issuance of debt, Moody's re- evaluates the issuer's debt position in order to determine the impact of the increased debt on credit quality. In rating debt, analysts calculate numerous ratios, which are detailed in Appendix B: Municipal Tax - Backed Debt: Components and Ratios. For General Obligation tax -sup- ported or General Fund — supported debt, analysts evaluate all the debt for which the issuer's tax base or citizens are the source of repayment, whether or not that issuer actually issued the debt. Therefore, in addition to reviewing debt obligations of the issuer, we also consider overlapping debt in determining the overall debt burden to the taxpayers. 4 Moody's Special Comment Overlapping debt is debt issued by municipal entities that have geographic boundaries that overlap (in part or whole) those of the issuer whose debt is being analyzed. For example, the debt of a city within a given county will be considered as overlapping debt for that county because the same tax base is responsible for supporting the debt. For measuring the burden of all tax - supported debt on the tax base, we calculate "over- all net debt," which excludes self - supporting debt that is unlikely to be paid from the tax base itself because it has its own revenue stream (i.e., from water and sewer fees or other self - supporting enterprise earnings). In general, counties have the lowest debt ratios among the three primary groups of issuers (counties, cities, and school districts). This is because even though underlying debt of cities and school districts is considered, counties often contain unincorporated areas that provide some support to the tax base but are generally not authorized to issue debt. Debt structure is another area of focus when examining the issuer's credit profile. Moody's examines such debt characteristics as the amount of short -term debt an issuer has outstanding, the extent of reliance on variable rate debt obligations, and the overall structure of debt service payments. One key debt factor is the rate of debt repayment or payout. This statistic measures the rate of princi- pal retirement within a given period of time and can sometimes be indicative of an issuer's willingness to pay. If retirement is rapid, the issuer may be viewed as very willing to draw upon its resources to pay its obligations. Conversely, if debt is structured for a very slow payout, the opposite may be true. Debt struc- ture, including the rate of retirement, can also reflect such considerations as debt limits, future borrowing plans, and political factors related to tax levies. As a general rule, issuers usually structure their issues so that all debt is repaid within the useful life of the asset(s) being financed. Moody's Special Comment 5 FJ Financial analysis involves a great deal more than just reviewing year -end financial statements. Although statements of operating results and year end financial position are important, they reflect only a snapshot of time; these indicators only have analytic significance when placed in a proper context. For example, a large budget surplus may appear impressive, but could actually have negative implications if it results from a municipality's inability to execute certain spending programs, or results in taxpayers' taking legislative action to limit taxation. Conversely, a planned draw -down of a prior surplus (particularly to fund one -time expendi- tures such as capital or year 2000 projects) may not signify fiscal problems. In fact, an established trend of financial performance and control is more important to Moody's than year -end figures alone. Budgetary planning and projecting, in conjunction with daily spending control, as well as an issuer's policies on spend- ing growth, use of surplus, and shortfall contingency plans are all incorporated into our credit analysis. One financial statistic that is key to evaluating financial strength is the General Fund balance as percent of revenues. This ratio provides a measure of the financial reserves potentially available to fund unforeseen contingencies. The level of fund balance should be related to the likelihood that such reserves will be need- ed, as well as the issuer's revenue raising flexibility. Larger balances may be warranted if budgeted revenues and expenditures are economically sensitive and therefore not easily forecasted. Moody's likes to see a General Fund balance sufficient to address normal contingencies which, as a general guideline, is typically between 5 -10% of annual revenues. It is important to emphasize, however, that the appropriate level of fund balance varies depending upon the particular issuer and its respective operating environment. Moody's examines a range of other financial data, such as annual growth in revenues and expenditures; the amounts of and reasons for interfund transfers; primary revenue sources and expenditures items; the composition of assets and liabilities; cash position; and actual financial performance relative to budget. Although General Fund operations are often a key focus in the analysis of general obligation debt, Moody's analysts are interested in the financial position of all funds, including special revenue funds and enterprise funds. Moody's analysts particularly focus on how an issuer funds expenditures from its own resources. Therefore, in the analysis of financial operations, we place special emphasis on those funds over which the issuer has discretion, rather than funds that are simply state or federal pass - throughs. Administrative factors are perhaps the most difficult credit fundamentals to assess because they are not easily quantifiable. An evaluation of management is, however, crucial because ultimately it will be manage- ment's responsibility to seize upon economic opportunities, adopt a budget, and take corrective action as may be necessary, to realize targeted results. Despite the qualitative nature of a management assessment, there are a number of elements that Moody's regards as indicators of management strength which are important to our evaluation. They are: an issuer's organization; division of responsibilities; professional qualifications; and, sufficiency of power to perform its functions. In many ways, management strength can be judged from looking at the other three factors: 1. Good management strategies will help ensure that financial practices, such as tax collection proce- dures, budgeting and investments, are appropriate and responsive to the municipality's needs 2. Debt practices will be thoughtfully structured and in line with statutory and voter prescribed debt limits 3. Good economic development policies will be adopted and government officials will be balanced in response to the demands for services relative to the needs of business and residential taxpayers In addition, strong management strategies often include institutionalized means of coordinating and /or cooperating with other government agencies, particularly if those agencies must come together to provide services to a common group of citizens. It should be noted that most issuers, both large and small, are well managed. Despite this fact, they may not all achieve high ratings because there are many aspects of credit quality that management simply cannot control — most notably a locality's economy. 6 Moody's Special Comment This section discusses typical issues that most often drive rating changes - either up or down. It will refer to the credit fundamentals depicted in the preceding sections and describe how these issues are actually synthesized to support a rating change. Ultimately, a rating will be driven up or down when one or more credit factors are significantly altered from the time of the last rating assignment. VIBRANT NATIONAL ECONOMY FUELS STRONG FINANCIAL PERFORMANCE AND MANY RATING UPGRADES In Moody's opinion, the strength of the national economy continues to benefit local governmental units including counties, school districts, and cities. The nation's low unemployment rates and healthy econo- my have resulted in strong growth in the sectors underlying the primary sources of municipal tax receipts- - property, income, and sales taxes — without a commensurate increase in expenditures resulting in many cases of large budget surpluses. The trend of economic prosperity has manifested itself in a trend of continued credit quality improve- ment. In fact, in 1997 and 1998 combined there were 659 rating upgrades on $160 billion outstanding general obligation bonds compared to 108 downgrades affecting $9 billion of debt. Projections for 1999 indicate a continuation of this trend with more than 350 upgrades year -to -date affecting $56 billion of outstanding debt compared to 47 issuer downgrades affecting $7 billion in debt. Location, size, and diversity of the local tax base are the predominant factors assessed when looking at the issuer's fundamental economy. These factors, however, are certainly not static and will most likely change over the life of the bond rating. That being said, significant growth in assessed values could eventually drive ratings up - simply because the growth results in a larger tax base supporting debt obligations - with a correlating decrease in debt burden (assuming additional debt to meet development needs is not grow- ing at the same or a faster pace than the tax base). 8 Moody's Special Comment A STRENGTHENING, DIVERSIFYING, OR GROWING LOCAL ECONOMY CAN PLACE UPWARD PRESSURE ON A RATING Furthermore, in addition to the absolute advantages in terms of decreasing debt burden and typically greater revenue generation brought by a growing tax base, continued valuation growth can also yield addi- tional tax base diversification in certain cases. This may offset a previous economic weakness such as con- centration in one industry or one particular business as the predominant employer and tax payer. For example, when economic development efforts by a city dominated by a particular industry (such as auto- motive or steel) are successful in attracting various support businesses to the area, many positive benefits occur. This is because while the new businesses are often connected to the original industry, they typically have components in entirely new or simply related business enterprises. The presence of the additional business benefits the local economy through new jobs and municipal tax revenues (including income, sales and property taxes). Additionally, they also provide a more positive operating and economic environment for the original industry and the regional as a whole. Although many may believe that the issue of location cannot be surmounted when considering a potential credit upgrade, this, Moody's would argue, is not the case. Over the past several years, the nation has benefited from interest rates that have been at record lows and, as a result, growth in annual new housing starts have been significant. Because many large cities and regional hubs are fully devel- oped or are subject to relatively strict zoning laws, some residents and businesses have chosen to devel- op properties in areas previously considered primarily agricultural or remote. Local, state and federal governments have responded, in turn, with grants and loans to construct new arteries connecting the previously developed areas with the developing areas. Therefore, location, while fixed in absolute terms, can experience significant economic changes that can lead to strong development and improved transportation networks. Together, this key credit factor, along with expectations that the trend in a particular area continue, can place upward pressure on a rating assignment. The absolute size of a municipality — whether it is valued in dollars or in population — is a tangible fac- tor. However, the function of size and its correlating implications (potentially stronger for mid- to- large- sized entities and perhaps somewhat weaker for particularly small credits) is also, in our opinion, fluid. Issuers, intermediaries and investors may concur that a municipality with an extremely modest tax base, has fewer taxable resources supporting its general obligation debt than another municipality with the same debt (in an absolute dollar amount) and a larger tax base. The smaller issuer may also face certain challenges that a neighboring but larger entity will not face. This includes the ability to generate greater tax revenues or flexibility in expenditure reduction, which often results in the need for even stronger management strate- gies. However, in our opinion, the prospects for rating upgrades are certainly present if economic trends point to continued valuation or population growth. Conversely, the issuer may feel downward rating pres- sure if confronted with the dual obstacle of a declining revenue base in a modest or limited local economy. A TREND OF PRUDENT AND SUSTAINABLE FISCAL MANAGEMENT STRATEGIES COUPLED WITH CAREFULLY MANAGED RESERVE LEVELS CAN PLACE UPWARD PRESSURE ON A RATING Moody's believes that careful, institutionalized budgeting policies, contribute to an issuer's ability to with- stand economic downturns without compromising recurring structural balance (annual revenues equal to or greater than annual expenditures). We also believe that cautious financial policies enable many local issuers to maintain or build their reserves and invest in technologies which, in turn, support more timely and accurate accounting, reporting, and oversight procedures. Because Moody's focuses on expected financial trends and anticipated fiscal flexibility (often deter- mined by state legislation and type of governmental unit), Moody's does not prescribe that cash or fund balance be augmented to a particular level prior to a rating upgrade. However, we do focus on the factors that resulted in a particular level of reserves with careful scrutiny placed on an issuer's expected ability to maintain the higher level of financial cushion in the future. To the extent that reserves are bolstered and are expected to be maintained (and the prior financial position detracted from other favorable credit fun- damentals), a rating upgrade may be warranted. Similarly, a change in management strategies or political environment that supports expectations for future reserve augmentation or depletion could also be suffi- cient to drive a rating change. A rating upgrade is not only warranted when Fund Balance increases. In fact, a rating upgrade could also be driven by the ability of the issuer to aggressively manage and limit fiscal volatility or augment financial flexibility — without changing reserve levels. An ability of an issuer to decrease volatility may occur if the issuer gains greater expenditure control or decreases financial vulnerability perhaps through the elimination of a service that historically proved to be expensive and difficult to budget such as a nurs- Moody's Special Comment 9 ing home or hospital. In our opinion, this could be a key credit strength that could result in a rating upgrade. Similarly, the ability of an issuer to garner additional fiscal resources and promote future fiscal flexibility — perhaps through referendum approval of a dedicated property tax millage or through council approval to augment certain fees or taxes — could also result in a rating upgrade. Both of these issues (decreasing fiscal vulnerability or increasing financial flexibility) could drive a rating upgrade without a corresponding increase in reserve levels because by limiting vulnerabilities or augmenting flexibility, the need for larger reserves is decreased. THE PRESENCE OR ELIMINATION OF A MAJOR VULNERABILITY MAY DRIVE A FUTURE RATING CHANGE In addition to the upward credit pressure that strengthening economic and financial position may place on a particular issuer rating, Moody's believes that the presence or elimination of a major vulnerability can also drive a rating change. The vulnerability can come in the form of litigation, implementation of electric deregulation (which could potentially and significantly reduce valuable taxable resources and user generat- ed revenues) and various tax appeals. For example, when a municipality is involved in litigation on a con- troversial issue, significant resources (both dollars and time) may be allocated to the cause and projects may be delayed until a municipality is more confident of a projected outcome. Therefore, when a ruling is eventually rendered, a municipality could re- allocate resources previously dedicated to litigation to improving its credit - worthiness. Although a municipality may be the beneficiary of a significant cash pay- ment at the conclusion of litigation, receipt of the settlement will probably not drive an immediate rating upgrade since an analytic determination assessing the future availability of those funds to provide overall financial cushion must be made. Ultimately, any rating action will synthesize the decisions of local officials with the rest of the issuer's credit profile. While a significant and favorable outcome to years of litigation may drive upward rating pressure, not all adverse settlements will drive a rating downgrade. This is because the Moody's analyst will want to ascertain the implications of the judgment. Will there be a one -time draw in Fund Balance to meet settle- ment costs or a one -time increase in debt burden if judgment - funding bonds are issued? In most cases of an adverse settlement, issuers typically have some time and some flexibility in repaying settlements. For example, an issuer may not be forced to spend its entire fund balance repaying a tax -payer who successful- ly appealed its assessments over a prolonged period of time. Rather, an issuer, with the court's permission, may orchestrate some repayment scenario (perhaps a credit against future taxes, repayment over time, or even funding through issuance of judgment bonds) that is agreeable to all involved parties; therefore, the issuer would not alter its credit profile sufficiently to warrant a downgrade. However, if the issuer is afforded no flexibility or chose not to prepare in advance, (for example by saving and designating reserves) for a worst -case scenario outcome, a rating downgrade may be warranted. 10 Moody's Special Comment ir a Jr— Revenue bonds have been issued since the 1930's to finance many purposes including environmental needs (water, sewer, storm water and solid waste), transportation facilities (airports, toll roads, parking facilities, rapid transit, ports, etc.) and a myriad of other activities (stadiums, hospitals, convention centers, higher education, etc.). Although once considered highly innovative securities, the capital intensive nature of most enterprise systems, in conjunction with growing government mandates, have made revenue bonds the predominant financing vehicle accounting for 67 % of 1998's new long -term issuance. Unlike general obligation bonds, revenue bonds pledge repayment from a limited source typically revenues generated by an enterprise system such as water, sewer, electric, and, solid waste. While ratings on these bonds generally trend near the general obligation ratings in the systems' service areas, there is no rule that the rating assignment be capped by an issuer's general obligation rating. In fact, ratings on municipal enterprise systems can be higher, lower, or even the same as an issuer's general oblig- ation bond rating. Moody's average rating for water and /or wastewater systems is an A2, which largely reflects the essential nature of these enterprise systems as well as extensive capital requirements driven by intergovernmental regulation. This section will focus on water and sewer bonds that, by far, constitute the largest category of rev- enue bonds. The issuance of water and /or sewer revenue bonds has been largely driven by government regulations and mandates arising from the CIean Water Act (1972) and the Safe Drinking Water Act (1974) and subsequent amendments. Meeting federal and state standards on issues such as wastewater treatment or drinking water filtration is always costly and often complicated. Many older, urban sewer enterprises must address problems stem- ming from their combined stormwater and wastewater systems, which create serious overflow problems during stormy weather. Separation of the systems is often not economical; thus system administrators often look for alternative measures to reduce overflows. Ultimately, in the case of sewer systems, the abili- ty for plants to create sufficient capacity, is a critical determinant of future area development. To compare, for water systems, the ability to secure and retain water rights sufficient to meet current, as well as future needs while maintaining water quality, is of paramount importance. Water and sewer ratings are based on the following factors: System Size, Local Economy, Customer Base - Generally, stronger systems that benefit from a robust local economy are better positioned to .meet the ongoing capital requirements of the enterprise venture. Economic strength can also be imputed from a diverse customer base, which can insulate the system from the risks that are evident when a few customers or a single industry dominates. Management and Strategic Planning - Management's skill in adapting to a dynamic regulatory en-6- ronment, while making the capital investments which will maintain the system's long -term viability, are key to the assignment of higher -grade ratings. Nloody's believes these factors are reflected in effective multi -year plans, which encompass ongoing capital needs and anticipated system upgrades or expansions. Operations and Rates - Smooth operations reflect management's expertise in maximizing efficiencies despite its inevitably politicized environment. INIanagernent has to meet the ongoing practical needs of its system while balancing the political limitation of raising rates and charges. This process includes the maintenance of sufficient operating capacity at periods of peak usage and flexibility to raise rates in order to maintain facilities or handle unanticipated requirements. Debt Levels and Structure - Moody's utilizes several ratios to determine how heavily the system is leveraged. Debt structures usually reflect the useful life of the assets being financed, thereby creating a payment schedule in which future required debt does not unduly stress system revenues or system cus- toners (via excessive rate increases). Legal Provisions - These include the following: pledge of gross or net revenues; flow of funds; size and structure of reserves; rate covenant; and, additional bonds test. Moody's Special Comment 11 MOODY'S APPROACH TO REVENUE BONDS INCORPORATES ASPECTS OF STRUCTURE, LEGAL PROVISIONS, DEBT PROFILE, RATE SETTING AUTONOMY, MANAGEMENT STRATEGIES, AND PERFORMANCE Legal Provisions The primary legal document defining a revenue bond structure is the "indenture" or "master res- olution". This document specifies the assets pledged to debt service (principal and interest) requirements. Generally, these are revenues generated by the service provided by the system for which debt is being issued; they are typically sufficient to cover both operations and debt service. As a rule, net revenues (those remaining after operating and maintenance [O &M] expenses are paid) are pledged first to debt service. An important credit factor addressed in the indenture is the rate covenant. The rate covenant mandates that the governing body assess rates sufficient to generate revenues at a designated threshold level. For instance, a system with a net revenue pledge of 1.1 times, covenants that net system revenues will be sufficient (during every year in which bonds are outstanding) to cover O &M expenses with a multiple of $1.10 of net revenues available for every $1.00 of debt service due. Moody's generally views covenanted requirements as a "floor" and looks for greater flexibili- ty for high -grade ratings; exceptions can be made for very large or primarily wholesale systems. The additional bonds test (ABT) is another legal provision. The ABT specifies that the issuer's revenue stream must demonstrate sufficiency to provide coverage of both existing and proposed debt service. The most conservative ABT is purely historical in nature, however, it is not uncommon for the ABT to factor in adjustments for future rate increases. The ABT is important because its intent is to ensure that future debt issuance does not erode bondholder security by creating too great a burden on the system's revenue stream. While not legally required, the ABT is often expressed as a coverage level equivalent to the rate covenant discussed above. 12 Moody's Special Comment The flow of funds requirements reflect the process by which revenues are allocated to various sys- tem funds created within the indenture Usually, monies are deposited into a general revenue fund from which monies flow into other funds. This generally occurs in the following order: first, O &M; second, debt service; third, debt service reserve fund replenishment; and, fourth, any other authorized system uses. Even gross pledges, when debt service is paid first, are evaluated on a net basis because Moody's views operations as paramount to longer -term viability. It is important to note that, if allowed, unrestricted transfers to funds outside the system (particularly to the issuers's General Fund) should be closely monitored as they can diminish system liquidity. The debt service reserve fund (DSRF) is another important structural component of a revenue bond. First, the DSRF creates a fiscal cushion substantial enough to prevent an immediate default when revenues are insufficient to cover debt service requirements. Second, utilization of the DSRF serves as a warning that operations and /or service rates may not be sufficient. The DSRF is typically funded in one of three ways: 1. from bond proceeds 2. incrementally from system revenues over a pre- determined period (traditionally 5- years) 3. with a surety bond. The size of the debt service reserve fund is limited by provisions of the 1986 Tax Reform Act which reduced the maximum amount to be funded from bond proceeds to 10% of issue size. As a result, the DSRF is often maintained at a level equivalent to the lesser of 10% of bond proceeds, Average Annual Debt Service, or Maximum Annual Debt Service (MADS). Debt Levels and Structure of Debt A common measurement for evaluating the debt load of an enterprise system is the "debt ratio" which is derived by dividing total outstanding system debt (net of the DSRF) by its fixed assets and net work- ing capital. This ratio reflects the system's reliance on debt relative to its asset base. The debt ratio also reflects the system's ability to support future debt. Generally speaking, the lower this ratio, the less leveraged is the system. Debt structure is as important as debt levels. Debt structures that are heavily reliant on short -term or variable rate debt can subject the system to fluctuating interest rate environments, which can make planning, forecasting, and rate setting more difficult. In addition, both short -term and variable -rate debt necessitate greater flexibility and autonomy to set rates. • Rate Structure In general, Moody's believes that systems which are able to set rates and charges independently of regu- latory bodies or local government boards are better positioned to meet the ongoing needs of their sys- tem because of their greater autonomy. Moody's believes that risk is reduced when rates are sufficient to support the costs associated with maintenance and operations, debt service, and to a certain extent, ongoing improvements as well as funding needs arising from unanticipated events. Though water and sewer systems generally function as monopolies within their service areas, relatively high rates can increase risk by limiting management's future flexibility to raise rates. In addition, unusually high rates could mask inefficiencies within the system or diminish the potential for future expansion. Conversely, unusually low rates could reflect a trend of deferred maintenance or result in extremely narrow debt ser- vice coverage levels —both factors often reflect management flexibility and political environment. MANAGEMENT AND STRATEGIC PLANNING ARE IMPORTANT FACTORS IN EVALUATING OPERATIONS Management In Moody's view, management is an important factor in the analysis of credit quality; management's flexibility to create an adequate rate structure and effectively dictate the direction of the enterprise despite the existence of political pressures is always an analytic focal point. Given these inherent pres- sures, water and sewer systems are often administered by independent boards. Thus, management's skill in interacting with both political and regulatory agents, while maintaining an agenda focused on best practices, is a key credit consideration. The institutionalization of good management practices can diminish the impact of a change in key personnel as reflected in budgeting techniques, methodologies used for capital planning, and responsiveness to regulatory shifts. Moody's Special Comment 13 Operations Though management is a critical credit factor, a number of practical points must also be examined. For example, water systems, that are simply distribution conduits, are far less capital intensive than sys- tems that treat water. Regardless of the type of operation, management considers whether the enter- prise has sufficient water rights to meet both current and reasonably projected near -term demands. Wastewater operations also range from simple collection systems to collection, treatment, and disposal systems. Though collection systems lack the heavy capital requirements associated with treatment sys- tems, they face additional risks associated with unanticipated rate increases from their treatment providers. Because a water or sewer system can be either a wholesale client or wholesale service provider, an important factor in the operational analysis is the number, structure, and length of any service agreements. Systems and Service Area Considerations Moody's believes that water enterprises are essential components of a community's economic health as the availability of water can dictate an area's rate of growth. Similarly, if a wastewater system is at or /near capacity, moratoriums may preclude new construction (housing developments, food processing plants, etc.). In its analysis of the service area, Moody's assesses the local economy's continued ability to support system operations. This includes analysis of the customer profiles and whether the system's clients are residential, commercial, or industrial. A key consideration is the degree of concentration in the user - base as this lessens the system's susceptibility to economic shifts or downturns. Resident wealth levels are also analyzed to determine the local population's ability to pay the system's rates. Excessive growth in a service area could tax a system's capacity. Conversely, a decline in customer base could leave the system with excess capacity, which could undermine finances. For additional information refer to Moody's rating methodology piece titled "Analytical Framework for Water and Sewer System Ratings" dated August 1999. 14 Moody's Special Comment WHAT IS A MOODY'S CREDIT RATING? Moody's ratings are intended to provide capital market participants with a framework for comparing the credit quality of debt securities. A credit rating compresses an enormous amount of diverse information into a single symbol. Credit quality embraces relative default probability, loss severity, "financial strength ", and "transition risk. "t Bonds with the same credit rating, therefore, may he comparable with respect to overall credit quality but may differ with respect to specific credit quality characteristics. Aaa Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are gener- ally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection map not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long -tern risks appear somewhat larger than in Aaa securities. A Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obliga- tions. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding invest- ment characteristics and in fact have speculative characteristics as well. Ba Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. ,Vote: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification fzom Aa to Caa. The modifier 1 indi- cates that the issue ranks in the higher end of its generic rating category; the modifier 2 indicates a mid range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic categwy. 1 Financial strength refers to intrinsic creditworthiness, which abstracts from potential (and uncertain) external support elements (such as a rescue by a third party). Transition risk, refers to uncertainty with respect to the levels and timing of credit events: high transition risk credits have relatively high probabilities of large rating movements. Examples of sectors subject to high transition risk are banks, sovereigns, investor -owned utilities and local government authorities. Issuers in these sectors derive significant credit strength from external sources of support: bank regulators, multilateral institutions, rate commissions and state governments. Furthermore, confidence - sensitive issuers with high levels of short term funding, such as securities firms, also face high transition risk Moody's Special Comment is Juawwoj leiaadS s,kpoow g L T f 105 :.taq —N vodz,H 8597'fSSZIZ711"'rival(`SA aqi apzssn0 VSA aq1 uz a"f 11 0869 118'008 11 0 asvdld `(auniuzuYa saado 001) moda.t sags fo slutIdda capo o uonelndod leioi Xq popLqp `:Cziado.zd algexei ;o anleA Iltt3 pa1eutnsg - elydej .rad amen rind uonelndod Imoi nq pap!Atp `;qaP Ilptano 1aN - elydvj lad jgja j1eraAo jaN uonelndod lnoi -Cq papjAy `igap loa.itp iaN - vgdej .rad 1gaQ 1.)a qa 1aN Cuado zd algrxe; ;o ante° I[t?F Pa1etIltlSa -,) Aq popLx p `agog IIp tano 1aN— uap-uW 1 QaQ 11eaanp RN .�).tado.zd algex .i }o an[PA IIn3 Pazet.ugsa agp Aq papLAtp 4gap ioa.up iaN - uaprng 7gaa 1,7a rrQ 1aN :soijflg oimvoato.)j pup zgaQ iCdX •amen passasse aenela.z uodn paspq pauop -todde Xllptaua� si igap 3L[ _ I_ •(sanssc aqz jo siaurl otgdei4oa2 age utgltm paieool aae st un zagpo aqp) it agsapun - to (shin saq age jo sittuil atgde t oad atp uul�tm iCp ted -to �Ilogm mpq -.) paxpaol st zansst aqp) it delzaeo .aqua gonlm shun leJuatuutanoo leaol ja po jo lgap aq1 }o a.tegs aimotuodo -id s,.tansst oL[I - )qaQ Wurddetranp -suonarpsunf ihuddel.zano IIp jo igap ioaitp iau otp jo oiegs algeotldde s,aansst aqi snld igap ioa_up la -1gaa rferanp 1aN - S uo no t p s u n l O u tdd e l.t a A 0 I I p }o igop ioastp iau aqi jo a -iegs algeagddp s,.tansst aqz sold igap iaaup JaN -1gda jreranO le1 •lgap 4un toddns 31as Ile pup suonelnurnooe putj 4utjuts ssal lgap 1aa up iaN -1gaQ papuog 1aN Jo lqda 1.ra 7a MAI •ztun lezuauzun - noS .tagiom gum uoizpptlosuoo to n.toit.z:tai jo uotlexauue oLp q.nozgl pauznssp .to autpu unko s,juauruzaeo' aqi uT pa.unout aq :Cetu igap ixmi(j •.tanssc aqi jo (sajou Luna -hogs �Ilea�clu) igop popun}un :Cue pue igap papuoq Imoi ay jo urns aq -1gaQ papuog sso rg .ro 1gda 1aa1ra :Svuauodu10D :SOI1d21 aNd S1N3NOdWO3 a3X3d8 lVdl3lNnw 0 =_ Moody's Investors Service Municipal Credit Research May 2001 Special Comment Minnesota Cities Exhibit Strong Credit Qualities That Are Expected To Be Maintained Over The Long Term Moody's rates the general obligation, unlimited tax debt of 172 cities and townships in the State of Minnesota. Moody's expectation that the solid credit quality of Minnesota cities will continue is based on the following three principal factors. First, the cities benefit from a strong state economy, which has led to low unemployment rates, as well as growing and diversifying tax bases. Second, they have a demonstrated history of generally sound financial positions, exhibit- ing healthy reserves (with a median General Fund balance of 52.5% of General Fund revenues). Third, the cities generally carry well- structured debt profiles, characterized by rapid amortiza- tion schedules, and generally above average debt burdens due to significant issuance of special assessment and tax increment bonds. The chart below illustrates the rating spectrum, and the median rating for Minnesota cities, which is A3. The rating distribution, and A3 inedian rating for MN cities, reflects the fact that Moody's carries ratings on many Baa credits in Minnesota, whereas in other states across the nation, credits of below A rated quality often go unrated or insured without an underlying rat- ing. Hence there is a skewing of the distribution both nationally and in the state. Since January 1996, there have been 53 rating changes, with upgrades comprising 75% of the total. This trend reflects, in part, the strong national and regional economic growth, which has prompted tax base growth and strengthened financial operations. continued on page 3 New York .. _.......... _...... _..... Jonathan North 1.212.553.1064 Patrick Williams 1.212.553.4940 Adam Goldin 1.212.553.1691 Dianne Golub 1.121.553.0566 Linda Ebrahim 1.212.553.4132 Steven M. Levine 1.212.553.4097 Minnesota Cities Exhibit Strong Credit Qualities That Are Expected To Be Maintained Over The Long Term Moody's rates the general obligation, unlimited tax debt of 172 cities and townships in the State of Minnesota. Moody's expectation that the solid credit quality of Minnesota cities will continue is based on the following three principal factors. First, the cities benefit from a strong state economy, which has led to low unemployment rates, as well as growing and diversifying tax bases. Second, they have a demonstrated history of generally sound financial positions, exhibit- ing healthy reserves (with a median General Fund balance of 52.5% of General Fund revenues). Third, the cities generally carry well- structured debt profiles, characterized by rapid amortiza- tion schedules, and generally above average debt burdens due to significant issuance of special assessment and tax increment bonds. The chart below illustrates the rating spectrum, and the median rating for Minnesota cities, which is A3. The rating distribution, and A3 inedian rating for MN cities, reflects the fact that Moody's carries ratings on many Baa credits in Minnesota, whereas in other states across the nation, credits of below A rated quality often go unrated or insured without an underlying rat- ing. Hence there is a skewing of the distribution both nationally and in the state. Since January 1996, there have been 53 rating changes, with upgrades comprising 75% of the total. This trend reflects, in part, the strong national and regional economic growth, which has prompted tax base growth and strengthened financial operations. continued on page 3 Author Jonathan North Senior Associate Kristofer Love Production Associate Brett Love g Copyright 2001 by Moody's Investors Service, Inc., 99 Church Street. New York, New York 10007. All rights reserved. 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The credit ratings, 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. 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. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. Pursuant to Section 17(b) of the Securities Act of 1933, MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds. debentures, notes and commercial paper) and preferred stock rated by MOODY'S have, prior to assignment of any rating, agreed to pay to MOODY'S for appraisal and rating services rendered by it fees ranging from'S7,000 to $1,500,000. PRINTED IN U.S.A. Moody's Special Comment Strong State pQPgmyAenefts Llederlyeng C>t►es � � ..��. � �� Minnesota has enjoyed a strong economy over the past several years, largely the result of a diverse econo- my, favorable demographic trends, and healthy income growth and employment trends. While more heavily represented in certain areas, the employanent mix among sectors closely mirrors that of the coun- try overall, making for one of the more diverse economies among the states. Manufacturing as a percent of the total non -farm employment has declined from 23.9% in 1960, to 16.5% in 2000. While the overall decline in reliance on manufacturing has allowed for continued economic diversity, the industrial sector remains strong compared to the relative decline in other areas of the cotuntry, specifically in such areas as instruments and industrial machinery, as well as resource - related sectors such as paper and food. The state has steady positive net migration Minnesota vs. National Population Growth patterns, and annual population 18 rates that 1% keep pace with the national growth trend, while 1 6 % % � outpacing the region. Historically a wealthy state, 1 4% Minnesota's personal income per capita has 10% 2% grown over the years relative to the U.S., from ' IR lo% 102.2% of the U.S. figure in 1990 to 107.9% in 811VO 1999. This ranks the state second among its 6% North Central neighbors for personal income per q % capita and first in personal income growth during 2% the 1990s. As a result of the national economic o% boom that has defined the last decade, unemploy- 1950 1960 1970 1980 1990 2000 ment rates have continued to decline. At 2.8 %, -a- Minnesota - U.S. 2000 unemployment marked the third consecutive year that Minnesota logged an unemployment rate below 3 %, compared to the U.S. rate of 4.0% in 2000. Through the 1990s, Minnesota maintained solid employment growth, despite the tight labor market. From 1990 to 1999, the state's non -farm employment growth of 22.5% outpaced the national rate of 17.6 %. These strong economic and wealth trends have resulted in the appreciation of property values, which has benefited local communities via expanding tax bases. Moody's Special Comment 3 Finances Characterized. By HealthyjuO Balances w Minnesota cities' finances are characterized by sizable financial reserve levels. The median General Fund balance (of rated cities) is a healthy 52.5% of General Fund revenues. In part, these sizable balances are a reflection of conservative budgeting practices. Typically, cities have reserves designated expressly for con- tingency purposes. However, the substantial reserves are also a response to a timing imbalance between property tax revenues and expenditures. While operating expenditures remain fairly level throughout the year (cities operate on a January 1 - December 31 fiscal year), the first property tax payments are not received by the county until May 15th, which the counties then remit to the underlying cities. This is sig- nificant in that property taxes, which comprise roughly one -third of most city operating revenues, is Median IMV by Rating not received until five or six months into the fiscal 6,000,000 year. As opposed to the other entities that will rely on annual short -term borrowing for cash -flow, 5,000,000 — Minnesota cities typically maintain a portion of the 4,000,000 , General Fund balance designated for working capital or cash flow needs. Depending on the historical prac- 3,000,000 . tice and the stated strategic use of such designated or 79 _ FS 2,000,000 reserved funds, Moody's may include these line - items in our analysis of " undesignated" reserves. The " 1,000,000 median undesignated reserves for rated cities is still an ample 44.9% of General Fund revenues, again 0 evidencing conservative budgeting practices coupled with the need to provide adequate liquidity through- Moody's Rating th As the primary economic driver of the state, the Twin City seven county metro- politan region continues to experience eco- nomic growth. Evidencing the strength of the regional economy, the seven counties carry high ratings on their general obliga- tion debt: Anoka County - Aa3; Carver County - A2; Dakota County - Aal; Hennepin County - Aaa; Ramsey County - Aaa; Scott County - Al; and Washington County - Aa2. Furthermore, of the 40 upgrades since January 1996, more then half have been from the 7 county metropol- itan area. In all cases, the rating upgrades were driven by consistently strong financial operations, coupled with significant tax base growth and diversification. out e year. Legi,.slature Allows Legit, L mats; Sunset, l>imted Impact On Credit Ratings Historically, the Minnesota State Legislature had enacted levy limits, which limited the amount that a city (with populations exceeding 2,500) could increase the tax levy. There were allowances for certain Ievies to fall outside of this limit, and new development was excluded. However, these limits were allowed to sunset in the 1999 legislative session, and the future of levy limits remains unknown. Moody's believes that the lifting of the levy limits has had a limited impact on the credit fundamentals of most cities. Furthermore, Moodv's also believes that possible reinstatement of levy limits would not inherently weaken the credit fundamentals of MN cities. While fully developed cities, or those with stag - nant growth, were hardest hit by the levy limits, most cities were able to successfully operate within the limits. New tax base growth was effectively able to offset limits placed on the existing tax base, particularly in fast growing regions, such as Dakota County and the St. Cloud corridor. 4 Moody's Special Comment Minneota Unemployment 2,800 8% — 7% 2,700 6% �, — 1 2,600 t% 5% 2,500 4% 2,400 3% 1 1 2,300 2% - [ 2,200 1% 2,100 u " 2,000 0% 1990 1991 1992 1993 1994 1995 196 1997 1998 1999 2000 MN Unemployed 0 U.S. Unemployed -o-- Total Minnesota Employment Finances Characterized. By HealthyjuO Balances w Minnesota cities' finances are characterized by sizable financial reserve levels. The median General Fund balance (of rated cities) is a healthy 52.5% of General Fund revenues. In part, these sizable balances are a reflection of conservative budgeting practices. Typically, cities have reserves designated expressly for con- tingency purposes. However, the substantial reserves are also a response to a timing imbalance between property tax revenues and expenditures. While operating expenditures remain fairly level throughout the year (cities operate on a January 1 - December 31 fiscal year), the first property tax payments are not received by the county until May 15th, which the counties then remit to the underlying cities. This is sig- nificant in that property taxes, which comprise roughly one -third of most city operating revenues, is Median IMV by Rating not received until five or six months into the fiscal 6,000,000 year. As opposed to the other entities that will rely on annual short -term borrowing for cash -flow, 5,000,000 — Minnesota cities typically maintain a portion of the 4,000,000 , General Fund balance designated for working capital or cash flow needs. Depending on the historical prac- 3,000,000 . tice and the stated strategic use of such designated or 79 _ FS 2,000,000 reserved funds, Moody's may include these line - items in our analysis of " undesignated" reserves. The " 1,000,000 median undesignated reserves for rated cities is still an ample 44.9% of General Fund revenues, again 0 evidencing conservative budgeting practices coupled with the need to provide adequate liquidity through- Moody's Rating th As the primary economic driver of the state, the Twin City seven county metro- politan region continues to experience eco- nomic growth. Evidencing the strength of the regional economy, the seven counties carry high ratings on their general obliga- tion debt: Anoka County - Aa3; Carver County - A2; Dakota County - Aal; Hennepin County - Aaa; Ramsey County - Aaa; Scott County - Al; and Washington County - Aa2. Furthermore, of the 40 upgrades since January 1996, more then half have been from the 7 county metropol- itan area. In all cases, the rating upgrades were driven by consistently strong financial operations, coupled with significant tax base growth and diversification. out e year. Legi,.slature Allows Legit, L mats; Sunset, l>imted Impact On Credit Ratings Historically, the Minnesota State Legislature had enacted levy limits, which limited the amount that a city (with populations exceeding 2,500) could increase the tax levy. There were allowances for certain Ievies to fall outside of this limit, and new development was excluded. However, these limits were allowed to sunset in the 1999 legislative session, and the future of levy limits remains unknown. Moody's believes that the lifting of the levy limits has had a limited impact on the credit fundamentals of most cities. Furthermore, Moodv's also believes that possible reinstatement of levy limits would not inherently weaken the credit fundamentals of MN cities. While fully developed cities, or those with stag - nant growth, were hardest hit by the levy limits, most cities were able to successfully operate within the limits. New tax base growth was effectively able to offset limits placed on the existing tax base, particularly in fast growing regions, such as Dakota County and the St. Cloud corridor. 4 Moody's Special Comment s luaurWoD /Goads S,kpooW •saarurpuadxa lelidec, aaueug of papaau IOU a.Ie SuiE3.11S anuaea.i .Iaglo leLll lualxa a[P of - [Irglxall le[JUeu[i suapEOSq ,(Iuo pLre `S1JalO.id IE1CdEJ a11[aadS Ol palearpap ST UTe0.11S 311LIaA3.1 aql lelp SaIOu s,,�pooy, `IeTagauaq sr amMAa.T }O as -rhos leuonlppe (uu alrlltVl •1iod.irV leuor�ag pnolD is aqp pue (Ieagrl Ai113 aql of sluauianozduir ioi xel sales luau 31eq e panoiddE pnolD •iS To sluaprsaz `npuaaas lsoW •(asod -.Ind pue salei furpuput ls[I ioj 4-my aas) Lunpua.Iajai aLp a.Tojaq s, eT 061seal le parduuapr aq isnut yn{m SIUaUIaAO.iduii lelydea >f4pQds of asn ui pauuirl sr anuana_r aq •IEAOIdde .IalOA Lne$ Ol OU[IIe3 asagi 3o ,qs qum `I/61 aaurs xEl aql asoduir of sappm) Z� pazr_Togine segazluelsLOal aql `0007 taquiaaaQ jo sy •uon -gala Ie.Iaua2 e le uinpua.Iapi joiOA Ol laafgns IeAO.idde le.ug aql grim `gels aql Xq papuoid aq uaLP lsnLu nu loglne aAuelSrOa-1 •alels aql LUOJJ uO[lelsrjal °urlgeua isanba.i pLIE auo asodurr of aarsap e 2LFQEDFPUf uou - nlosai E ssed 1snut 1s.Ig It `xei sales leaol e asodwr of (1lunoa Io) Xim e .Io3 'lr sAkolle uouelsi�ai fuggEUa ssalun `alnleis Xq paltgigoid nlle.iQma l ST xEl sales IEaol e 3o uoulsodun aq j •xei To Aki srgl Ouisodmi Spuasina saugedpfunlu ;)Ala.," tiluo yiAl, `adoDs pallui[I seq elosauuryV' ur xEl asn puE sales Ieaol aLlj_ ash : -Isapnw seH: XEI F301 Property TUS MSS Rate e a In 1997 and 1998, the state gradually reduced the taxable value of all property, which result- ed in an overall net decrease in Net Tax Capacity in all but the most rapidly growing communities. The decreases in classification rates were most pronounced in the Commercial /Industrial sector, which has dropped from 4.6% as recently as levy year 1996, to 3.4% in levy year 1999. In areas with high concentrations of Commercial/Industrial properties, and in mature communities with little new development to offset the rate reduction, the drop in Net Tax Capacity was significant. In some cases, this reduction has put pressure on tax increment revenue streams. However, cities for the most part have responded to these changes effectively, thereby mitigating the overall impact (see Red Wing sidebar). Reliance On Unlimited Tax, General Obligation Debt; Statutory Debt limit Nas Uttle Impact. .. _...:: While the vast majority of debt issued by Minnesota cities is secured by a general obliga- tion unlimited tax pledge and state statutes limit the amount of general obligation net debt that a city can incur to 2% of its estimated market value, most cities have substantial mar- gins under those limits. The statutory defrii- tion of net debt excludes debt supported by sources other than the general levy, such as special assessment, tax increment revenue, and enterprise revenues. Cities, for the most part, rely heavily on special assessment and tax increment debt to satisfy their capital needs. These supporting revenues not only provide margin against the debt limit, but also help to mitigate the impact of the debt on the general levy. If the enterprise has supported its annual debt service requirements from operations for three consecutive years, Moody s will back out the related debt from our debt burden equa- tion, as the burden is relieved from the proper- ty tax base. While Moody's make a qualitative note of other supporting revenue streams, such as tax increments, Moody's does not exclude this debt from our quantitative analysis nor our published ratios. In general, while !Minnesota cities have debt burdens that are above average, the level of direct debt incurred has overall trends that correspond to the credit rating (see accompanying chart). 7.0% 6.0% 5.0% _ 4.0°% 3.0% 2.0% 1.0% 0.0% cam` Moody's Rating 6 Moody's Special Comment Median Direct Debt Burden by Rating 8.0% Moody's Special Comment 7 ivawcuoD 1eaad5 s, CpooW 9 1uauuu-io3 ieoads s,kpooW juawwoj jeaadc s, - pooW OL