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
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AGEN D,4ft.
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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.
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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.
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FREERS
ASSOCIATES INC
Ehlers & Associates
Key Financial Strategies
Financial Policies
Policy
Description
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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.
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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.
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EHLERS& ASSOCIATES
1 �:
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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
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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
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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
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=_ 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. 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 (includ)ng 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 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
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,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
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