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Credit Factors Affecting General Obligation Bonds

  • Tax Revenues generated by a state, district, or a county.

  • The General Fund of a state, district, or a county. The income sources of the general fund of a state are primarily income taxes and sales taxes. Certain other sources of income include license fees and fines. The income sources of either a district or a county are primarily property taxes.

  • Other Sources of Income Some states don’t have a personal income tax. Instead they depend upon sales tax revenues as their primary source of general operating funds. Therefore, during times of economic contraction, fewer sales tax revenues are collected; thereby, reducing the amount of funds available to cover bondholders’ interest and principal payments when due.

  • Reductions of Federal Help to States During times of economic hardship and budget cuts, intergovernmental assistance to states and local governments might be impaired. When this happens, financial burdens are placed on localities to make up for potential budget deficits; thereby, reducing debt service coverage on outstanding municipal debts.

  • Economic factors Deteriorating economic conditions could potentially reduce the sources of income, states and local government rely upon. States’ income tax collection during times of economic contraction normally decline. Local governments’ property tax collection also normally declines during these times as property values contract; thereby, impairing the credit quality of municipal debt.

  • Budget Surplus/Deficit Sound management of a municipal general fund and/or budget is critical for maintaining good credit quality. High-grade issuers normally annually balance their budget, creating rainy-day funds, and have sequential budget surpluses for over at least five consecutive years.

  • Expenditures and Revenues Sources of revenues such as income tax, property tax, sales tax, fees and intergovernmental aid are critical for determining trends in tax collections. Not less important is the level of expenditures, and whether a state is mandated to balance its budget every year. Sound management of a municipality finances requires constant increase in the level of revenue and/or reduction in expenditures. This in turn increases the credit quality of an issuer.

  • Per Capita Debt Sound management of the per-capita debt of either a state, district, or a county should not exceed comparable national medians. If that happens, the credit quality of an issuer in that municipality suffers. Per-capita overlapping debt is also a factor affecting credit quality of an issuer. In this case, when evaluating the total debt of a school district, for instance, one needs to include the debt of all of the communities that are backed by the same taxing authority. In general, the percentage of debt of a general operating fund should not exceed 5% of expenditures. Excessive debt impairs the ability of a municipality to continue supporting its debt outstanding.

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