Evaluations of Local Government Bond Issuance Market

Presentation to the Florida Government Finance Officers Association

May 2012John Incorvaia, SVP

2

Outline

1. Introduction: National Trends

2. Florida Economy

3. Florida Debt Securities

4. Florida Sector Issues

5. What We’re Watching

6. Special Tax Methodology

7. Looking Ahead

3

Introduction: National Trends

4

Themes in U.S. Municipal Finance

» Significant changes in market dynamics since 2008: – Bond insurers mostly gone

– Build America Bonds came and went

– Borrowing for capital spending is much reduced as public scrutiny rises

– Still strong demand for tax-exempt paper, but retail investors more skittish

– Absolute rates remain very low, in lock step with Treasuries

– Despite changes, tax exempt market functions very smoothly

» Credit pressures persist, with negative outlooks on most sectors

» Downgrades have outnumbered upgrades for 12 consecutive quarters

» Credit fundamentals continue to support high ratings in many sectors

» Municipal default rates remain low, in line with our expectations

» Defaults expected to rise, but still remain few in number

5

Unprecedented Financial Stress Across Municipal Sectors» Municipal market is broad and has diversity of credit risks

» State and local governments continue to be stressed through the weak recovery

» End of federal stimulus made 2011 an even more stressful year for state and local governments

» Moody’s has had negative outlooks on state and local governments for 4 years

» Downgrades have outpaced upgrades for 13 consecutive quarters

Source: Moody’s Investors Service

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q120

50

100

150

200

250

Downgrades Upgrades

Rating Changes by Number

6

The Revenue Downturn Was Severe and Recovery Remains Uncertain

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

201120102009200820072006200520042003200220012000

Yar o

ver Y

ear

% C

hang

e

(20.0)

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%

Year-Over-Year % Change Total State Tax Revenue

Year-Over-Year % Change Local Government Tax Revenue

Source: Rockefeller Institute of Government, Bureau of the Census

» Both state and local tax collections were hard hit during the downturn

» Some positive signs, but governments are not out of the woods yet

» State government taxes are more economically sensitive and face challenging environment

» Local governments entered the downturn later, but property taxes will continue to be weak amid listless housing market

5

7

Total Tax Revenues Recovered, but Still Lag Prior PeakNational Totals of State and Local Tax Revenue, by Type of Tax—Percentage Change on a

Year Ago

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11-15

-10

-5

0

5

10

15

Income Sales Property Other Total

8

Spending and Debt Have Outpaced Tax Revenue GrowthYear-Over-Year Percentage Change in Debt and General Fund Spending

Source: U.S. Census Bureau

-10%

-5%

0%

5%

10%

15%

20%General Fund Spending Tax-supported debt

9

Medicaid Costs Continue to Strain State BudgetsActual and Projected Medicaid Spending, 1970-2013 ($ billion)

Source: Congressional Budget Office; Federal Funds Information for States; National Association of State Budget Officers; Centers for Medicare and Medicaid

1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f0

50

100

150

200

250

2 6 1118

32

67

8998

112122

133 137 142150

158147

156168

181

196

$

10

Local Governments Strained by Weak Property TaxYear-Over-Year Quarterly Percentage Change in Local Tax Revenue

Source: U.S. Census Bureau

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Q3-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%Personal Income Tax Sales Tax Total Tax Collections

Change data

11

Local Government Revenue Sources

Local Government Revenue Sources (FY 2009)

State Aid33%

Sales Taxes, Income, Other Taxes

10%

Miscellaneous7%

Federal Aid4%

Charges for Service16%

Property Taxes29%

Source: U.S. Census Bureau

12

Weak National Economic Recovery is Primary Drag on Local Government Credit Quality

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%

2%

4%

6%

8%

10%

12%

120000

130000

140000

150000

Annual Unemployment Rate Number Employed

PercentUnemployed

Number Employed (Millions)

Source: U.S. Bureau of Labor Statistics

13

Defaults Most Significant In 1800s Depressions

1840s: nine of 26 states defaulted; four states repudiated debt (5%+ total par)

• Led to new state constitutions or debt limitation amendments

1870s, 1890s: city, county, special district defaults; no reliable recovery data

1930s: 0.5% loss, quick recovery for larger issuers

• Defaults likely triggered by bank failures, liquidity shocks

PeriodState, Local Gov't Debt* (millions)

Percent Par Defaulted

1837-43 $245 51%

1873-79 $1,000 25%

1893-99 $1,300 10%

1929-37 $18,500 16% (0.5% loss)

*average par outstanding in period

Municipal defaults significant in four previous depressions

14

Recent History Shows Few Defaults

Post WW II period was benign

1970-2011

» 5 general government defaults, 2 lease defaults among Moody’s rated issuers

» Mostly project and enterprise credits: hospitals, housing projects, real estate-related

» 11 rated defaults in 2010 and 2011

Great Depression often regarded as worse-case stress scenario for municipals

» Government is now much larger and more complex

» Pensions, municipal unions, entitlements, interconnected markets did not exist in scale in 1930s

» Federal government significantly less leveraged

» Neither Depression nor the post WWII experience may be relevant to current situation

15

Moody’s 2012 Default Study Signaled Potential Shifts

» Spotlight on general government default risk

» Non-debt obligations – pensions, entitlements, salaries – have grown faster than the resources to pay them

» Tax and revenue shortfalls and rising pension and retiree health care obligations are creating new stresses for many local governments

» Deep recession or US government debt crisis would likely result in substantially higher default rates for municipal bonds

» The effects of the financial crisis and recession are not over: most states, cities and non-profit organizations have adjusted to the new economic reality, but some have not

» Municipal defaults may exceed the historical average, although still likely to remain rare and isolated events

16

Recent U.S. Municipal Defaults

Issuers (#) 2008 2009 2010 2011

Rated by Moody’s 5 2 7 4

Unrated and Rated by Moody’s* 162 259 169 107

Volume ($millions) 2008 2009 2010 2011

Rated by Moody’s $ 3,678 $ 287 $ 609 $ 259

Unrated and Rated by Moody’s* $ 8,150 $ 8,952 $ 5,031 $ 24,616

Defaults are Higher Among Unrated Municipal Bonds

*Unrated data includes tobacco settlement bondsSource: Moody‘s, Income Securities Advisor, Inc.

17

Municipal Bankruptcy: Only Secured Bondholders Protected

» Municipal bankruptcies are rare events

» Municipalities in 28 states can file, but many hurdles

» Bankruptcy and default are not synonymous– Bankruptcy filing does not always result in a debt default, and a

payment default can occur outside of and without leading to bankruptcy

» “Automatic stay” may result in a payment default– Special revenue bondholders are better protected from stay than

GO bondholders

» Unsecured GO debt is more likely to suffer losses in a restructuring than secured debt and debt secured by special revenues

» Predicting levels of recovery for unsecured debt in a municipal bankruptcy is still uncertain due to the limited number of actual examples

18

Are New Patterns Emerging?

» Declaration of fiscal urgency/emergency– Many cities have invoked fiscal urgency/emergency to tackle spending cuts

– Not guaranteed effective

» Bondholders may not be as well protected as once assumed– Vallejo CA (unrated) defaulted on bonds, reconfigured labor contracts, but left pensions untouched

– Harrisburg, PA bankruptcy presents risks for GO bondholders

– Victor Valley, CA defaulted on tax increment bonds, following massive loss of housing values

– Stockton, CA pursues AB 506 mediation process, voted to suspend debt payments for 2012 and taps bond insurance for debt service

– Central Falls, RI continues to pay debt while renegotiating pensions in bankruptcy court

19

Pension Analysis Has Long Been Part of G.O. Rating Approach

» Moody’s has long considered pension liabilities and required annual contributions in our rating analysis … but recent large growth in unfunded liabilities increases their importance

» What has caused the recent growth of unfunded liabilities?

»Asset losses due to real estate and stock market weakness

»Granting of benefit increases at the peak of asset values

»Downsizing via early retirement incentives shifted costs from payroll to retirement systems

»Demographics – retirement of the “baby boomers”

» Moody’s ratings address repayment of government issued debt

» We are not rating the pension fund or it’s ability to pay retirees

»Pension liabilities and associated operating burden are one factor in our G.O. rating analysis

20

FY2005 FY20100

100

200

300

400

500

600

700

800

900

1000

$354 Bn

$795 Bn

UAAL

$, B

illi

on

s

Sources: Center for Retirement Research at Boston College 2010 aggregate data; Moody's estimate of additional 15%; Bureau of Economic Analysis

$416 Bn est.

(85% sample)

(85% sample)

(15% estimate)

(15% estimate)

$935 Bn est.

3.3% of GDP

6.4% of GDP

Pensions Continue to Pressure Public Sector

» Aggregate unfunded liabilities reported by a sample of 126 state and local plans have doubled since 2005

» Combined state and local debt + pension liabilities are approx 23% of GDP

21

Pension Liabilities are Understated . . . .

o Public pensions use 7%-8% discount rates / investment return assumptions that can understate liabilities

o Increased benefits, poor market returns and low annual contributions contribute to weak funding positions

o GASB has proposed two major changes for reporting purposes:

- Assets would be valued at market rather than smoothed

- Liabilities would be discounted by a blended rate

o Impact:

- Increases Liability

- Reduced funded ratio

- Increased annual required contributions

22

Florida Economy

23

Florida Economy

According to Moody’s Economy.com

Florida will recover faster than the region or the nation in the next couple years as its in-migration engine re-engages and procyclical industries rebound. In the long term, robust population growth and strong economic fundamentals will enable FL to outperform the national economy.

March 2012

According to State Office of Economic and Demographic Research

Florida growth rates are slowly returning to more typical levels. But, drags are more persistent than past events, and it will take several years to climb completely out of the hole left by the recession.

April 2012

24

Recovery expected to be protracted in Florida

It will be a slow recovery, . . .mostly due in part to the “large wealth that was lost and the poor labor market, both of which are applying downward forces on consumer spending.”

Home Equity is the one area that still hasn’t recovered to pre-recession levels, or even started improving yet, and it won’t recover like the financial markets.  That is the main thing that will hold consumers back.

UCF Economist Sean Snaith (Feb. 2012)

Nearly half the mortgages in Florida are underwater – owe more than home is worth

25

Data from RealtyTrac

Foreclosure Filings Remain Daunting

“Optimists point to declining home inventories in relation to sales, but they are looking at an illusion. Those supposed inventories do not

include about 5m housing units with delinquent mortgages or those in foreclosure, which will soon be added to the pile. Nor do they include

approximately 3m housing units that stand vacant – foreclosed upon but not yet listed for sale, or vacant homes that owners have pulled off the

market because they can’t get a decent price for them.” Financial Times

Foreclosure Process (once begun; Q4: 2011)

806 Days - 2.2 yrs - in Florida (3rd Longest Period in Nation)

At the beginning of 2007, 169 days.

February 2012

2nd Highest # of Filings

5th Highest Foreclosure Rate

Calendar Year 2011

2nd Highest # of Filings

6th Highest Foreclosure Rate

26

High Unemployment Rates Across the State

17 of 67 counties with double-digit unemployment

rates

27

Historical state unemployment rate

State Unemployment Rate is at a Historic High Relative to U.S.

28

Florida’s Job Market in Deep Hole

Although unemployment down from peak levels, the job market will take a long time to recover – about 766,900 jobs have been lost since the most recent peak. Rehiring, while necessary, will not be enough.

Florida’s prime working-age population (aged 25-54) is forecast to add over 2,600 people per month, so the hole is deeper than it looks.

It would take the creation of about 1 million jobs for the same percentage of the total population to be working as was the case before the recession.

Source: FL Office of Economic and Demographic Research

29

Fewer Jobs Means Less In-Migration

Besides Tourism and Retirement, people come to Florida primarily for Jobs. Thus in-migration is an important factor in the state’s growth. Nearly one million jobs lost in the state between 2007 and 2010.

Net in-migration as a % of Florida’s Population Growth:

92.0% - 1970 to 1980

86.8% - 1980 to 1990

85.3% - 1990 to 2000

81.3%* - 2000 to 2010

*Estimate

Growth has slowed to the lowest level in more than 60 years.

30

Less In-Migration Means Slower Economic GrowthPopulation growth is the state’s primary engine of economic growth, fueling both employment and income growth. And in-migration is the driver of population growth.

Florida’s long-term growth rate between 1970 and 1995 was over 3%. But going forward expected to average 1.1% between 2025 and 2030 with 86% of the growth coming from net migration.

Florida is on track to break the 20 million mark during 2016, becoming the third most populous state sometime before then – surpassing New York.

200015,982,824

201018,801,310

201118,905,048

203023,567,012

4,800,000

6,800,000

8,800,000

10,800,000

12,800,000

14,800,000

16,800,000

18,800,000

20,800,000

22,800,000

24,800,000

Source: FL Office of Economic and Demographic Research

31

Population is Aging

In 2000, Florida’s working age population (ages 25-54) represented 41.5 percent of the total population. With the aging Baby Boom generation, this population now represents 39.7 percent of Florida’s total population and is expected to represent 36.0 percent by 2030.

Population aged 65 and over is forecast to represent 24.1 percent in 2030.

9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9

0 - 4

5 - 9

10 - 14

15 - 19

20 - 24

25 - 29

30 - 34

35 - 39

40 - 44

45 - 49

50 - 54

55 - 59

60 - 64

65 - 69

70 - 74

75 - 79

80 - 84

85+

Percent

2010

9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9Percent

20102000 2030

Source: FL Office of Economic and Demographic Research

32

Florida Debt/Securities

33

Florida

FLORIDA – The Rules are different here.

34

Debt by Rated Security

COP11%

GO13%

REV42%

SPASS2%

SPTAX32%

TXALO2%

Florida Securities

COP10%

GO69%

REV17%

SPASS0%

SPTAX3%

TXALO1%

Nationwide Securities

35

Types of Debt Securities

General Obligation: Unlimited Tax and Limited Ad Valorem

Non-Ad Valorem: Trade-off of specific revenue pledge for “pool” of revenues

Tax Increment

COPs/Lease Rental – Primarily school districts (under Master Lease concept)

Enterprise: Airports; Ports; Toll Roads; Landfills; Resource Recovery; Electric; Gas; Water and Sewer; Storm Water; Parking, etc.

Special Taxes: Sales tax (dedicated and state-shared); utilities taxes; CST; Franchise Fees; Documentary Stamp taxes; Occupational (business) license taxes; Tourist Development Taxes; Gas taxes; Professional Sports Franchise taxes; Motor Vehicle license taxes; Car Rental taxes; Lottery, Liquor and Cigarette taxes; Guaranteed (and Second Guaranteed) entitlement revenue; 50% of prior year SRS; etc.

While Florida issues nearly all the above classes of debt, Special tax and enterprise debt represent the most significant proportion of debt – anomaly to rest of the country

36

Pressures on Certain Classes of Florida DebtGeneral Obligation (ULT & LT), Tax Increment and COPs– Declines in taxable values associated with tax base declines related to housing market correction and property tax reform limitations

Non-Ad Valorem – All of the above, plus rising fixed costs (operating and debt related)

Special Taxes –

CST – Elimination of land lines, state tweaking of taxing bundled services

Sales Taxes – Declines in consumer spending associated with weak economy, employment loses, and rising gas prices

State withholding Medicaid current payments from Counties Sales Tax Distributions

Gas Taxes – Uneven trend, dependent on pricing and discretionary travel

State Revenue Sharing - Declining

Documentary Stamp Taxes – Weak but recovering real estate transfers; state taking excess amounts over debt service from WMD’s for

own needs

Bright spot remains Tourist taxes which have been strong for nearly two years now.

38

Documentary Stamp Tax

2005 2006 2007 2008 2009 2010 2011 2012* 2013* 2014* 2015*0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Documentary Stamp Tax Falls With Housing Downturn [1]

Source: FL Revenue Estimating Conference

39

Sales Taxes Have Remained Relatively Stable

2005 2006 2007 2008 2009 2010 2011 2012* 2013*

0

5,000

10,000

15,000

20,000

25,000

Sales and Use Tax Trends

$000

Source: FL Revenue Estimating Conference

40

Medicaid Costs Continue to Strain State BudgetsActual and Projected Medicaid Spending, 1970-2013 ($ billion)

Source: Congressional Budget Office; Federal Funds Information for States; National Association of State Budget Officers; Centers for Medicare and Medicaid

1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f0

50

100

150

200

250

2 6 1118

32

67

8998

112122

133 137 142150

158147

156168

181

196

$

41

Coffee Break

42

Florida Sector Issues

43

Cities and Counties

o Rising health care, pension and OPEB costs pressuring operations

o Structural balance and improved liquidity not yet achieved

o Stabilizing tax bases and home prices with reduction in housing inventory

o Political decisions/platforms appear set to dominate FY 2013 budgets

o Impact of HB 5301 (Medicaid payments) on counties sales tax bonds and capacity

o Management’s ability to influence/expand the taxable base will be key – can’t cut your way to fiscal health, must have growth as well

44

School Districts

o Reductions both in capital millage and property taxes have drastically reduced capital spending and fund available for regular maintenance.

o Majority of capital millage used to pay significant amount of lease obligations outstanding.

o “75% Rule” no longer applicable to COPs issued prior to June 30, 2009.

o Uneven annual state funding, now potentially impacted by:o Adverse ruling on employee pension contributions (3%) to state plan

o November referendum on capping state spending

o Growing Medicaid expense and Medicare cuts

Surpluses generated in FY 2011, due largely to Jobs Bill and other one-time funds, have expected givebacks in FY 2012.

Lack of recent employee raises and position cutbacks could impact Class Size mandates as enrollment starts increasing – potential penalties could be sizable.

45

Water and Sewer Utilities

Many fared OK basically due to timely rate increases and/or surcharges automatically implemented with drought declarations

Anti-tax/fee issuers have seen narrowing coverage, erosion of liquidity and increases in accounts payable

State weakening of Water Management Districts (capping property taxes and reducing reserves) affects amount of available grants and larger planned projects

Alternate water supplies are needed as demand will again increase as the economy improves especially in central and southern Florida; State encouraging regional solutions

Regulatory requirements related to TMDL and other Nutrient Removal requirements could be potentially costly

Treatment and disposal of Biosolids – regional solutions?

Aging infrastructure needs to be addressed – leaks, broken pipes, etc.

Political appetite for rate increases?

WATER WILL COST MORE

46

Signs of Credit Stress

• Continual declines in major revenue sources

• Declining tax base and state sales tax receipts

• Increasing property tax delinquencies

• Continued funding cuts, uncertainties, irregularities

• Lack of spending discipline (non structurally-balanced budgets) and declining financial flexibility

• Continued decreased/deferred capital spending

• Declining flexibility – reserves and liquidity

• Debt restructuring which increases risk profile

• Payment deferrals

• Self-insurance deficits

47

What We’re Watching

48

What are we watching? What could change?» States: Revenues have returned to pre-recession levels, but spending pressures remain.

» Most states continue to manage by adjusting revenues and spending.

– Risks:

» Entitlement spending for pension, OPEBs, Medicaid continues to grow (although Medicaid spending as % of budget has been kept stable)

» Economic recovery is fragile

» Impact of federal deficit reduction plans

» Material shift in market confidence

» U.S. Local Governments: Small, weaker issuers will be most stressed, some distressed

– Risks:

» Further state aid cuts

» Some have exposure to enterprise risk with outsized debt levels

» Exposure to financial institutions, liquidity and credit facilities expiring

» Breakdown in political process that results in failure to pay debt, bankruptcy filing

» Impact of federal debt ceiling and deficit reduction plans

48

49

Things We’re Watching in Florida

o Rebuilding or continued erosion of equity and liquidity

o Debt restructuring and replacing expiring facilities, bank loans and private placements

o Impacts of continual cuts (furlough days, layoffs, etc.) on service delivery and flexibility

o Rising health care costs – who absorbs these increases? Plan changes.

o Pensions – Defined benefit vs. defined contribution; funding of ARC; outdated assumptions; increase funding requirements with updated assumptions and recouping of market losses

o How will November 2012 ballot questions on property tax reform and TABOR-like state spending caps affect local issuers?

50

Special Tax Methodology

51

Special Tax Bonds – Sector Overview

Tax-exempt bonds secured by a variety of dedicated tax revenues, excluding those secured by property taxes, with a legal structure securitizing the tax revenue stream

Debt structures are typically fixed rate fully amortizing bonds, but a handful have used variable rate debt and swaps

General Characteristics: More volatile than property tax revenues, though historic performance shows rare for revenues

to decline by more than 10% in any one year Passive in nature – once they are set only in rare cases can the rate be raised Demand based revenues – related to consumer behavior mostly Legal Structure – defined revenue pledge (secured bonds), flow of funds administered by trustee,

debt service reserve funds, additional bonds test, and usual “events of default” and “remedies” Bankruptcy – Special taxes that are dedicated for a specific project or system may not be subject

to the automatic stay during bankruptcy, regardless of the pledge type (i.e. property vs. sales tax)

51

52

Special Tax Bonds Defined – Rated Universe

Dedicated Special Taxes (i.e. Special Revenues in bankruptcy code) Rated primarily on the tax pledged, the legal structure, and debt service

coverage. Pledged revenues are usually dedicated for capital, passive in nature, and likely to be highly leveraged given the dedicated nature. The non-dedicated special taxes included in this methodology, typically are not a major operating revenue source.

Primary Operating Special Tax Secured by a special tax that is a significant revenue source for the issuer,

usually a sales, income, or utility tax. Thus, they have high coverage ratios yielding material excess revenues to support operations after debt service is paid in an open loop flow of funds. The analytical approach for these bonds was historically similar to that used for General Obligation Bonds and the rating was notched down or on par with the issuer’s General Obligation rating

Excludes ALL Property Tax Pledges and GO Related Bonds NO Florida Fixed Millage Property Tax bonds & CA School property tax

bonds

Special Tax Ratings have GO ceiling on their rating unless legal separation exists

52

53

Special Tax Bonds – Rated Universe

Wide variety of pledged special taxes (580 ratings) Local Governments: 411 rated issuer/security/lien combinations

Sales Tax most common (63% of portfolio) Gas, Hotel, Utility, Income, Car Rental, Meals, License and Fees, Fixed State Aid

States: 169 rated issuer/security/lien combinations Transit sales tax, Highway gas tax, and Others (Lottery, Rum, Document Stamp, Deed, Sales,

Cigarettes, Income)

Ratings range from Caa1 to Aaa and sector median is A1 with 94% rated A3 and above

Local Government ratings are more prevalent in states with property tax limits or voter authorized taxes and pledges (FL, TX, LA, OH, NM, IA, CO, AL)

No history of default among rated special tax bonds

Proposed Scorecard derived ratings are typically within one notch of current actual ratings

53

54

Special Tax Bonds Portfolio – Local Government Ratings54

411 rated unique issuer/security/lien combinations of U.S. Local Government Special Tax credits (We are finalizing an estimate of total rated debt outstanding)

Ratings range from Caa1 to Aaa and the median rating is A1 and 72% are A2, A1, or Aa3 94% of ratings are A3 or higher and 98% are Investment Grade Global Scale Recalibration of special tax credits resulted in a one notch rating increase

across the portfolio, except for Baa2 and below ratings, which migrated in place Many special tax ratings migrated as “notched” ratings off the GO rating, consistent with a

GO ceiling limitation for this methodology unless legally enhanced

Rating Distribution 411 Special Tax Local Government Ratings

Aaa Aa1 Aa2 Aa3 A1 A2 A3Baa

1Baa

2Baa

3Ba1 Ba2 Ba3 B1 B2 B3

Caa1

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Aaa Aa A Baa Ba B Caa0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0.2%

40.1%

54.0%

3.4%0.7% 1.2% 0.2%

55

Special Tax Bonds Portfolio – Local Government Ratings by Location55

50% of ratings are in FL (28%), TX (12%), and NM (10%) due to the historical approach to debt financing in those states

80% of ratings are located in the top 10 states listed below, with ratings in 38 states and Washington DC

FL TX NM AZ LA CO AL IA SD NV OH CA IL IN UT NY OK ND KS MNNE OR WI AR NC NJ PA SC AK DC GAMAMDMONH TN VAWA0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Located mostly in South, Southeast, and Midwest States of the US

FL TX NM AZ LA CO AL IA SD NV0%

5%

10%

15%

20%

25%

30% 28%

11% 10% 9%

5% 4% 3% 3% 2% 2%

80% located in 10 states

56

Special Tax Bonds Portfolio - Local Government Ratings by Security56

Primarily Sales, Gas, Hotel, and Utility Tax bonds (92% combined)The Hotel bonds listed below also include combined tax pledges like “Hotel/Car Rental” or

“Hotel/Parking” or “Hotel/Meals/Beverage” “State Aid” are the State Revenue Sharing Bonds in FL

Sales Gas Hotel Utility State Aid Income MVRT Document Stamp

Meals/Bev Other0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%63.0%

12.2% 11.2%

5.8%3.2% 2.2% 0.7% 0.7% 0.5% 0.5%

411 Special Tax Local Government Ratings by Security Type

57

Special Tax Bonds – Scorecard and Methodology Main Credit Factors57

Rating Grid:

Factor 1: Taxing Base and Pledge (30%)

» Metrics used to evaluate strength of economic base generating taxes and the quality of the pledge

Factor 2: Debt and Legal Structure (30%)

» Metrics used to evaluate additional bonds test and debt service reserve fund

Factor 3: Financial Metrics (40%)

» Metrics used to evaluate MADs debt service coverage, revenue trend and revenue volatility

Notching Factors (up or down in increments of ½ notches):

Uplift

» EX: legal enhancements, active management, institutional presence

Down Drag

» EX: potential state impairment of pledged revenue, complex debt structure, lack of monthly segregation, prospective additional bonds test, appropriation risk, weak debt service coverage,

reserve draws, etc.

58

Scorecard58

Factors Sub-Factors Very Strong (1) Strong (2) Average (3) Weak (4) Very Weak (5)

1. TAXABLE BASE AND PLEDGE -

30%

Economic Strength 15%

Very strong and very well diversified economic base

with solid growth OR PCI/MFI is 200% or greater

of national median for primarily residential bases

Strong and well diversified economic base with solid

growth OR PCI/MFI is 125% - 200% of national median for primarily residential bases

Developed and reasonably diversified economic base with average growth OR

PCI/MFI is 75% - 125% of national median for primarily residential

bases

Small to evolving economy with modest

diversification and some concentration with slow to

declining growth OR PCI/MFI is 50% to 75% of

national median for primarily residential bases

Deteriorating economic base with very little diversification or signficant concentration with declining growth OR

PCI/MFI is 50% or below of national median for primarily

residential bases

Nature of the Special Tax

Pledge15%

Very Broad (e.g. Sales, Utility, Income,

and Gas Taxes, Motor Vehicle Registration Fees; Fixed Payments from the

State depending on State's Rating)

Broad (e.g. Sales, Utility, Income,

and Gas Taxes, Motor Vehicle Registration Fees; Fixed Payments from the

State depending on State's Rating)

Average (e.g. Sales, Utility, Income, and Gas

Taxes, Motor Vehicle Registration Fees)

Narrow (e.g. Hotel, Car Rental, Meals, Lottery, Liquor, and Cigarette Taxes)

Very Narrow (e.g. Document Stamp,

Hotel, Car Rental, Meals, Lottery, Liquor, and

Cigarette Taxes)

Factors Sub-Factors Very Strong (1) Strong (2) Average (3) Weak (4) Very Weak (5)

2. DEBT AND LEGAL

STRUCTURE - 30%

Additional Bonds Test (ABT) 20% 3.0x and above OR a closed

lien 1.76x to 2.99x 1.26x to 1.75x 1.0x to 1.25x NO LIMIT

Debt Service Reserve Fund Requirement

10% DSRF funded at level greater than 1-year of MADS

DSRF funded at 1-year of MADS

DSRF funded at traditional 3-prong test

DSRF funded at level less than 3-prong test or a

springing DSRF

NO DSRF (or DSRF funded with low rated to below investment grade surety

provider)Factors Sub-Factors Very Strong (1) Strong (2) Average (3) Weak (4) Very Weak (5)

3.FINANCIAL METRICS -

40%

MADS Coverage 20% Over 4.5x Over 2.51x to 4.5x Over 1.51x to 2.5x Over 1.1x to 1.5x Less than 1.1x

Revenue Trend 10% Significantly improving with

one to no historic declineGenerally improving with few

historic declinesStable with some historic declines Declining Rapidly Declining

Revenue Volatility 10% Has never declined Negative fluctuations

generally within 0% to 5%Negative fluctuations generally within 5% to

10%

Negative fluctuations generally within 10% to

15%Negative fluctuations greater

than 15%

59

Scorecard – Notching Factors59

Uplift

1) Structural Enhancement - (1) Revenue diverted to trustee/external entity/lockbox and used to pay debt service with first in dollars before being distributed; (2) additional dedicated reserve funds with stable balances

2) Active management: (1) ability to raise pledged revenues; (2) demonstrated willingness/likelihood of parent to utilize non-pledged revenues to pay bonds

3) Additional Tax Base Strength: Tourist or regional service/shopping hub or other stable institutional presence (i.e. military/university)

4) Other - Specify the reason:

Down drag

1) Structural Complexities or Weaknesses: (1) Complex debt structure with notable swap and VRDO exposure; (2) Appropriation Risk; (3) Lack of Monthly Segregation; (4) State collects revenue and has the ability to lower the distribution to the underlying municipality below their debt service requirement.

2) Debt Service Coverage below key thresholds - Additional Bonds Test or 1.0x coverage

3) Additional leverage

4) Other - Specify the reason: (i.e. (1) Tax expires/sunsets prior to bond maturity; (2) major concentration; (3) using other reserves to pay debt service (not DSRF); (4) weakening competitive position; (5) Subordinate Lien; (6) GARVEE reauthorization; (7) Mass Transit Operating risk

60

Looking Ahead

61

Looking Ahead

• Finally seeing employment and tax base declines starting to stabilize as well as housing prices, although high sustained foreclosures with significant inventory to absorb, as well as Global uncertainties pose risk elements to recovery. Protracted and modest recovery expected.

• Operational stress will continue for the intermediate term – low lying fruit has been picked; three years of operational and department cuts have been made; capital spending greatly reduced; last fall’s political promises of no new taxes or fees come to roost in 2013; anti-tax sentiment has not diminished.

• Reserves tending toward minimum required levels and liquidity (and flexibility) has declined. Will focus be on stabilizing budgets or political expediencies?

• Continuing voter anti-tax sentiment and state “business” or budget actions continue to muddy the waters.

• At some point in near future – return to voters for separate voted bond securities?

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John IncorvaiaSenior Vice-PresidentMoody’s Investors Service7 WTC at 250 Greenwich StreetNew York, NY 10007Email: john.incorvaia@moody’s.comPhone: 212-553-0501Fax: 212-553-1390

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Schedule at a Glance

Monday, May 6, 2012

3:30 p.m. - 5:10 p.m. Accounting Complexities for Local Governments – Andrew Laflin

3:30 p.m. - 5:10 p.m. Budget Efficiency – Thinking Long-Term, Sustainable Planning, Being a Leader – Shayne Kavanagh

3:30 p.m. - 5:10 p.m. Are You Prepared? – Christopher Ghosio and Daniel O’Keefe

3:30 p.m. - 5:10 p.m. Stiffed On the Billing! – Harve Platig