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Thread: Municipal bonding of special assessment districts

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    Cyburbian hilldweller's avatar
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    Municipal bonding of special assessment districts

    Is it fairly common for local governments to issue bonds based on anticipated special assessment revenues for particular projects (i.e. an assessment charged to new homeowners to cover the costs of new infrastructure in a subdivision)? How could this method affect the city's bond rating? Could this ever be done with a G.O. bond or would this be against the law?

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    Cyburbian Cardinal's avatar
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    I am no bonding expert, but I do not see why it can't be done. Other borrowing, such as that secured through TIF, may be done as a GO bond. This debt would also be paid for through a tax appropriation and backed by the general government.
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    Cyburbian boiker's avatar
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    It's been done here, although I'm unclear on how it worked.
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    Cyburbian Brocktoon's avatar
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    It happens all the time. A comparable examples are tax anticipation notes which is often used for gap financing or municipalities using future sales taxes to pay for stadiums.

    The benefit of using a special assessment tax over GO bonds is the assessment tax usually does not count against the debt ceiling of the city. This helps with the bond rating of the city since the debt is not counted against the cap.

    The down side is the city will probably be required to offer a credit enhancement which appears as an expense on the balance sheet. The reason for this is if the special assessment does not cover the debt service the bond holders have some assurances they will be paid. So every year the notes are outstanding a line on the balance sheet will show and expense of what ever the credit enhancement amount is. The money will only be used if the special assessment does not cover the debt. At the end of each fiscal year the unused money gets swept back to the general fund only to be reallocated.
    There are other credit enhancements that could be offer like insurance wraps, sinking funds or pledging of assets but the type listed above is what I am mostly farmiliar with.

    Hope this helps.
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    Cyburbian Emeritus Chet's avatar
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    I'd say its pretty common in larger cities around here. Brockton's response was pretty comprehensive.

    As long as the funding source is clearly known ahead of time, and committed to, the bond rating should not be affected as long as the municipal debt has been at reasonable levels and paid on time.

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    Cyburbian hilldweller's avatar
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    Quote Originally posted by Brocktoon View post
    The down side is the city will probably be required to offer a credit enhancement which appears as an expense on the balance sheet. The reason for this is if the special assessment does not cover the debt service the bond holders have some assurances they will be paid. So every year the notes are outstanding a line on the balance sheet will show and expense of what ever the credit enhancement amount is. The money will only be used if the special assessment does not cover the debt. At the end of each fiscal year the unused money gets swept back to the general fund only to be reallocated.
    Thanks for your great response. This is on top of bond insurance, right?
    Also, I would think that a special assessment would hurt the bond rating of the city due to the risk involved since it is essentially dependent on the housing market.

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    Cyburbian Brocktoon's avatar
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    Quote Originally posted by hilldweller View post
    Thanks for your great response. This is on top of bond insurance, right?
    Also, I would think that a special assessment would hurt the bond rating of the city due to the risk involved since it is essentially dependent on the housing market.
    Bond insurance in another type of credit enhancement. The municipality buys an insurance policy to cover the principal and interest. This increases the rating but does add cost to the bond issuance. Areas with poor bond ratings or when the market is demanding higher interest rates is when places will get insurance.

    When a city does these types of bonds the market usually demands a credit enhancement. Insurance or the other types I mentioned in my last post are examples of other types. I guess you could mix and match but I have never seen that.

    The dependence of the housing market and the fact that it is a special assessment could cause a reduction in the bond rating of the issue (this one special assessment bonding) but not on the rating of the cities credit worthiness overall. This means that when issuing these special assessment bonds they city could have to go to the rating agencies and apply for a rating.
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