PUBLIC FINANCE

1. PUBLIC FINANCE PHOENIX PUBLIC FINANCE William C. Davis Managing Director (602) 808-5428 William.c.davis@pjc.com Peter J. Phillippi Managing Director (602) 808-5427 Peter.j.phillippi@pjc.com James B. Sult, Jr., VP (602) 808-5425 James.b.sult@pjc.com Greg G. Swartz, VP (602) 808-5426 Greg.g.swartz@pjc.com Logan K. McKenzie, Associate (602) 808-5422 Logan.k.mckenzie@pjc.com Helen Cregger, VP (303) 820-5856 helen.x.cregger@pjc.com BOND RATING BASICS May 11, 2007

2. OVERVIEW • OVERVIEW • Understanding Bond Ratings • Understanding the Rating Process • What to Expect from your Banker • A Look at Arizona Ratings • A Surprise

3. BOND RATINGS • A relative measure of risk to bondholders that reflects an issuer’s willingness and ability to repay debt on time and in full. • Measure of financial strength that takes into account all of the resources of an issuer within given security provisions. • A measure of both what is known and unknown – a measure of uncertainty. • Ratings are comparative and relative. • Ratings are highly definitional – Anything Baa and above signifies essentially no probability of default; not just Aaa.

4. BOND RATINGS • While sound financial management is always a positive, rating criteria don’t necessarily correspond with your management priorities or the concerns of your community. • Ratings are certainly not intended to encapsulate all of the qualities of your community. • Ratings are larger than any particular individual, administration or legislative body.

5. BOND RATINGS Public Finance Ratings

6. GENERAL OBLIGATION BONDS • Full faith and credit of issuer with a pledge of either unlimited or limited property tax revenues • Generally the safest form of bond issue • Implied G.O. Rating = Issuer Rating

7. GENERAL OBLIGATION BONDS • Economy/Taxbase/Socio-economic factors • Management • Debt • Financial Performance

8. LEASE OBLIGATIONS • Typically secured by some form of general fund pledge to make lease payments for an asset • Issuing “shell” corporations • Specific asset lease vs. master lease • Value of asset(s) vs. par amount

9. LEASE OBLIGATIONS • Essentiality • Fixed asset vs. equipment • Rating typically “notched” off the GO/IR • General fund lease payment burden • Other Legal Covenants • Insurance • Reserve Funds

10. EXCISE TAX REVENUE BONDS • A gross or specific pledge of excise tax revenues • Excise tax revenue bonds • Moody’s – rating “notched” off GO/IR • These are typically general fund revenues • Operations typically highly dependent upon these revenues for operations • S&P – strength and consistency of revenue stream more important • Evaluated separately from GO rating • Dedicated sales tax revenue bonds • Not typically general fund revenues • Often voter-approved for specific uses/projects

11. EXCISE TAX REVENUE BONDS • Historical Trend of Revenue Growth • Debt Service Coverage • Additional bonds tests and reserve funds • Non-impairment clauses and other legislative issues

12. ENTERPRISE REVENUE BONDS • Water & Sewer Bonds • Electric Revenue Bonds • Combined System Pledges • Other

13. REVENUE ENTERPRISES – AREAS OF ANALYSIS • Type of System • Economy/Service Area • Financial Performance (Including Key Measures and Ratios) • Management • Capital Needs • Covenants and Other Security Provisions

14. TAX INCREMENT FINANCING • Secured by property tax revenues generated by incremental growth • Redevelopment project areas • Taxpayer concentration and tax appeals • Plan limits • Sunset date • Debt limits • Limits on amounts of incremental revenues which may be collected

15. TAX INCREMENT FINANCING • Additional bonds test • Multiple liens • Pass-through agreements, and housing set-asides • Often a passive revenue stream unless rates can be adjusted • Sometimes backed by broader pledge – other project areas or issuer/parent organization • Legislative issues

16. IMPROVEMENT DISTRICTS • Growing acceptance and activity by rating agencies • Municipal oversight enhances credit quality • Development agreements and step-up provisions can overcome risks • Concentration risks • High debt burden • Competitive tax rates and favorable location also strengthen credit evaluation

17. MMD YIELD CURVE COMPARISON

18. MMD YIELD CURVE COMPARISON$100 Million Amortized over 30 Years

19. SELECTED ARIZONA RATINGS* * Ratings are given in the following order: Moody’s, S&P and Fitch

20. ARIZONA CITY MOODY’S RATINGS

21. ARIZONA MOODY’S RATINGS CREDIT CHARACTERISTICS OF ARIZONA CITIES VERSUS NATIONAL MEDIANS

22. THE RATING PROCESS • Rating committee is not intended to be a mysterious black hole. Rather, its intent is designed to: • Maintain objectivity • Maintain consistency among ratings nationally • Ensure a broad perspective • Leverage functional expertise of individual analysts • Ensure quality control

23. THE RATING PROCESS continued • What’s not Fair: • Asking an analyst what rating he or she is recommending. • Asking which individuals will comprise the committee. • Asking how the votes were placed.

24. THE RATING PROCESS continued • What is Fair: • Asking the analyst for anticipated outcome of committee. • Asking what credit strengths and weaknesses the analyst intends to highlight to committee. • Asking the analyst what credits will be presented as comparables to committee. • Requesting that specific comparables are presented to committee. • Providing a list of credit strengths to be presented to committee. • Requesting that a specific individual with unique knowledge of your credit represent at least one member of committee. • Requesting a site visit or in-person meeting (acknowledging the limits of individual schedules).

25. WHAT TO EXPECT FROM YOUR BANKER • Their assessment of your credit. • Provision of comparable credits. • Benchmarking to enhance decision making. • Assistance in structuring transactions to ensure and maintain credit quality. • An advocate and cheerleader even outside of specific transactions. • Effective intermediary in communications.

26. SURPRISE! Pop Quiz