This problem is based on a recent annual report of the City of Tucson. Dates have been changed.
1. The letter of transmittal from the city's finance director reports that the city's bonds were rated AA by Standard & Poor's. What is the significance of an AA rating? (Standard & Poor's ratings are similar to those of Moody's.)
2. Another city of approximately the same size received a bond rating of AAA, even though its overall financial condition by all reasonable measures was substantially weaker than that of Tucson. What would be the most likely explanation of why the city received a higher rating than Tucson, even though Tucson is more financially sound?
3. A note to the financial statements indicates that the total required general obligation debt service payments over thelifeoftheGObondswere$370million.Yetthetotal reported liability for GO bonds was only $209 million.
What is the most likely explanation for the difference? How can you justify reporting the lower amount, when it is the higher amount that will have to be paid?
4. The city's ''combined schedule of bonds payable'' indicates that GO bonds issued in 2008 bore interest at the rate of 6.4 percent, while those issued in the current year carried an interest rate of only 4.95 percent. Why do you suppose the city does not refund (redeem) the 2008 bonds and replace them with lower-interest obligations?
5. The Arizona constitution limits the amount of debt that a city can have outstanding to 6 percent of the assessed value of its property. The assessed valuation of property inTucsonwas$1,818,909,000.Inasmuchasonlycertain types of debt are covered by the limitations, the city's applicable debt was only $70,998,000, not $209,000,000 as indicated in Part 3 of this problem. What was the amount of the city's legal debt margin?
6. In 2008 the assessed value of the property in Tucson was $1,555,216,000, and the city had $110,910,000 in GO debt (and no balances in debt service funds).
By 2015 the assessed value of property had increased to $1,818,909,000, and bonded debt had increased to $209,000,000 (with $4,012,000 in debt service funds).
Taking into account the amount in the debt service funds, would you say that, other factors being equal, the city's debt burden was greater or less in 2015 than it was in 2008? Explain, making relevant computations.

  • CreatedAugust 13, 2014
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