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In This Issue: Cover Story How The Slowdown May Affect The Largest U.S. Cities By Karl Jacob, New York Of the most immediate concern to the largest rated U.S. cities-no matter their age, location, or size-is that they are all confronting the developing economic slowdown and everything that it implies about jobs and tax revenues. All are feeling the effects of the housing slump and all have to consider and deal with taxpayer resistance to increased levies. How tough are current conditions? Where Cities Get Their Money On the whole, the most common sources of revenue for the largest rated U.S. cities are property, sales, income, business, and utility taxes. For six of these cities-Houston, Dallas, San Antonio, San Jose, Los Angeles, and New York-property taxes are very important, making up from 21% to 42% of general fund revenues. For several cities, including Dallas, Detroit, New York, and Philadelphia, local income taxes are significant, making up 11% or more of the general fund budget. Where Cities Spend Their Money A period of slower economic and revenue growth portends financial and budgetary challenges for most U.S. cities, not just the large ones. The National League of Cities survey of "City Fiscal Conditions in 2007" found city governments to be in a strong financial position as measured by their unreserved fund balances as a percentage of general fund expenditures. In aggregate, city ending balances were 25.7% of expenditures as of fiscal 2006, higher than any time since at least 1985. Credit Considerations Going Forward Cooperation between governments will be one opportunity for cities to secure their future. Although we have seen some government consolidations in cities smaller than the 10 biggest, a more likely trend will be the increased use of cost and revenue sharing and the regionalization of services. As all governments seek to better align costs of certain services with those who benefit, regional sales and income taxes or user fees may become more prevalent, and suburban areas may demand a larger say in governance issues. Rating Trends Since The Last Recession Over the period 2003 to 2008, the 10 largest rated cities have seen a fair amount of rating adjustments considering the relative stability of municipal ratings. Four cities received upgrades (Chicago, Houston, New York, and Phoenix), and two suffered downgrades (Dallas and Detroit). The upgrades were largely related to improvements in financial position and condition, with notable mention of improved financial management. The two cities that experienced downgrades were felled by economic challenges that also affected financial performance. Top 10 Cities Scorecard Standard & Poor's has put together a synopsis of the top 10 U.S. cities, with a ratings summary, review of their strengths and weaknesses, and an outlook on the future expectations of each city. This scorecard gives a concise, in-depth view on what might affect their ratings down the road. Detailed Results Of Subprime Stress Test Of Financial Guarantors By Dick P. Smith, New York Standard & Poor's tested the capital adequacy of various primary bond insurers against a scenario that applies stressful default assumptions to various RMBS-related transactions that the companies have insured. S&P Takes Additional Bond Insurer Rating Actions By Dick P. Smith, New York Standard & Poor's took various rating actions on several monoline bond insurers following additional stress tests with respect to their domestic nonprime mortgage exposure. Credit FAQ The Interaction Of Bond Insurance And Credit Ratings-Structured Finance Update By Calvin R. Wong, New York This FAQ focuses on questions about credit-enhanced ratings and the interaction of these ratings with bond insurance. Following Standard & Poor's recent rating actions on certain bond insurers and given the possibility of future changes, we believe there are certain points that need to be addressed. Various Rating Actions Taken On 23 Structured Investment Vehicles By Katrien van Acoleyen, London Standard & Poor's took various rating actions on 23 structured investment vehicle transactions. These rating actions reflect our ongoing review of the restructuring plans offered by those SIVs that have not entered enforcement mode. Revolving Credit Terms Are Tightening For Several U.S. Homebuilders By James Fielding, New York Aggressive rate cuts by the Federal Reserve and the recently passed federal economic stimulus package have raised hope for a more positive scenario for homebuilders in 2008, but our base case for the sector assumes challenging economic and market conditions along with further, though possibly decelerating, downgrade activity.