Credit Risk Assessment and Monitoring of TIF Bonds

Abstract

Local governments have multiple options to secure financing for infrastructure projects, including using tax-increment financing (TIF) bonds. Although the TIF concept brings numerous benefits, it is also associated with several key challenges, including characterizing the uncertainty in tax increment revenue as the most prominent challenge. This article presents a framework that aims to help all market stakeholders better understand the credit risk associated with TIF bonds. The framework focuses on reconstituting the asset credit risk profile and detecting early warning signals of changing conditions. The key benefit of the proposed framework is its capacity to use publically available time series data. The case study illustrating the framework is based on the “Uptown Development Authority” bond, structured to support redevelopment projects in Houston, Texas.