August 12, 2010

Summary:
Independence, Oregon; General
Obligation
Primary Credit Analyst:
Bea Chiem, San Francisco 1(415) 371-5070; bea_chiem@standardandpoors.com
Secondary Credit Analyst:
Chris Morgan, San Francisco (1) 415-371-5032; chris_morgan@standardandpoors.com

Table Of Contents
Rationale
Outlook
Related Criteria And Research

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Summary:
Independence, Oregon; General Obligation
Credit Profile
US$7.535 mil Full Faith And Credit bnds ser 2010
Long Term Rating A-/Stable New
Independence GO (AGM)
Unenhanced Rating A-(SPUR)/Stable Affirmed
Many issues are enhanced by bond insurance.

Rationale
Standard & Poor's Ratings Services assigned its 'A-' rating to Independence, Ore.'s series 2010 full faith and credit
obligations. In addition, Standard & Poor's affirmed its 'A-' underlying (SPUR) rating on the city's outstanding full
faith and credit obligations. The outlook is stable.

The ratings reflect our opinion of the city's:

• Proximity to the state capital, Salem, with participation in the Salem metropolitan statistical area (MSA);
• Steady assessed value (AV) growth; and
• Record of maintaining good unreserved fund balances.

Constraining credit factors in our view include the city's:

• Limited revenue flexibility, including constitutional restrictions on property taxes;

• Reliance on an interfund transfer in fiscal 2009 to maintain good fund balances and an estimated negative fund
balance in fiscal 2010 to repay that transfer;
• Expected reliance on Monmouth-Independence Network's (MINET) nascent operations, with assumed large
customer growth to pay debt service on these bonds; and
• High overall net debt and low cash.

The bonds are full faith and credit obligations of the city and are secured by an ad valorem property tax pledge
subject to constitutional restrictions, including a limit on AV growth at 3% per year plus new construction and a
maximum levy rate by all non-school entities to $10 per $1,000 of market value.

We understand that bond proceeds will be used to refund Oregon Business Development Department of Public
Works loans and for capital projects related to the MINET project, an intergovernmental entity formed by the cities
of Monmouth and Independence to provide broadband services to users there and in the surrounding communities.
We also understand that although the bonds are secured by a full faith and credit pledge of the city, there will be a
pledge agreement between each city and MINET whereby MINET pledges to repay from its net revenues to each
respective city its scheduled interest and principal payments.

Additional terms under the pledge agreement include:

• MINET is prohibited from pledging or granting a lien on its net revenues that is equal or superior to the lien that

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 Summary: Independence, Oregon; General Obligation

it has granted to each city unless approved by the city in question.

• In the event MINET cannot meet its full debt service repayment, it must distribute available net revenues on a pro
rata basis to each city until all payments are made, and will either raise rates or take actions as necessary to meet
full debt service repayment.
• Any debt incurred by MINET will be obligations of MINET unless the city in question agrees to guarantee the
obligations.

Estimated combined debt service for this issuance is roughly $1.1 million annually, of which Independence accounts
for about $520,000. Historical debt service coverage (DSC) for MINET has ranged from 1x to 1.1x in fiscals
2008-2010. Management forecasts DSC to range from 1x to 1.9x in fiscals 2011-2015, reflecting assumed customer
growth.

Encompassing approximately 2.8 square miles and 8,240 residents within Polk County (A+/Stable), the city is
located in the Mid-Willamette River Valley, approximately 13 miles southwest of the City of Salem (AA-/Stable), the
state capital, and is adjacent to the City of Monmouth to the west. We consider the city's effective buying income to
be adequate on a median household basis at 82% of the national level but low on a per capita basis at 59%.

The city's employment base is primarily concentrated in manufacturing. As of June 2010, the Salem MSA
unemployment rate reached 10.3%, in line with the state rate of 10.4%. Top employers in the city include
Mountain Forestry Inc. (323 employees), Marquis Corp. (190), Medallion Cabinetry Inc. (141), Robert Lloyd Sheet
Metal Inc. (125), and Forest River Inc. (100). In line with the current economic slowdown, total market value fell by
roughly 7% in 2010 after several years of increases. However, total AV, the primary driver of property tax revenues,
grew about 3.2% to $317.8 million. City officials expect continued AV growth in the near term. The top 10
taxpayers represented, in our view, a very diverse 11.3% of AV for fiscal 2010. The city does not have a local
option levy rate, but does have an urban renewal special levy associated with its urban renewal bonds.

The city's financial performance has been good, with unreserved general fund balances that we consider good to
strong (in relative terms, but small on an absolute dollar basis), ranging from approximately 11% to 25% of
operating expenditures, or roughly $226,000 to $675,000, in 2004-2008. However, in fiscals 2008 and 2009, the
city experienced general fund operating deficits (net of transfers) of about $198,010 and $222,569, respectively,
having had increased capital outlay expenditures during those years.

Based on the city's preliminary fiscal 2009 audit, ending unreserved fund balance was about $254,131, or in our
view a good 5.8% of operating expenditures. According to management, this fund balance reflects a transfer-in of
roughly $1.1 million, $650,000 of which was from the transportation systems development charges (SDC) fund used
to fund the new city hall project and the remainder from other operating funds reimbursing the general fund for
overhead expenditures. The $650,000 transfer was repaid by the general fund in fiscal 2010, resulting in a decline in
fund balances for fiscal 2010.

Based on preliminary, unaudited fiscal 2010 results, city officials estimate an unreserved fund balance of negative
$36,096, or a low negative 0.9% of operating expenditures. Management had expected $100,000 in proceeds from
the sale of the old city hall building in fiscal 2010, but now expects the sale to occur in fiscal 2011. After the
interfund loan repayment to the transportation SDC fund, the city expects to restore its reserves.

Excluding the asset sale, the city's fiscal 2011 budget shows an ending fund balance of roughly $451,600, or a
strong 14% of operating expenditures, including $280,000 in debt service savings from this refunding. Management

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 Summary: Independence, Oregon; General Obligation

expects the city's cash balance in the general fund to decrease to near zero for fiscal 2010, as compared with an
unaudited $465,000 in fiscal 2009. Management expects to apply most of the cash to the city hall project and to
funding the debt service reserve for the city hall bonds issued for the project.

We consider the city's management practices "standard" under Standard & Poor's Financial Management
Assessment (FMA) methodology. An FMA of "standard" indicates that the finance department maintains adequate
policies in some but not all key areas.

Following the city's March 2010 debt issuance, combined direct and overlapping debt supported by city taxpayers
stands at what we consider to be a high 10.2% of market value and a high $6,587 per capita. Approximately 63%
of the city's debt is from overlapping debt related to school districts and the county. Based on the city's preliminary
audit, its carrying charges were a moderate 12% of government expenditures in fiscal 2009. Independence's
estimated portion of annual debt service for this issuance is approximately $520,000 annually beginning in fiscal
2013, of which all is expected to be funded by MINET net revenues. However, if MINET is unable to generate
sufficient net revenues, then the city's debt burden may increase to even higher levels, resulting in what we believe
could be significant pressure on the general fund.

Outlook
The stable outlook reflects our expectation that the city will restore strong reserves in fiscal 2011. Although the
city's general fund balances have historically been good to strong as a percentage of operating expenditures, major
fluctuations on a nominal basis could quickly pressure credit quality due to the city's small budget base. If the city's
audited fiscal 2009 and/or fiscal 2010 results are materially worse than management's current estimates and fiscal
2011 results do not show a return to a positive fund balance, and/or if the city is unable to meet its large debt service
requirements (especially if MINET is unable to generate sufficient revenues to fully cover its debt obligations), then
we could lower the ratings. We believe that the rating is constrained by the city's high debt burden, expected
negative reserves in fiscal 2010, and estimated low general fund cash balance, and do not expect to raise the rating
over the near term.

Related Criteria And Research

USPF Criteria: GO Debt, Oct. 12, 2006

Complete ratings information is available to RatingsDirect subscribers on the Global Credit Portal at
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rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings
search box located in the left column.

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