Busy Kansas City Selling $30M,With $217 Million More to Come

CHICAGO - Kansas City plans to enter the market with four deals in the coming months, beginning next week with a $30 million new-money and refunding special obligation issue and later with a $217 million new-money and refunding issue to upgrade the city's water system and its borrowing program.

Wachovia Securities LLC is the senior manager with Oppenheimer& Co. and Harvestons Securities Inc. serving as co-managers on the issue. First Southwest Co. andValdes & MorenoInc. are financial advisers and Kutak Rock LLP and the Hardwick Law Firm LLC are co-bond counsel.

The bonds carry a AA with a negative outlook from Fitch Ratings, an A2 from Moody's Investors Service, and a AA-minus from Standard & Poor's. Fitch revised its outlook on Kansas City's credit, including its AAA general obligation credit on $290 million of debt, earlier this year, citing a recent general fund operating deficit coupled with an economic slowdown.

Next week's deal marks a further shift in city issuance as it represents the first negotiated sale of special obligation bonds, backed by an annual appropriation, conducted by Kansas City itself. Previously the city was required to hand over issuance responsibilities to one of its conduit agencies. A voter-approved charter change in 2006 and the City Council's adoption of a debt management policy last fall now provides the city with authority to act on its own.

The charter previously banned the city from issuing GO or revenue debt through negotiation and included a series of arcane limits on debt structuring. The old charter also did not permit the use of derivatives and any unused, voter-approved debt authority expired after 12 years. The amended charter required only that the City Council adopt a debt management policy. The city first took advantage of the change last year with a negotiated GO issue.

The city in early April will then enter the market with a water revenue bond issue that will refund about $104 million of outstanding debt and include as much as $113 million of new money. The refunding will allow the city to establish a new master bond ordinance for the water revenue bond program.

The finance team is working with the managers of the city's wastewater program led by its acting director, Jack Buckler, in an overhaul that includes the adoption of set fiscal policies such as the maintenance of revenues at a certain level of days cash on hand.

"The goal is to have a program with all the hallmarks of a modern, well-run system," said city Treasurer Randall Landes.

Merrill Lynch & Co. is the book-running senior manager on the deal. Public Financial Management Inc. and TKG & Associates are financial advisers, with Gilmore & Bell PC and the Martinez Law Firm serving as bond counsel.

Kansas City currently holds voter authorization to issue $250 million of bonds for clean water projects and another $250 million for sewer projects. The city has tapped a small piece of the sewer authorization in a previous sale but not the water authority.

The new-money piece does, however, hinge on whether the City Council approves a 12% increase in its water and sewer charges to help repay the bonds and finance new projects. The increases have come under fire in some circles and council members are expected to scrutinize the increases as part of their review of the proposed $1.3 billion city budget.

"We need the rate increases to build our operating and capital reserves and bring coverage levels in line with ratings requirements," Landes said. The city's water revenue bond program carries existing ratings that range from the high single-A category to the double-A range.

The city also plans to sell nearly $40 million of new-money bonds backed by its annual appropriation pledge to provide financing towards JE Dunn Construction Co.'s new city headquarters and parking garage. City funds will finance various public improvements to the site. Stern Brothers is the underwriter, with First Southwest and Valdes as financial advisers and Hardwick as bond counsel.

The previously approved subsidy comes as the city is curtailing financial help for future private projects, strictly limiting subsidies and subjecting them to more scrutiny. The changes come following the election last year of a new mayor - former city auditor Mark Funkhouser - and many new council members. TIF subsidies, often financed by city-backed debt issues, were a favored development tool of former Mayor Kay Barnes and the council typically obliged.

Kansas City also has a roughly $40 million GO sale coming up in April that will sell competitively to finance various capital projects.

Finance officials and their advisers are also busy on several other fronts. Landes is watching the variable-rate demand obligation market closely, as he's seen chunks of the city's $550 million of insured floating-rate debt capture interest rates as much as 200 basis points above the Securities Industry and Financial Markets Association's index.

The city has further taken a hit with its swap payments on portions of the $235 million of its floating-rate debt that has been swapped to a synthetic fixed rate falling short of the bond rates.

"We are exploring our options, including converting to a fixed rate or including a letter of credit," Landes said. Though the city's rates have shot up, they still fall below the overall cost of borrowing officials included in their fiscal projections on affected programs.

The city also faces a roughly $70 million in its proposed budget. Funkhouser and city manager Wayne Cauthen are at odds over whether the city should tap revenues from a settlement from a telecommunications lawsuit in the proposed budget, which would lower the looming deficit but contribute to the budget's structural deficit going forward because it's a one-time revenue stream. Funkhouser wants the funds to go into a reserve while Cauthen wants the funds used now to avoid service cuts and layoffs. e_SRit

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