DALLAS — Battling an unrelenting economic crisis, still triple-A rated Phoenix today is seeking to take advantage of a favorable municipal market as the nation’s fifth-largest city offers $530 million of general obligation bonds.
Though not the largest issue on record for Arizona’s capital, the deal ranks as one of the biggest of the year for a city in the Southwest and includes $201 million of taxable Build America Bonds.
“We would expect to see significantly lower rates on BABs [versus tax-exempts], particularly if you’re willing to give up your 10-year call provision,” said Jeff DeWitt, Phoenix’s interim finance director. “You attack a broader range of investors when you go with BABs.”
While the city’s revenue slump continues, DeWitt sees a silver lining in the muni bond market.
“A year ago, it was hard to sell bonds,” he said. “The world has changed. We’re seeing the lowest rates in a long time.”
Included in the deal pricing today are $180 million of Series D refunding bonds that are expected to bring present-value savings of 7.3%, or $13.2 million. The size of the refunding was increased from the $130 million listed on the preliminary official statement to $180 million because of good market conditions, according to DeWitt.
“We always evaluate a refunding opportunity when we do a new-money issue,” he said. “This is just a regularly scheduled sale that happened at a very good time.”
Series B contains the Build America Bonds, while the $79.9 million Series A and the $69 million Series C consist of fixed-rate tax-exempt GOs.
Phoenix opened the pricing yesterday with a retail order period. Details were not available.
As a state that imposes an income tax, Arizona represents an important piece of the retail market, DeWitt said.
Institutional orders come in today.
RBC Capital Markets is senior manager and book-runner, with Siebert Brandford Shank & Co. as co-senior manager. Co-managers include Barclays Capital, JPMorgan, Estrada Hinojosa & Co., Rice Financial Products Co., Robert W. Baird & Co., and Wedbush Securities. Public Resources Advisory Group serves as financial adviser, and Greenberg Traurig LP is bond counsel.
The underwriting team was assembled from a pool of firms that were qualified for city business, DeWitt said.
“We rotate through the qualified list to give all the firms on the list some of our business,” he said.
The bonds will come from the remainder of a 2001 voter authorization and from a March 2006 election authorizing $878.5 million of debt.
This issue will be used for a variety of civic improvements, including police and fire stations, libraries, parks, neigh iborhood improvements and expansion of public land.
While Standard & Poor’s affirmed its AAA rating and Moody’s Investors Service maintained its Aa1, Moody’s analysts shifted the outlook to negative, citing “significant weakness in the regional economy, ongoing revenue declines, and expected tax base losses which, together, are likely to weaken the city’s credit profile relative to its Aa1-rated peers over the near- to medium-term.”
“Despite city management’s strong efforts to maintain fiscal stability during the current recession, the negative outlook reflects Moody’s expectation that city finances will remain pressured for the foreseeable future given continuing economic underperformance and the uncertain timing and character of the region’s next economic expansion,” wrote analysts Matthew Jones and Patrick Ford.
Phoenix was one of the first major cities to fall into recession with the collapse of the housing bubble. The recession has now spread to virtually all sectors of the local economy, including tourism.
With job losses continuing and particularly heavy in the construction and manufacturing sectors, Moody’s Economy.com projects a 7.2% contraction in the Phoenix metropolitan area’s employment base this year. Unemployment has risen to 9.7%, slightly below the national average of 9.8%.
With the threat of increasing foreclosures and anemic job market, Moody’s anticipates that retail sales, which generate the state and local sales tax, will continue well into 2010.
Moody’s also anticipates declining property values that will add further pressure to state and local budgeting. That would represent an unprecedented reversal for a city whose tax base has grown by an average of 15.2% since 2005 to $169.3 billion, analysts noted.
“Officials anticipate that the 2011 and 2012 assessments will reflect steep declines in both residential and commercial values, resulting in potential 20% tax base losses in each of the next two years before stabilizing somewhat in 2013,” Jones and Ford wrote.
“Moody’s notes that under Arizona law, declining assessed values will not negatively impact the city’s property tax levies for debt service or operations given the statutorily-allowed 2% levy growth for operations (the primary levy) and unlimited growth for the debt service levy (the secondary levy).”
With revenue falling early in February, Phoenix bridged a $270 million budget gap for fiscal years 2009 and 2010 by raising fees and deferring capital improvement projects. It also imposed a hiring freeze and cut spending across departments. Since then, the city has found another shortfall of $40 million to $70 million that it is already dealing with through spending cuts.
“When we identify the need to adjust the budget, we don’t ignore it,” DeWitt said. “We do it proactively.”
Standard & Poor’s cites the city’s conservative fiscal strategies in maintaining a stable outlook on the AAA credit.
“The stable outlook reflects our expectation of continued good financial performance for a city that has managed to maintain strong reserves during a period of revenue stress,” analysts Matthew Reining and David Hitchcock wrote.
“If revenues decline further such that city management could not bring the operating budget into structural balance, the rating would be pressured.”
The analysts also take somewhat more sanguine view of Phoenix’s employment prospects.
“The broad and diverse metro economy, while experiencing a housing-centered correction and a national recession, remains a regional center and has continued to attract new businesses, albeit during a period of higher employment,” they wrote. “We base our outlook on the long-term stability in the city’s economic underpinnings.”
Dewitt said he is confident that the city will also regain its stable outlook from Moody’s once the fiscal crisis eases.
“We will continue to balance our budget, just as we always have done,” he said.
