CHICAGO — Kansas City, Mo., will enter the market later this month with a $55 million new-money and refunding general obligation issue that comes as the city is bracing for a public vote next month on whether the city can continue to collect an earnings tax that serves as its main revenue source.
The sale is set for March 15, according to city treasurer Tammy Queen. Bank of America Merrill Lynch is the senior manager. Oppenheimer & Co., Stifel Nicolaus & Co., and Valdes & Moreno are co-managers. First Southwest Co. and Moody Reid Inc. are advising the city.
The sale will raise $47 million of new-money proceeds to finance various infrastructure improvements. The issue will leave Kansas City about $20 million in remaining GO borrowing authority under a 2004 voter referendum.
“We expect to use the remaining authority as soon as later this year or in 2012,” Queen said this week. The remainder of the upcoming sale will refund bonds sold in 2002 for present-value savings.
The deal marks the first in a series of transactions planned this year. Next up, in May or June Kansas City will restructure $175 million of floating-rate special obligation bonds from an issue that helped finance projects in the downtown entertainment district known as KC Live.
The city will shift to a fixed rate to shed the renewal risk tied to its letter of credit. The current LOC provided by JPMorgan Chase expires next month. The bank has extended the term to allow the city to complete the restructuring. JPMorgan and Oppenheimer are co-senior managers. The city also may sell $50 million each of water and sewer revenue bonds later this year depending on the timing of projects.
Ahead of the new-money and refunding issue, Moody’s Investors Service affirmed the city’s Aa2 GO rating and stable outlook while Standard & Poor’s affirmed its equivalent AA rating and stable outlook.
Kansas City will carry $357 million of unlimited-tax GO debt after the sale and another $1.15 billion of appropriation debt.
Fitch Ratings downgraded the city’s GOs rating one notch to AA and placed the GO and special obligation ratings on negative watch due to the challenges posed to the city’s balance sheet by the looming referendum.
“The downgrade reflects the greater inherent risks to the city’s financial performance and overall vitality created by the new initiative requiring voter approval of the continuation of the city’s principal revenue source every five years,” Fitch analysts wrote.
The negative watch “reflects the risks associated with the first such voter referendum, which could have a materially adverse impact on the city’s already thinly balanced finances absent draconian expenditure reductions over the long term,” the report said.
The April ballot measure follows the statewide voter passage in November of a referendum on the ongoing imposition of earnings taxes in Kansas City and St. Louis, the only two cities in Missouri to levy the 1% tax on wages and salaries.
More than 69% of state voters approved Proposition A, requiring St. Louis and Kansas City to ask voters this April to approve the continued collection of the earnings tax. The referendum also banned the tax from being imposed on additional cities.
If local voters call for the repeal of the tax in 2011, it would be phased out over 10 years beginning in 2012, and it could not be reinstated.
If they approve it, the cities can continue collecting the tax, but it must be renewed every five years.
Representatives of both cities have warned that the demise of the tax — which is their single largest revenue source — could have a dire impact on their budgets and ratings.
The tax generates $200 million annually for Kansas City, supporting 40% of its operations, and $140 million for St. Louis, representing 30% of general fund revenues.
Supporters of the proposition believe the warnings from city officials about credit damage are exaggerated.
Let Voters Decide, a committee that led efforts pushing for passage of Proposition A, argues that voters ought to have the final say in levying a tax that the group believes is unfair to residents and businesses that already pay state and federal income taxes.
Kansas City’s acting city manager, Troy Schulte, has proposed two budget plans for 2012 with alternative revenue sources should voters reject the earnings tax, according to finance director Randall Landes.
“It would cripple the city to do nothing but cut to make up the difference,” he said. The government would need to lay off 500 firefighters and a similar number of police officers.
If voters reject the tax, the city would take advantage of existing but unused authority to increase its debt-service property tax levy and impose a fee on solid waste. Many other taxing options would require voter approval.
“These are actions that can be approved by ordinance so they provide a short-term solution that buys the council some time to decide on a long-term financial plan to replace the earnings tax revenues if it is repealed,” Landes said.
Proponents of continuing the tax are hoping city residents vote to keep it because about half of the funds collected come from those who work in Kansas City but live in the suburbs, while it is city residents who would bear the burden of paying for new taxes and suffer the effects of service cuts.
The city’s alternative proposal helped fend off negative rating action by Moody’s.
“Our outlook also incorporates management’s proactive approach to determining potential expenditure cuts and revenue enhancements should voters repeal the earnings tax on April 5, 2011,” analysts wrote.
Kansas City’s strengths include a large and diverse economy and good management, Moody’s said. Its challenges — aside from the earnings tax issue —- include a reliance on general funds to support debt for various projects that have failed to generate sufficient revenue to cover payments.
The city has also failed to fund the actuarially based annual required contribution for pensions for nine of the last 10 years. The city’s unfunded liability stood at $706 million for a 72% funded ratio in fiscal 2009.
Kansas City revenue is up in the current fiscal year and officials expect to close out the year with balanced operations after eliminating 100 vacant positions and freezing wages to reduce spending by $65 million. A fiscal 2012 budget is expected to be adopted by the end of the month. It tentatively includes a third year of wage freezes and leaves 75 vacant positions open.
Politically, the city is bracing for the election of a new mayor. Candidates Sylvestor “Sly” James and Mike Burke, both attorneys, were the two top vote-getters in the nonpartisan primary election last month and will face off in the March 22 general election. Both received more votes than incumbent Mayor Mark Funkhouser and other challengers.
