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Jacksonville, Fla., Continues Hunt for Savings, Budget Relief

NOV 14, 2012 10:04pm ET
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BRADENTON, Fla. — Jacksonville, Fla., is on the hunt again for big savings this week and next month as historically low interest rates continue to provide opportunities for budgetary relief and portfolio restructuring.

The city prices $245 million of special revenue refunding bonds Thursday with Goldman, Sachs & Co. as the book-runner.

Another $125 million or refunding bonds will be sold around Dec. 5.

This week’s offering is being sold as $197.41 million of tax-exempt special revenue refunding bonds, Series C, $12.5 million of tax-exempt refunding bonds, Series D, and $35 million of taxable special revenue refunding bonds, Series E.

The double-A rated bonds are being sold for interest savings within existing maturities.

The deal is expected to achieve some of the highest savings since the city’s current refunding program began in July 2011, after Mayor Alvin Brown took office and focused on balancing the budget, in part, with refundings and other measures such as reducing fees for letters of credit, officials said.

The $245 million of refunding bonds pricing Thursday are expected to achieve combined savings of $42.7 million or 16.08% of refunded par, according to estimates by Public Financial Management, the city’s financial advisor.

The three series are structured with serial bonds that have “nice blocks” for institutional investors and smaller pieces for retail, said David Moore, a managing director at PFM.

With ratings in the double-A category, Jacksonville should find buyers who are looking for a transaction with “a little more spread to it,” said a muni trader in Florida paper. “I do think you are going to find interest in that deal.”

In addition to the highly rated credit, the trader said Jacksonville’s deal may especially interest retail investors because there isn’t much supply for them in the Sunshine state.

The bonds are rated AA by Fitch Ratings, Aa2 by Moody’s Investors Service, and AA-minus by Standard & Poor’s. All three agencies have stable outlooks on the city’s bonds.

Fitch affirmed Jacksonville’s implied general obligation rating at AA-plus, while Moody’s and S&P affirmed their issuer ratings of Aa1 and AA.

Since Jacksonville began a concerted refunding program in mid-2011 through the end of this year, it expects to have marketed $1.15 billion of bonds in nine offerings for an estimated total net present value savings of $113.3 million or an average 9.85% of refunded par, according to PFM’s statistics.

The savings have generated multiple years of budget relief, Moore said. “That’s a material benefit for the city in a time when budgets are very tight.”

Jacksonville also will continue refundings over the next few years to complete restructuring of its debt portfolio, which is a secondary goal underpinning a majority of the refunding program, he said.

“The city had four or five different liens so what they are doing is refinancing, over time, almost all of the general fund debt into special revenue bonds,” said Moore, adding that this week’s offering is the beginning of that process.

Bond proceeds will refund some or all of outstanding excise tax revenue bonds, guaranteed entitlement revenue bonds, and local sales tax revenue bonds.

With the elimination of those liens, the refunded bonds will become special revenue bonds under a single, general-fund lien structure with a covenant to budget and appropriate non-ad valorem revenues.

The process should strengthen some lower-rated credits that are more appropriate under the higher rated general fund, Moore said.

“Over the next few years, the intent is to fold all the general fund debt into the special revenue bond lien,” he said. “Over time, this would move the city into having three debt programs with special revenue bonds for allgeneral capital projects, capital improvements for tourist development tax projects and the third program for Better Jacksonville projects.”

In concert with the refinancing program, Jacksonville is also amending and modernizing the master ordinance with the approval of bondholders.

The most “material” aspect of amending the master ordinance will allow the city to pledge revenues outside the ¬general fund to the special revenue bonds, and ensure that ancillary revenues are ¬included in coverage calculations, Moore said.

“It will improve coverage, but equally important it will enable the city to align revenues with the debt,” he said.

If the portfolio restructuring to eliminate older liens helps improve coverage calculations, the city may see a bump in the way the special revenue bonds trade after a track record is established, the Florida trader said.

“It can’t hurt if it improves coverage calculations,” he said. “It can only help when an analyst is looking at the bonds.”

If a POS is clear and easier to read a deal can get quicker approval, said the trader.

Jacksonville, which is consolidated with Duval County in the northeast corner of the state, historically has sound fiscal management, though the state’s most populous city has not been immune from the economic downturn, declining property values, and the effects of property tax reform, according to rating agency analysts.

For fiscal 2011, the city finished with an $18.9 million general fund surplus on an $855 million budget, according to Standard & Poor’s. The year-end available balance was $63.8 million, which did not include an emergency reserve of $45.9 million.

“City officials expect to close fiscal 2012 with a $13.8 million general fund surplus despite a $65 million budget gap,” said S&P analyst Hilary Sutton. “We understand that structural balance was ultimately achieved through labor concessions, layoffs, and a major effort to reduce expenditures.”

Fitch analyst Michael Rinaldi said the city’s “significant” unfunded pension liability is “of increasing concern” because pension costs have risen dramatically and consume an increasing share of discretionary resources.

The combined pension burden for general employees, corrections officers, and police and fire “is very weak” at 50.5%, according to Fitch. The unfunded actuarial accrued liability is $2.67 billion.

“The city is in the process of unveiling pension reform measures with the hope that changes to the pension system may be negotiated and implemented by fiscal 2014,” he said. “The failure to do so for any reason could lead to negative pressure on the rating.”

The syndicate for Thursday’s transaction consists of Drexel Hamilton LLC, Jefferies & Co., JPMorgan, Loop Capital Markets, and Siebert Brandford Shank & Co.

Greenberg Traurig PA and Ezell Law Firm PA are co-bond counsel. Ballard Spahr is underwriters’ counsel. Greenberg and D. Seaton and Associates are co-disclosure counsel. Underwriters are represented by Ballard Spahr LLP.

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