Austin Bypasses BABs

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DALLAS — After scrutiny from the Internal Revenue Service over a previous issue of Build America Bonds, Austin is forgoing BABs in its sale of $145 million of general obligation debt this week.

The combination of GOs, certificates of obligation, and contractual obligations will be auctioned competitively through the Parity system on Thursday, with a 30-minute window for bids on each of the four deals beginning at 9 a.m. Central Daylight Time.

“By noon, we pretty much know who won,” said Treasurer Art Alfaro.

The bond sale is an annual event scheduled for the last Thursday in August. The city needs to know what kind of interest payments it will have to make as it prepares to set the tax rate in budget hearings next month, Alfaro said.

The largest piece of the sale, the $79.5 million Series A, is traditional tax-exempt bonds for a variety of projects authorized by voters in 2006. Alfaro expects those bonds, with final maturities in 2030, to be sold quickly.

“With all the taxable Build America Bonds on the market, there’s a big appetite for tax-exempt debt,” he said. “We’re excited about the prospects.”

Municipal bonds have set record low yields 10 times this month, according to the Municipal Market Data’s benchmark triple-A 10-year municipal scale. The 10-year closed Monday at a yield of 2.29%, 28 basis points lower than the record in 2009.

The average price for a municipal bond has climbed 2.6% this summer, according to the Standard & Poor’s AMT-Free National Municipal Bond Index.

In the first half of the year, tax-exempt issuance in Texas fell nearly 12%, while taxable debt rose more than 58%. Overall issuance in the state was down 1.9%, falling 7.5% in the second quarter.

Austin’s $26.4 million Series B will be taxable bonds maturing in 20 years. The debt will finance affordable housing, possibly for private uses that could draw scrutiny from the Internal Revenue Service if it were offered as tax-exempt.

“It’s such a small piece, we decided we’d be better off ­selling it as a taxable issue so there’s no issue over private use,” Alfaro said.

The city is also selling $22.3 million of certificates of obligation with final ­maturities in 2030, along with $16.5 million of contractual obligations with seven-year maturities for equipment purchases, primarily for the city’s public water and electric utilities.

This week’s sale was developed with Bill Newman Jr., managing director at Public Financial Management Inc., as financial adviser. Attorney Jeff Leuschel of McCall, Parkhurst & Horton is bond counsel.

Alfaro said he expects interest costs on the tax-exempt debt to average about 4%.

Last year, Austin sold about $79 million of taxable BABs, the subsidies of which later became entangled in an offset by the IRS.

The March 1 federal subsidy of about $637,000 was withheld because the city was disputing a payroll tax issue of similar size. Officials are expecting the full subsidy for its Sept. 1 interest payments, Alfaro said.

While the tax issue was in dispute, the city’s payroll division transferred the amount of the subsidy to the GO debt-service fund so that the debt fund was made whole.

Questions about BABs in general were raised when Treasury Department officials indicated that the taxable stimulus bonds from issuers nationwide would face audits and questions about pricing.

The issue of tax offsets also was of concern but IRS figures obtained by The Bond Buyer indicate the overwhelming majority of BAB subsidy payments have been paid in full to issuers.

“We decided not to issue BABs because it’s a new-money issue and the city would prefer to wait for clearer guidelines from the IRS before issuing BABs for the GO credit,” Alfaro said. “I wouldn’t say we didn’t issue BABs because of the problems or uncertainty of the past. We’d prefer to see clearer guidelines from the IRS on the pricing issue.”

The city did issue BABs in June for Austin Energy and will consider using them for its water utility this fall, according to Alfaro.

“The purpose of the issuance of debt for these two credits is for refunding commercial paper for expenses that have already occurred,” he said. “So we have the luxury of having our tax attorney review and confirm that the expenditures meet all of the BAB requirements.”

With triple-A ratings from Standard & Poor’s, Fitch Ratings and Moody’s Investors Service, Austin tends to attract risk-averse investors, including large ­institutions.

“The city’s experienced management team and sound fiscal and budgetary practices and policies are expected to continue to result in favorable financial performance,” Fitch analyst Mark Campa wrote. “Austin’s debt profile is moderate, and the pace of debt retirement is above average.”

Standard & Poor’s raised the Texas capital’s GO ratings to AAA in January 2008 based on “the likelihood the city’s employment base and fiscal policies should allow it to maintain its strong financial condition even during economic fluctuations such as the current recession.”

Through the middle of 2010, Austin’s jobless rate of 7.4% was nearly unchanged over the past year and continues to better even Texas’ 8.2% rate.

The city’s economy has been cushioned by state government as well as seven colleges and universities, primarily the University of Texas system.

High-tech manufacturers like Dell Inc., in the northern suburb of Round Rock, are major employers. Employers are attracted to the area by a well-educated workforce, relatively low cost of living, and the availability of major research facilities, according to analysts.

“While there has been some employment contraction in this sector, the recent rebound in chip sales continues to benefit the Austin area, and several companies, including Samsung and Advanced Logic Chips, are undergoing sizable plant and/or job expansions,” Fitch noted.

“In addition, Austin continues to attract new businesses, aided by the use of economic development incentives provided by the city and state.”

Taxable values averaged 11.2% annual increases from fiscal 2006-2010, although the ongoing downturn has resulted in a more modest gain of 4.9% in fiscal 2010. That growth in the tax base includes about $900 million added through a major annexation. The tax base is budgeted for a modest decline for fiscal 2011, reflecting weaker values across nearly all property classes.

After 16 consecutive months of declines, sales tax numbers began to see year-over-year increases in January. Sales tax numbers have remained strong enough that the city is projecting a 3% increase for fiscal 2010 over fiscal 2009 levels. It had previously budgeted for a 5% ­decrease.

“Management’s $87.7 million total unreserved general-fund balance for fiscal 2009 equaled 15.4% of general fund ­expenditures, after a small surplus,” wrote Standard & Poor’s analyst Theodore Chapman.

“While the fiscal 2010 budget appropriated some reserves to fund the acquisition of capital assets, much-better-than-budgeted sales tax revenues have management projecting reserves at similar levels.”

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