Austin loses triple-A rating ahead of $271 million bond sale
Austin will price $271 million of debt next week after losing one of its three triple-A ratings.
Moody’s Investors Service on Thursday downgraded the city’s general obligation bonds to Aa1 with a stable outlook, citing “high leverage and fixed costs attributable to the city's pension and other post employee benefit plans.” Moody’s had rated Austin Aaa since 2010.
The downgrade comes as the city struggles with revenue losses amid the coronavirus pandemic, amid the losses of conventions and events that made it the self-proclaimed “Live Music Capital of the World.”
It also comes two weeks after the Austin City Council placed City Council approved a tax rate election to support a $7.1 billion investment in a mass transit rail system, and a $460 million active mobility bond.
Fitch Ratings Thursday lowered its outlook on Austin's AAA rating to negative.
“Absent near-term meaningful reform to the city's municipal and police pension plans, further increases in annual plan contributions will be a chronic constraint on overall spending flexibility,” said Fitch analyst Steve Murray.
S&P Global Ratings Thursday affirmed Austin at AAA with a stable outlook.
The upcoming sale includes $87.2 million of tax-exempt public improvement and refunding bonds, $49.9 million of taxable bonds, $23.4 million of public property finance contractual obligations, and $110.4 million of certificates of obligation.
Despite the downgrade, the city's municipal advisor, Dennis Waley, managing director of PFM, said he expected strong demand for the bonds on Sept. 15.
Siebert Williams Shank & Co. is book runner on the deal, led by Keith Richard, managing director and head of the Texas region.
Piper Sandler & Co. s and Wells Fargo Securities are co-managers, and attorney Jeff Leuschel of McCall Parkhurst & Horton is bond counsel.
After this deal, Austin will have $1.6 billion in outstanding general obligation limited tax debt and $39.8 million in contract revenue debt subject to appropriation.
“Long-term liabilities are moderate at nearly 14% of total personal income,” Murray said. “This metric is expected to increase but remain within the 'AA' assessment range (that is, below 20%) given additional growth-driven borrowing needs and expansion of the resource base.”
The $460 million bond proposal approved by the City Council Aug. 13 for the Nov. 3 ballot comes nearly two years after voters showed strong support for $925 million of bonds, including $250 million for affordable housing.
The proposed bond would come with a tax rate increase over a six-year period. The city still has bond authority from the 2018 election and one in 2016.
The council also voted to put an 8.75 cent tax rate per $100 of property value increase toward the $7.1 billion initial investment for Project Connect that includes new light rail lines, a downtown tunnel and buses.
The city and the Capital Metro transit agency created the joint venture Project Connect to finance and manage the design, construction and implementation of the project.
After light rail projects were defeated twice in recent years, the city separated the Project Connect proposal from the regular transportation bond that focuses on bikeways and sidewalks.
The public improvement bonds, including next week’s issue, are backed by property tax limited to $2.50 per $100 of assessed valuation. The GOs also feature a limited pledge of surplus revenues of the city's solid waste disposal system.
The upcoming issue includes $4.36 million of contract revenue bonds for the city’s Mueller Local Government Corp., created by the city to redevelop the former site of Robert Mueller Airport. The pledged revenues are any of the city's available general fund monies, including sales tax revenues from retail activity within the designated Mueller project area.
The 700-acre Mueller site is a public-private partnership between the Austin Economic Development department and Catellus Development. Mueller will provide at least 6,200 single-family and multi-family homes, including more than 1,500 affordable homes. A mixed-use town center district will be known as Aldrich Street, with 4.5 million square feet of prime commercial space.
Moody’s downgraded the Mueller bonds one notch to Aa3 from Aa2 based on the city’s pledge to make any deficiency payments on the bonds if sales taxes within the tax increment financing zone are insufficient.
“Although the city has never been called upon to make a deficiency payment, the rating reflects Austin's pledge, which is subject to annual appropriation by the city, as well as the less essential nature of the financed project,” said Moody’s analyst John Nichols.
Austin’s general fund revenues are projected to fall about $41.5 million or 4.5% below budget in the current fiscal year due to the recession and pandemic. The city cut spending more than $46 million by fiscal year-end. The cutbacks include a hiring freeze and reduction in departmental and capital spending.
The city projects fiscal 2020 general fund results to include a decline in fund balance of about $25 million or 2.4% of projected spending. Those outlays will be reimbursed with proceeds from a Federal Emergency Management Agency grant. Fiscal 2019 ended with an unrestricted general fund balance of nearly $234 million or roughly 22% of spending and transfers.
Pandemic-related financial assistance totals nearly $250 million, led by roughly $171 million in Coronavirus Aid, Relief and Economic Security (CARES) Act proceeds and an estimated $55 million FEMA grant.
As the state capital, Austin enjoys stability from state hiring and the University of Texas campus just a few blocks from the Capitol.
With attendance at football games limited due to the coronavirus, UT is not expected to contribute its usual impact to the city’s economy this fall. Austin also suffered a fiscal blow in March when the annual South by Southwest festival was called off amid what proved to be well-founded coronavirus concerns.
With a population of more than a million, Austin’s top employers include Dell, IBM, Samsung, AMD, Google, Oracle and Apple. Amazon and Facebook. Electric car maker Tesla recently selected Austin as the site of its next assembly plant for pickup trucks.
High profile projects either recently completed or underway include redevelopment of the city's Seaholm Power Plant and Green Water Treatment Plant, the Domain mixed use campus, and the Dell Seton Medical Center at the University of Texas.
“The stable outlook assumes that the city's economy will continue to exhibit relative resiliency to the coronavirus pandemic given year to-date revenue projections and ongoing economic development,” Nichols wrote. “The outlook also reflects the expectation that the city's experienced administrative team will continue to produce stable financial performance and metrics.”