LOS ANGELES — The crash of Nevada’s real estate market is continuing to take a big bite out of the state’s municipal bond market.
State finance officials say property-value declines mean there could be little new-money general obligation paper coming to market over the next decade, though low rates mean refundings are in store for Nevada’s outstanding debt.
The same issues affect many local governments, market participants say.
The Debt Affordability Report issued by state Treasurer Kate Marshall’s office earlier this year projected that Nevada would only have the capacity to issue $29 million of new-money GOs for the next two years, and possibly until 2021.
While real estate experts have been predicting a return to pre-boom property values by 2014, the treasurer’s office is more cautious.
“If the state is going to err, it is going to err on the side of being conservative,” said Mark Mathers, senior deputy state treasurer. “Nevada has gone through a downturn with the rest of the nation. Until the economy stabilizes, we think it is prudent to be as conservative as we are being.”
The last time the state issued GOs in an amount that small was in 1980 when it sold, according to Thomson Reuters data. The state’s issuance over the past decade has ranged from a low of $114 million in 2001 to a high of $754 million in 2005.
Nevada plans to sell the remaining $29 million of new-money debt next month in a deal boosted by a strong refunding component. The sale will total about $150 to $200 million, mostly to refund 2004 to 2006 issuance coming in late October, with a November closing expected, according to deputy treasurer Lori Chatwood. State officials are still working out the details on the refunding with senior underwriter Morgan Stanley.
“We are going to be price-sensitive to where the rates are when we price next month,” Chatwood said. “So, the size of the advance refunding could change when we hold the bond sale.”
In March, both Moody’s Investors Service and Standard & Poor’s downgraded Nevada GOs one notch to double-A. Fitch Ratings rates the credit AA-plus.
“I would say the impact of those actions were minimal due to the fact that we are still a solid AA/Aa,” Mathers said. “Additionally, many of the major mutual fund shops perform their own credit analysis, so the ratings action by Moody’s and S&P has less impact on them.”
Nevada repays GO bonds with a 17-cent per $100 in assessed valuation statewide property tax. Those collections have declined with property values in the foreclosure-ridden state.
The statewide assessed valuation of $148.2 billion on June 30, 2008, dropped by more than a third in two years, to $95 billion in 2010, according to the debt affordability report.
“Our actual property tax receipts for that 17-cent share has been above the estimate we provided back in January,” Mathers said. “Part of that increase comes from the tax on the net proceeds of mining. As gold prices have risen, the revenues have gone up as well.”
The treasurer’s office has not built those increases into the model, however, because they are trying to be fiscally conservative, he said, noting that the projections call for 1% to 2% growth in property values over the next 10 years.
Richard Bird — a regional manager overseeing operations for national commercial real estate brokerage Marcus & Millichap in a four-state region that includes Nevada — said the state’s projections are definitely conservative.
He concurs with projections of 1% or 2% growth for the next few years, but not through 2021. Within a few years, Bird said he expects property values will begin growing at double the rates estimated by the state.
It will take another two or three years for all the distressed commercial real estate assets to be sold and for the market to reset, Bird said. His projections would put the state in a more normalized real estate market by 2014, seven years ahead of the report by the state treasurer’s office.
“There are definitely still a lot of bank-owned distressed properties that need to be worked through,” Bird said. “But there was a billion dollar note sale on commercial real estate that went to auction on May 17 to 19. The majority of the properties sold and some sold above expectations. I think that is a vote of confidence for Nevada.”
To deal with the lean times, the state has compiled a priority list so that the most urgent infrastructure needs will be met.
“Clearly we are not unlike other governmental agencies,” Mathers said. “Infrastructure going forward will be a big issue for all states to grapple with and we don’t rely on bond proceeds. We are also cash-funded as well.”
Local issuers are likewise still being hampered by the burst of the state’s massive real estate bubble. Like Nevada, the Clark County School District, normally one of the state’s biggest bond issuers, does not plan to issue new debt for several years.
Current projections put the next new bond issuance at 2017, according to Pat Zamora, a vice president with NSB Public Finance, the district’s financial advisor.
The CCSD’s voter-approved authority to issue new debt expired in 2008 and it has not been back to voters since then, Zamora said. But given the decline in property values and its outstanding $3.86 billion in GO debt, school officials don’t expect they will have the fiscal capacity to issue new-money bonds before 2017, he said.
Before the school district could consider going to voters for bonding authority there has to be the capacity, which means property values have to rise, Zamora said.
“The state gets their 17 cents and it continues forever, where the school district has to go to voters,” Zamora said. “Then we are given the authority to issue bonds for 10 years, but that authority terminates.”
Even if property values do go up, state law sets a 3% cap on taxes for residential properties, absent an improvement, and a cap between 3.2% and 8% for commercial properties depending on which county the property is located in.
In Clark County, the cap on commercial properties is 6.3%. The CCSD gets a cut of property sales and hotel room tax, which also helps it to meet bond debt payments, however, he said.
Building and renovation costs in the school district — the fifth largest in the country with a student enrollment of 304,447 for the current school year — are not likely to stand still while the state waits for revenues to grow, Zamora said.
“I tell people if you have $7 billion in asset value for schools, it quickly becomes a liability if you don’t maintain those assets,” Zamora said. “It means constant renovations and repairs, or you let them deteriorate and then they don’t last as long.”
Las Vegas has several new-money bond issues on tap, but none are over $50 million and all are backed by money that is already available, according to Venetta Appleyard, the city’s financial services manager. The city’s largest planned issue is a $36 million bond deal to fund fire department costs, backed by a 9-cent tax on property dedicated to fire services.
“Most of what we are doing is replacing debt service, because we have expired the bonds,” she said.
Vegas officials are being just as conservative in their projections as state officials.
“Commercial real estate lags residential and we are not sure residential has bottomed out,” Appleyard said. “We are not projecting much growth. We are looking at the same 2% growth, if not 1% over the next few years.”
