Cleveland Bringing $60 Million of Non-BAB GOs for Capital Projects

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CHICAGO - Cleveland will enter the market today with just under $60 million of fixed-rate bonds as part of the city's regular issuance of general obligation debt to finance capital projects.

The city's finance team considered issuing Build America Bonds instead of tax-exempt debt, but opted to stick to a traditional financing in part because the cost savings associated with BABs was uncertain, according to the city's financial adviser.

The city today expects to sell $46 million of new-money bonds and $13.5 million for refunding bonds originally sold in 1998. Assured Guaranty Corp. will insure the debt.

George K. Baum & Co. is senior manager, leading a team of four additional underwriters on the transaction. Calfee, Halter & Griswold LLP is bond counsel. Government Capital Management LLC and Phoenix Capital Partners are co-financial advisers.

Ahead of the deal, Fitch Ratings affirmed its A-plus rating on Cleveland's GO debt. Moody's Investors Service and Standard & Poor's also affirmed their respective A2 and AA ratings, according to Steven Hoffmann, the city's financial adviser with Government Capital Management, who added that the different rating levels add to the appeal of using insurance.

Proceeds from the new-money borrowing will finance road and bridge projects, as well as parks and recreation projects and improvements to various municipal buildings. By refunding the 11-year-old GOs, the city expects to achieve a net present-value savings of 3% to 4%, Hoffmann said.

Cleveland has the authority to issue either taxable or tax-exempt debt, but the finance team decided not to issue BABs after analyzing the costs, Hoffmann said.

"We weren't sure whether there would be an economic advantage to issuing BABs. That was in question, so we decided to go the traditional tax-exempt route," he said.

Hoffmann added that it was also unclear whether certain capital improvement projects would be eligible for financing with BABs and that the city wanted to issue the debt all in one series instead of breaking it up into several pieces.

The bonds are secured by the city's property taxes and income tax revenue. Cleveland's 2% income tax makes up the largest piece of the city's revenue stream - around 55% - and is expected to remain relatively stable throughout the year despite climbing unemployment.

While all Cleveland's revenue sources, including income tax, are expected to decline slightly over the near term, Fitch analysts said the city's financial performance should remain "satisfactory, though strained."

"Despite increasing unemployment rates for the city, Cleveland remains the employment hub for the region and the ability to capture income taxes from residents outside the city's corporate limits as well as non-resident workers in the city is an important credit consideration," Fitch analyst Melanie Shaker wrote in a release on the upcoming bond sale.

Officials are considering several additional bond issues this year, including a refunding for Cleveland Public Power and a new-money issue for the city's water district.

The finance team is also considering taking advantage of a provision in the new federal stimulus bill in order to convert a portion of the Cleveland Hopkins Airport's debt that is now subject to the alternative minimum tax to non-AMT debt, Hoffmann said.

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