Cleveland refunding paves way for new debt

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Cleveland, Ohio’s upcoming $70 million sale of taxable refunding bonds will free up capacity for new debt issuance.

The city is pricing the bonds the week of Feb. 10 for an anticipated $7 million in savings, according to city debt manager Betsy Hruby. The bonds are secured by a subordinate lien of the city's income taxes levied at a rate of 2.5%.

The bonds — using a taxable structure — advance refund subordinate-lien income tax revenue bonds the city issued in 2014 and 2015 and also refund a portion of general obligation bonds the city issued in 2012. The refunded debt was issued to finance improvements to parks and recreation facilities.

The GO refunding will free up capacity for additional issuance. “The refunding is being done for debt service savings,” Hruby said in an email. “The city began working on this refunding near the end of 2019. Given the substantial savings, we tried to move the deal along as quickly as possible in order to catch the favorable market.”

Hruby said the city plans to issue its roughly $50 million of annual general obligation bonds sometime in the first half of the year to finance various capital improvement projects.

Wells Fargo Securities is the senior manager. Phoenix Capital Partners LLP and Government Capital Management LLC are advising the city. Squire Patton Boggs LLP is bond counsel.

Cleveland levies a 2.5% income tax on gross salaries and wages earned by nonresidents as well as by residents working in or outside Cleveland, and on net business profits attributable to business conducted within the city.

The tax supports both the city’s subordinate-lien income tax bonds and its GO bonds which are additionally secured by the city’s property tax.

Income tax revenue necessary to pay debt service on the bonds flows directly from the city's collection agency to an escrow agent and is irrevocably committed to payment on the bonds.

Income tax receipts increased 26% to $447 million for 2017 because of the city’s 0.5-percentage-point increase in the tax rate which took effect Jan. 1, 2017. In 2018 total collections increased by 5.8% to $473 million. The city is budgeting for a 3% increase in fiscal 2020. Management expects to budget for increases in the 1%-2% range in future years.

Ahead of the sale, Moody’s Investors Service affirmed its A1 ratings on the bonds and S&P Global Markets affirmed its AA ratings on the subordinate bonds. The outlook is stable. The city has $327 million of subordinate-lien income tax revenue debt outstanding and $293 million of general obligation limited tax debt.

S&P rates Cleveland AA-minus and the city’s GOs AA-plus.

“The 'AA' rating on the subordinate-lien income tax bonds is one notch higher than the obligor's creditworthiness, reflecting our view that legal provisions are less restrictive than the GO bonds with respect to revenue collection and distribution and therefore that the pledged revenue has greater exposure to operating risk,” S&P said. “The 'AA+' rating on the city's first-lien pledge of income taxes is two notches higher than the obligor's creditworthiness, reflecting our view that the pledged revenue and the flow of funds are sufficiently removed from the city's control so as to substantially mitigate operating risk.”

Moody’s rates the bond based on Cleveland’s A1 issuer rating. “The issuer rating serves as a cap on the income tax rating given an absence of legal separation of pledged revenue from the city's operations and subordination of special income tax debt service to GO debt service,” Moody’s wrote.

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City of Cleveland, OH Revenue bonds Refunding bonds State of Ohio