Columbus sets bond deal with clearer pandemic picture in hand
Columbus, Ohio, returns to the market Thursday with its first COVID-19-era borrowing in a $484 million triple-A rated sale.
The city has suffered tax and economic blows from the pandemic but has weathered the impacts with adjustments to its roughly $1 billion budget so that its top general obligation ratings remain intact.
The city isn’t out of the economic woods but its fiscal health heading into the pandemic provided a buffer.
The city entered 2020 “on strong footing with record fund balances,” said City Auditor Megan Kilgore. “Right now we have more than $160 million in [general fund] reserves. We ended 2020 with income taxes down less than 1% and we have been able to maintain and stay on track with our capital plan.”
The city maintains a rainy day fund that grew to $85 million in 2020 from $80 million in 2019 and is on course to reach $90 million by 2024.
The city quickly amortizes its debt so if it hits an especially rough patch on revenues, debt restructuring is an option. The city also has alternate revenue options as much of its debt is voter authorized so it could levy a property tax to repay bonds. That backstop provides additional flexibility noted by rating agencies.
The bonds are secured by the city’s ability to levy a property tax but are repaid from income tax revenues that account for about 75% of the budget and user and enterprise fees. The city hasn’t levied an ad valorem property tax to service debt since 1957 and property tax revenues currently account for only 5% of city revenues.
The 2020 budget assumed 3% growth in the income tax and 2.8% in other revenues. The auditor in June revised estimates downward by 4.7% or $41.5 million.
The picture improved and through Nov. 30 revenue was down by only about $8 million including a $3.8 million hit to income taxes, $1 million in property tax, and $1.7 million cut to casino revenue.
Columbus managed the 2020 stress through CARES Act funding to cover expenses, worker’s compensation rebates, and cuts. The city did not tap reserves and while it imposed a hiring freeze it did not turn to layoffs or furloughs.
The city's last 2021 revenue estimate increased its third quarter revised budget projection by $3.5 million for income taxes and almost $12 million for other general fund revenues.
Ahead of the sale, Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings affirmed triple-A ratings and stable outlooks on $3 billion of debt.
"The 'AAA' rating reflects our view of the city's strong economy and budgetary performance, and its very strong management, budgetary flexibility, and liquidity," said S&P analyst Randy Layman.
The city’s reliance on income tax revenue from commuters poses a potential risk given the pandemic’s impact on employee work locations, S&P warned.
In response, the state had approved emergency legislation that temporarily allows municipalities to continue to collect income taxes from non-residents who work from home. It extends to 30 days after the state ends its emergency declaration, which remains in place.
The auditor and state were named as defendants in a lawsuit filed in July by the Buckeye Institute, a Columbus-based think tank, that challenged the constitutionality of the legislation and the city's ability to collect income taxes from workers who were working remotely during the mandatory stay-at-home order. The parties are still filing briefs on the litigation.
Two bills are also pending before the legislature that would end the emergency legislation.
“If successful, they could drastically change the collection and distribution of income taxes for remote workers, and therefore materially reduce the city's income tax revenue,” S&P said. “Although we do not believe this poses an immediate risk to the city.”
Kilgore declined to comment because her office is a party in the lawsuit but stressed that the city’s has reserves and options to manage any potential fiscal blows.
The offering statement notifies potential investors that “if successful, this action could result in a significant reduction in the amount of payroll taxes attributable to the city during the state emergency.”
Fitch noted the city’s ability to manage saying: “Management has worked to mitigate the risk associated with the heavy reliance on income tax revenue by growing available reserves through the recovery from the Great Recession. General fund reserves are maintained well above conservative policy guidelines.”
The rating benefits from the city’s strong and diverse economy and being home to the state’s capital and Ohio State University and “despite the economic shock of the global coronavirus pandemic, the city's incomes taxes have proved resilient and declined by a very minor amount in fiscal 2020,” Moody’s said.
The deal raises $372 million of new money. It was delayed as city officials sought to have a better handle on how revenues would pan out for 2020 and considered market conditions. The transaction also advance refunds $112 of debt.
It is being offered in multiple series that includes a tranche for $299 million of new money, tax-exempt unlimited GOs; $19 million of new money, tax-exempt limited tax GOs; $23.6 million of new money, taxable unlimited tax GOs; and $30.4 million of new money, taxable limited tax GOs.
The taxable advance refunding is selling in two tranches for $66 million of unlimited tax GOs and $46.3 million of limited tax GOs. The city expects to achieve 6.39% of present value savings. “This is a traditional refunding for economic savings with matched maturities,” said Kilgore’s director of debt, Mollie Petitti.
BofA Securities is senior manager and Stifel is co-senior manager with Barclays, Goldman Sachs, and Loop Capital Markets LLC as co-managers. PFM Financial Advisors LLC is advising the city and Bricker & Eckler LLP is bond counsel.
Proceeds will finance transportation, water and sewer, parks, public safety, affordable housing, information services, and economic development projects.
The transaction includes $15 million to fund O'Shaughnessy Dam Hydroelectric project improvements and $13 million to cover the city’s 2020 contribution for projects that are part of a mixed-use district with public space being developed that will be anchored by a new $300 million stadium for the Major League Soccer’s Columbus Crew SC. The city will provide another $12.5 million in its 2021 capital program.
Mayor Andrew Ginther included the hydroelectric plant funding in the capital budget to promote green energy and sustainable initiatives.
The Columbus plant that tapped hydropower at the dam was built in 1987 and its turbines produced five megawatts of power. It was shuttered in 2018 after equipment and generators fell into disrepair. Work on the hydropower unit will begin early this year and it’s expected to return to its former generation capability in 2023. The dam dates back to 1925 and is located on the Scioto River; its reservoir providing a major source of drinking water for the city.
At the helm of the office that manages the city’s debt and revenues, Kilgore said the pandemic has kept her staff busy but also provided an opportunity to improve data collection and take advantage of private sector relationships.
Kilgore spent more than a decade working alongside longtime Auditor Hugh Dorrian rising to serve as his deputy before taking a job at the advisory firm Umbaugh. When Dorrian retired, Kilgore ran for the office and won it in 2017 with Dorrian’s blessing. She is running for a second term this year.
Early in the pandemic, Kilgore began meeting weekly with the regional heads of major local banks like Huntington and Fifth Third. Those heads are also women.
Kilgore said she’s kept in close contact too with other corporate leaders all of which helps the office better project the pandemic’s revenue impact and steer where to direct both private and public programs and federal relief to help businesses and individuals most in need.
“At the beginning we were really salivating for information and it was difficult to get real-time employment information that was going to guide and have consequences for the city,” Kilgore said. “One good outcome is we’ve really accelerated our use of data collection” and have engaged in “unprecedented levels of collaboration.” The office has relied for expertise from the economics team at Nationwide Insurance and the university.
Heading into 2021 “my focus has really been on mitigating the long term impacts to those who been the hardest,” Kilgore said. That involves working to promote the availability of credit for struggling individuals and working with corporate and the not-for-profit sector. The benefit isn’t just for the public good but for the city's fiscal health. “By hyper-targeting support to those most impacted the stronger our tax base ultimately will be.”