DALLAS - Election-year politics and lower oil prices threaten Houston's boomtown image as the city prepares to issue $128 million of hotel occupancy tax and special revenue refunding bonds.
The bonds are expected to price Thursday through negotiation with book runner Hutchinson, Shockey, Erley & Co. and co-managers Piper Jaffray & Co. and Blaylock Beal Van.
The lead banker is Mark Nitcholas, senior vice president of Hutchinson.
First Southwest Co. vice chairman Michael Bartolotta and managing director Drew Masterson are financial advisors.
The bonds are rated A2 by Moody's Investors Service and A-minus by Standard & Poor's, with stable outlooks.
Critics of the city government have a much more alarming view of Houston's estimated $13 billion of debt.
In a series of opinion pieces in the Houston Business Journal, Jim Noteware, a real estate developer and former head of the Houston Department of Housing and Community Development, claimed that "Houston is broke and has been for a very long time," relying on borrowing to balance the budget.
"The city has funded these deficits mostly by borrowing (along with some accounting sleight-of-hand, not to mention the sale of city properties and assets at distressed price)," Noteware wrote in a Dec. 31 article. "By the end of fiscal year 2013, the city had borrowed some $2.9 billion (mostly from the employees' pension funds), including issuing $600 million in pension bonds to cover the cumulative shortfall.
"The consequences of this situation are dire," he wrote. "The city's infrastructure and capacity to deliver services are deteriorating (hit a pothole lately or waited on a permit?), despite the spending and borrowing spree over the last decade or so."
A spokeswoman from Mayor Annise Parker's office said that Parker does not comment on opinion pieces in the local press.
"We would urge anyone who's buying the bonds to check out the tons of information on our Web site," said Janice Evans, chief policy officer for the city. "All of our budgets are posted online. We have had balanced budgets for all the five years that Mayor Parker has been in office. Everything indicates that we're doing fine."
The Greater Houston Partnership, a business association that until this year provided research for Houston, Harris County and other governments in the region, is also questioning the city's debt provisions. The organization is preparing to issue a series of reports on the city's debt that it says will come before the November elections.
Gina Luna, chairwoman of the GHP and chairwoman at JPMorgan Chase & Co., told the Journal that "city leaders have done the best they can, but at some point, no amount of creativity is going to overcome the amount of debt the city has to deal with."
The financial relationship between the Houston, Harris County and the GHP was severed this year as the partnership announced that it was ending its $1 million worth of contracts with the public governments. Some of the 1,200 business members of the GHP apparently did not want to be subject to the public scrutiny that came with city and county contracts.
"You can't be in the economic development business and not be able to honor confidences," Paul Hobby, former chairman of the GHP and board member for NRG Energy, told the Journal in December.
The dustup over debt comes as Houston is preparing to host its third annual Investor Conference that includes finance officers from Harris County and regional governments. Mayor Parker, leaving office this year because of term limits, is the keynote speaker at the opening session.
The nation's fourth-largest city is facing political upheaval as every citywide office is up for grabs this year, including that of controller, Ronald Green, also term-limited.
"Odd numbered years are kind of interesting because every office is up for grabs," Green said, adding that this year is especially interesting because there are no incumbents running for re-election. Green and officials for other Houston-area issuers attribute much of the alarm over the city's debt to election-year politics, while acknowledging that pensions represent the key issue.
"I believe a lot of this public discussion has been triggered by other municipalities' insolvencies and the dire circumstances in other cities' pension plans," Green said in a transmittal letter accompanying this year's annual financial report.
Houston's total unfunded liability for its three pension plans as of July 1, 2014 was $3.218 billion, Green reported.
"The projected levels of pension contributions should be worrisome to anyone concerned about the City's financial health in another decade and the City's bond ratings, which are so crucial for our ability to borrow in order to proceed with much needed infrastructure improvements," Green wrote.
"There is a need to restructure the pension plans," he wrote. "However, the plans are intractable -- the City is legally bound to honor these contracts. Any re-negotiated plans would almost certainly apply to only newly hired employees and have little impact on the current and near term City contribution levels."
Changes require consent from pension board and/or the state legislature, he added.
Combined, the plans' funded ratio as of July 1, 2012, the last actuarial valuation date, was 76%. The city's combined pension contribution was 73.7% of the annual required contribution for fiscal 2013, about $93 million less than the ARC. Pension and other post-employment benefits contributions were 14.7% of expenditures in fiscal 2013.
"While we recognize that the city continues to make incremental steps to improve funding levels, Houston has not, in our view, implemented a plan to fully address the unfunded obligations," S&P analyst Robert Bryce wrote in the most recent report on Houston's general obligation debt.
Speaking Feb. 10 at a Bond Buyer conference in Austin, Green said he had little expectation that this year's Texas Legislature would modify the law on Houston firefighters pensions, which Houston unsuccessfully sought to challenge in court.
However, the city did reach agreement Feb. 9 with the Houston Police Officers Union on a contract that includes cost-saving measures.
"This contract will for the first time in a long time bring HPD's entry-level salary to market level," Parker said. "It will also address market inequities in ranks at HPD that are currently being paid below the market.
The debt and pension issues are coming to the fore as Houston and surrounding suburbs face falling oil prices. The metro area recovered from the 2008 recession much more quickly than other parts of the country as oil prices soared from around $40 to more than $100 per barrel. Since August, 2014, that pattern has reversed.
One concern is whether the Houston area's housing boom is sustainable.
According to Fitch Ratings, Houston has the second most overvalued housing market in the country behind Austin. Home prices in Houston are 19% overvalued, just behind Austin's 20%, analysts said.
Despite those concerns, Houston retains stable outlooks on its AA-plus general obligation rating from Standard & Poor's and Aa2 from Moody's.
The hotel occupancy tax bonds are backed by dedicated tax revenue from a tax on hotel stays. Following this sale, the city will have $491.9 million outstanding in hotel occupancy tax bonds.
"The rating reflects satisfactory debt service coverage even under stressed scenarios, adequate legal structure and flexibility afforded by cash balances," Moody's analyst Adebola Kushimo said. "The rating also takes into account recent declines in oil prices and the potential for them to result in a slowdown in the energy sector."
