Houston hurries $1.6 billion of bonds to market
DALLAS – With its bond ratings intact and a pension restructuring in the works, Houston is planning to issue more than $1.6 billion of debt by the end of the year.
The flood of issuance comes amid uncertainty about the municipal bond market with legislation moving in Congress to end tax exemption for private activity bonds and forbid advance refundings. Proposed legislation also would end or reduce federal exemptions for state and local taxes and cap deductible mortgage interest, moves that would have an impact on local government finances, effective at year-end.
House Ways and Means Committee Chairman Kevin Brady, whose 8th Congressional District includes Houston’s affluent northern suburbs, is the chief sponsor of the $1.5 trillion tax bill that has already passed in the House.
Houston wants to get $1 billion of pension obligation bonds and $610 million of public improvement bonds to market by then. The city is also issuing $135 million of tax-exempt private activity bonds this month for United Airlines facilities at Bush Intercontinental Airport.
Despite the threat from tax reform, “we’re proceeding as normal,” said Max Moll, spokesman for Houston Controller Dan Brown.
“The biggest concern we have is advance refundings,” Moll said. “We’ve saved a lot of money using that financial tool -- $172 million since January 2016.”
“If these proposals become law, the result will be higher costs for capital improvement projects,” said Bennett Sandlin, executive director of the Texas Municipal League. “That means fewer projects will be built or higher taxes to pay for them.”
Private activity bonds can be used to finance projects like airports, solid waste facilities and affordable housing.
“By scrapping the tax-exempt status of these bonds, the tax reform proposal would make these bonds less attractive to investors and ultimately limit the use of public-private partnerships to build critical infrastructure and create local jobs,” Sandlin said.
The PABs for United Airlines are tax-exempt but still subject to the alternative minimum tax, which could also be eliminated in the tax-reform bill. The AMT is a supplementary income tax to prevent wealthy individuals, corporations and trusts from artificially reducing their tax bill through deductions and exemptions.
If the United bonds price as expected Nov. 28, they will be tax-exempt. However, if the law is enacted as Republicans expect by year’s end, future refundings of that debt may be taxable and the AMT provision would no longer apply, the preliminary official statement says.
“Any proposed legislation, whether or not enacted, could also affect the value, marketability and liquidity of the Series 2017 Bonds,” the POS states. “There can be no assurance whether any of the proposed changes to the Code will or will not be enacted into final law.”
The airport bonds are backed entirely by United lease payments and carry no pledge from the city of Houston.
Citi and Wells Fargo are lead managers. FirstSouthwest and YaCari Consultants, LLC are municipal advisors. Bracewell and West & Associates, LLP are bond counsel.
Two days after the airport bonds price, the city expects to price $610 million of public improvement general obligation bonds that will include refunding. The POS for those bonds also points out the risk of changes in tax law but not the specific legislation under consideration.
Goldman Sachs is lead manager. FirstSouthwest and YaCari Consultants, LLC are municipal advisors. Bracewell and West & Associates, LLP are bond counsel.
In advance of the issue, Moody’s Investors Service revised its outlook on Houston's Aa3 rating to stable from negative, citing resolution of the growing pension funding problem and less impact than feared from Hurricane Harvey’s landfall Aug. 25.
Resolution of the pension crisis hinged on voter approval of $1 billion of pension obligation bonds that the city expects to price Dec. 18. Under terms of a deal with the city’s unions, the deal must close by the end of the year. Barclays and Jefferies are co-senior managers on the pension bond deal.
“The stable outlook reflects the long-term trajectory of the credit profile which resulted from the meaningful pension reform as well as the strength of the economy, and increasing liquidity which contribute to a stable credit profile over the medium to longer term,” Moody’s analyst Adebola Kushimo wrote.
Houston's expanding economy is expected to remain largely unimpaired by damages related to Hurricane Harvey because current damage estimates suggest modest potential impact to assessed values, according to Moody’s. Rebuilding has already begun in several parts of the city.
In its POS for the public improvement bonds, Houston said it incurred costs of $175 million related to the hurricane and record rainfall that reached 50 inches in some areas. The city said insurance is expected to cover about $100 million of those costs.
“In the near term, the economy could face some sluggishness until damage assessments are complete and rebuilding is well underway,” Kushimo said. “Preliminary estimates suggest that the impact to the tax base will be modest.”
According to the Texas Department of Public Safety, some 27,825 single family homes, and 675 multifamily properties were impacted in some way by the storm, as of Nov. 6. Of the total, 56.9% and 65.2% respectively, experienced major damage. Using the total numbers from both estimated impact to the fiscal 2018 tax base is a decrease of 2.9%, Moody’s said.
Strong population growth, as well as commercial and residential investments, have resulted in assessed valuation performance averaging a strong 8.6% annually over the past five years, Moody’s said. Despite the oil downturn, assessed values continued their trend of impressive growth increasing 4.2% in fiscal 2018 following an 8% increase in the prior year.
“While the oil sector remains belabored by low oil prices, the metropolitan area's economy has been resilient within the past two to three years,” Kushimo said.