BRADENTON, Fla. — Jacksonville, Fla., this week sold the first in a series of three bond deals that could total as much as $435 million within a month, depending on market conditions.
New-money proceeds from $106.7 million of Series A revenue bonds sold Wednesday, plus $88.9 million of Series B bonds expected to sell on June 9, are providing funds for various projects in the city’s capital improvement plan, including a $350 million Duval County courthouse under construction and expected to open next year.
In a third sale of refunding bonds expected to be marketed in mid-June, the city expects to sell between $130 million and $240 million, with the final amount dependent on market conditions at the time, according to Jeremy Niedfeldt, a senior managing consultant with Public Financial Management Inc., the financial adviser.
The Series A bonds are secured by non-ad valorem revenues and a covenant to budget and appropriate. The maturity structure is designed to match the useful life of the assets, Niedfeldt said.
The bonds priced competitively Wednesday using a pre-qualified group of banks consisting of Barclays Capital Inc., Citi, Goldman, Sachs & Co., JPMorgan, Loop Capital Markets LLC, Bank of America Merrill Lynch, Morgan Keegan & Co., Morgan Stanley, Raymond James & Associates Inc., RBC Capital Markets, Siebert Brandford Shank & Co., and Wells Fargo Securities.
JPMorgan won the deal with a true interest cost of 4.67%. The bank also won Jacksonville’s last two offerings, Niedfeldt noted.
Bryant Miller Olive LLP and Lawrence & Parker PA are co-bond counsel. Greenberg Traurig PA and Ezell Law Firm PA are co-disclosure counsel.
Niedfeldt said the deal priced well and noted that there was aggressive bidding between the investment banks, with about eight basis points difference in the TIC between the winner and the nearest bidder, he said.
The transaction sold with serial maturities between 2012 and 2033. The bonds priced to yield 0.70% in 2012 with a 3% coupon, 3.65% with a 5% coupon in 2022, and 4.92% with a 5.25% coupon in 2033.
There were also two term bonds that priced to yield 5.10% with a 5% coupon in 2036 and 5.13% with a 5% coupon in 2041.
The bonds were rated AA by Fitch Ratings, Aa2 by Moody’s Investors Service, and AA-minus by Standard & Poor’s, all with stable outlooks.
Located in northeast Florida, Jacksonville was founded in 1832 and consolidated with Duval County in 1968. With 820,000 residents, it covers 840 square miles and is a major banking and manufacturing center for the region, which includes southern Georgia.
The fast-growing city has experienced a slowdown since the recession due to restrictions on property tax levies and reduced property values. In response to the downturn, Jacksonville includes a detailed discussion of its finances and a debt-affordability model created to establish and monitor debt limitations in annual audits and bond documents.
With this week’s sale, all three major rating agencies affirmed Jacksonville’s issuer or implied general obligation ratings of AA-plus by Fitch, Aa1 by Moody’s, and AA by Standard & Poor’s.
“Jacksonville’s financial position has improved steadily despite pressures associated with assessed valuation declines and property tax reform,” according to a report by Moody’s analyst John Incorvaia.
Assessed property values declined by 5.2% for fiscal 2010, requiring the city to close a $12.3 million budget gap with continued cuts in expenses that resulted in “only a marginal reduction in fund balance,” he said, noting that the city aims to maintain separate reserves for emergencies and operations.
Fiscal 2010 ended with a fund balance of $110 million, a $44.9 million emergency reserve that can only be appropriated with a two-thirds vote of the City Council, and a $41.8 million operating reserve.
In the current fiscal year, which ends Sept. 30, the city addressed a projected revenue gap of $60 million by eliminating jobs, cutting or freezing salaries, requiring employee contributions to health care premiums, hiking solid-waste and other fees, and other spending cuts, according to Moody’s. “Currently, officials anticipate finishing the year with a variance of up to a negative $2 million,” Incorvaia wrote.
The 2012 budget will be presented in July, but a five-year projection by the city estimates a budget gap of roughly $65 million for fiscal 2012, and departments have been asked to trim operations by 10%-12%, said Standard & Poor’s analyst Le T. Quach.
“Rating stability will largely depend on management’s actions to close this projected fiscal 2012 gap,” she said. “We believe Jacksonville has, in the past, been proactive in identifying expenditure reductions, and we expect this trend to continue.”
The city’s next sale consisting of $88.9 million of Series B bonds in two weeks will be for the Better Jacksonville plan, for which about $1.4 billion of bonds are outstanding.
The $2.25 billion plan was approved in 2000 when Jacksonville voters agreed to impose a half-cent sales tax to back 20- and 30-year bonds. The debt supports a pre-approved list of $1.5 billion for transportation and $750 million for special projects, such as a stadium and new infrastructure for the fast-growing consolidated city. The half-cent sales tax expires on Dec. 31, 2030.
Better Jacksonville bonds were sold in 2001, 2003, and 2008, with the half-cent sales tax as the single security. But a decline in sales tax revenue due to the recession resulted in negative outlooks from rating agencies, according to a 133-page disclosure supplement to bondholders for the fiscal year ending Sept. 30, 2010.
All three rating agencies have downgraded ratings and maintained negative outlooks on the outstanding Better Jacksonville bonds secured only by the sales tax. Moody’s lowered its rating to A1 from Aa2 in November, and Standard & Poor’s dropped its rating to A from AA-minus in April. Fitch maintains its AA-minus rating.
To address the decline in sales tax revenue, and protect additional debt sold for the Better Jacksonville program, the city implemented what it called a “bridge financing” strategy and authorized $300 million of Better Jacksonville bonds to be sold with non-ad valorem revenues as the security, and a covenant to budget and appropriate. Half-cent sales tax revenues will be used if available after paying debt service on outstanding bonds.
The city sold the first two tranches of the $300 million in 2009 and 2010. The final tranche of $88.9 million will be sold June 9. Ratings for the deal have not been released.