CHICAGO — Kansas City, Mo., will enter the market on Tuesday with a $43 million new-money and refunding general obligation deal that includes $10 million of recovery zone economic development bonds, and which will be the city’s first negotiated sale to use only certified minority, women, and disadvantaged underwriting firms.
Ahead of the deal, Fitch Ratings and Moody’s Investors Service downgraded the city’s GOs one notch each, citing the city’s weakened financial profile. Fitch rates the city AA, Moody’s rates it A1, and Standard & Poor’s rates it AA.
The deal includes a $10 million current refunding for present-value savings. The city is considering selling a portion of the new money as Build America Bonds. The city will also sell $10 million as recovery zone economic development bonds, applying for the direct-pay 45% interest subsidy, said acting city Treasurer Tammy Queen.
Kansas City recently promoted Queen, who has worked in the treasurer’s office for the last seven years as a cash manager. She replaced Randy Landes, who was treasurer for 15 years. Landes was promoted to director of finance, the city’s top fiscal post, earlier this year.
Siebert Brandford Shank & Co. is the senior manager. Backstrom McCarley Berry & Co. Harvestons Securities Inc., and Valdes & Moreno Inc. are co-managers.
It has been a long-term goal in Kansas City to promote minority, women, and disadvantaged firms and “this deal was the size and scope of which we felt we could go with a team that was 100%” minority, women, or disadvantaged, Landes said.
Proceeds of the sale will finance the city’s public safety radio communications project.
Fitch downgraded Kansas City’s $300 million of GOs to AA and $1.2 billion of special obligation bonds or appropriation-backed debt to A-plus.
“The downgrade reflects financial weakening in the city’s general fund, which was previously expected to be stable, and heightened economic stress that has contributed to high unemployment,” Fitch wrote.
The city’s unemployment rate rose to 11.8% in December, compared to the national average of 9.7%.
Kansas City hopes to bring its reserves back to higher levels over the next two years. Fitch also cited the city’s debt load, variable-rate exposure, and swap exposure as contributing factors.
Moody’s downgraded the GOs to A1 and the other debt to A2.
“The downward rating actions indicate operating and management weaknesses resulting in a deteriorated financial position at fiscal year-end 2009, which significantly impedes the flexibility to absorb future budgetary uncertainties,” Moody’s wrote, adding that ongoing economic softness will make it difficult for the city to rebuild its reserves in the near term.
Landes and Queen said city officials were disappointed with the action, but noted that the outlooks from all three agencies now are now stable.
Kansas City is considering several other financings and two potential projects under consideration that could also result in new borrowing.
It is planning a $20 million special obligation refunding next month and may restructure a portion of its $180 million of floating-rate bonds still outstanding from its KC Live entertainment district financing. Though converting to a fixed rate would allow savings on liquidity support, the city would face a penalty due to a negative swap valuation.
On the education front, Mayor Mark Funkhouser is pushing for City Council approval to ask voters to support $100 million of new GO borrowing to finance his Schools First Initiative that would pay for infrastructure improvements and improve public safety around the city’s schools.
Funkhouser said he will continue to press for support for the program following the Kansas City School District board vote earlier this week to close down nearly half of the city’s 61 schools. The dramatic proposal was pushed by superintendent John Covington to address a $50 million shortfall and avert bankruptcy amid dwindling enrollment. Funkhouser said the funds are needed to support both the schools that remain open and to maintain the vacant buildings.
Separately, the city is weighing plans for a new, $300 million convention center hotel, though the project is in the early stages. It has hired a consultant to conduct an economic feasibility and impact study.
Officials on Monday interviewed four investment banks and plan to pick one in the coming months to work with the consultant to develop a potential financing plan to help a city steering committee “decide where we want to go from here and how deeply the city will be involved in the project,” Landes said.