CHICAGO - Kansas City, Mo. will borrow $124 million next week to fund its downtown street car project, other infrastructure improvements, and to restructure debt.
The streetcar financing has long been in the works and delayed since last spring.
City officials say the debt restructuring will give Kansas City budgetary breathing room to strengthen its pension funds without deep service cuts.
The special obligation bonds are secured by the city's general municipal revenues, subject to an annual appropriation. They are scheduled to price on March 11, with an A1 rating and stable outlook from Moody's Investors Service and a AA-minus and stable outlook from Standard & Poor's. Moody's also affirmed the city's GO rating of Aa2 and Standard & Poor's affirmed its AA rating.
The bonds will be offered in three tranches, with the $71.5 million Series A for construction of the downtown streetcar system, said City Treasurer Tammy Queen. Series B, for $17.5 million, will fund various infrastructure and equipment purchases and bring buildings into compliance with federal disabilities rules under a city settlement with the federal government.
Series C totals $35.5 million will restructure a portion of the city's debt issuance for its downtown KC Live entertainment district to provide near-term budget relief. The funds will go to bolster the city's increased pension contributions as part of reforms agreed to by city unions. City officials describe it as a central step in a five-year fiscal plan to structurally balance the budget.
Oppenheimer & Co. is the senior manager with George K. Baum & Co., Stifel Nicolaus & Co., and Valdes & Moreno rounding out the underwriting syndicate. First Southwest Co. and Moody Reid Inc. are advising the city. Kutak Rock LLP and Hardwick Law Firm LLC are bond counsel.
Downtown residents within the boundaries of a special transportation development district in late 2012 approved taxes and assessments to finance the two-mile route — supported by Mayor Sly James and long lobbied for by the City Council member Russ Johnson.
"Discussions are already underway about an expansion," Queen said. Officials are studying the optimal routes for an expansion and the city has approved the formation of a broader transportation development district that would expand the current downtown district. The measure is expected to go on the August ballot for voter consideration.
The successful mail-in ballot in 2012 paved the way for a 1% increase in the sales tax within the district, which includes 4,000 parcels, along with special parking and property tax assessments.
"The streetcar is what downtown residents want and will serve as an economic engine along its route," Queen said. "It's the next logical step in the development of downtown."
The various taxes are expected to generate about $7.7 million in annual revenue and the city will tap $1.2 million from a citywide sales tax annually, with all the revenues going to fund various operating reserves, operations, and bond repayments although they are not directly pledged to the bonds. Series A will provide $62.9 million for the streetcar construction fund and establish reserves. The project relies on $58 million of federal grants and the city water department is contributing $14 million to upgrade water lines.
The financing plan was temporarily stalled after some downtown businesses challenged the special taxes imposed in the area, because they were not allowed to vote. Only property owners could vote in the election. The court threw out the lawsuit last year and the Missouri Supreme Court declined to hear the case, clearing the way for the bond sale.
The streetcar line, to run mostly along the city's Main Street between its River Market and Union Station, is under construction and could be up and running in 2015. The city is bolstering reserves tied to the project to insulate it against any drop in revenues or other problems, to prevent the need for city subsidies which other development projects have required.
The KC Live partial debt restructuring will push off principal coming due in the next five years. The city will see $7 million in relief in the next budget, when its pension payments will rise by $15 million, and another $6.6 million in relief will be taken in the following year.
The relief will ramp down over the course of the five years smoothing out the city's absorption of higher pension payments. The restructuring pushes off the final maturity of the original bonds to 2040 from 2033. The restructuring will add to the overall interest costs of the original borrowing. Repayment of the original KC Live bonds is already being subsidized by city coffers, fueling criticism from some corners.
The city was cautious in deciding on the maneuver - referred to by market participants as a "scoop and toss" move and frowned on by municipal analysts for the one-time savings it provides.
"We have not done such a restructuring before for budget relief but in this case it's for a very specific reason," city Finance Director Randall Landes said.
"One of our goals in our five-year financial plan is fully funding the actuarial required contribution for the city's defined benefit pension plans," he added.
After several years of blue-ribbon panel meetings and negotiations, the city and its labor groups and pension boards reached accord on reforms to establish different tiers of benefits for new employees, tie cost-of-living increases to the strength of the funds or inflation, and raise employee contributions.
The city council approved an actuarial required contribution funding mandate as part of the reform package, for which the state legislature paved the way with approval of pension plan amendments last summer.
In exchange for the employee concessions "it made sense for the city to do its part and pay the ARC but in a way that would not cuts into services so deeply," Landes said of the restructuring. The city is also trimming spending and eliminating more than 100 positions to offset the increased contributions.
Contributions were previously tied to a legislatively defined rate that fell short of the ARC. The city's unfunded liability totals $611 million for a funded ratio of 77.5%. Landes said the city wanted to shore up the funds before any further deterioration. The ARC was underfunded by nearly $25 million in fiscal 2013.
The city's decision to directly link the restructuring to pension funding improvements helped smooth over potential rating agency concerns and won positive reviews.
"Although the reform presents near-term budgetary challenges, the measure is credit positive for the city because the increased pension expenditures can be absorbed into the city's budget while simultaneously improving the long-term fiscal health of the city's four pension plans," Moody's wrote in a recent weekly credit outlook report. "By addressing its pension funding issues early, the city will avoid greater budgetary pressures in the future."
Moody's also notes that all of the city's labor unions have agreed to the changes.
Kansas City has $400 million of GO debt and $1.2 billion of special obligation bonds.
The city's ratings reflect its "sizable full value and role as the economic hub for western Missouri and eastern Kansas," a leveraged debt profile, and strong financial management, Moody's wrote.
The city's debt load has been strained because it's been called upon to support debt service payments related to bonds that were originally intended to be repaid by increased special taxes and other revenues derived from the financed projects such as the entertainment district, Moody's wrote.
Other challenges include uncertainty over the long-term collection of an earnings tax, due to the risk that voters won't reauthorize the tax when it appears on the ballot every five years, and modest general fund reserves that provide a limited cushion.
Standard & Poor's said its ratings reflect strengths from strong budgetary flexibility with available reserves at 9.8% of expenses, an adequate economy and its role as an anchor for the region, very strong liquidity, and very strong management. Its challenges include a high net direct debt level and "ongoing pension pressure, although the city is taking steps to better fund its pension while keeping the budget in balance," analysts wrote.
