LOS ANGELES — Los Angeles heads to market this month with its first bond sale from the $1.2 billion Proposition HHH voters approved in November to house homeless people.

The city plans to build 10,000 units of permanent supportive housing in 10 years to chip away at a homeless population recently estimated at more than 34,000 people.

“The goal of investing in homelessness is to ensure a functional zero, or housing the homeless within 30 days of them becoming homeless,” said Los Angeles Councilman Marqueece Harris-Dawson.

Los Angeles wants to reduce the number of residents who are homeless by building 10,000 new units over the next 10 years.
Los Angeles wants to reduce the number of residents who are homeless by building 10,000 new units over the next 10 years. Bloomberg

Over the past several years, homeless tent encampments — once contained to Skid Row in downtown — have sprung up all over the city.

“We may never eliminate tents entirely, but I do believe our city will be fundamentally different, and we will no longer see anyone living on the streets as acceptable or inevitable,” Harris-Dawson said.

S&P Global Ratings upgraded the city’s general obligation bond ratings one notch to AA Monday ahead of the city’s plans June 27 to sell competitively $169.3 million in general obligation bonds.

The $86.5 million Series 2017-A taxable bonds will provide gap financing on eight projects that will provide nearly 615 units, of which 415 will be permanent supportive housing for the homeless and 200 will be affordable housing. Also pricing are $82.8 million of Series 2017-B tax-exempt refunding bonds expected to achieve $11 million in net present value savings.

“Our goal is to get to 1,000 units a year,” said Meg Barclay, the city’s homelessness coordinator.

The city does not hope to eradicate homelessness with the bond program alone, Harris-Dawson said, but by combining it with other efforts. They include Los Angeles County's Measure H bonds, approved by county voters in March. The county will invest $125 million in rapid rehousing, bridge housing and emergency shelters to provide immediate relief, Harris-Dawson said.

The city also hopes to tap funding from the state’s “No Place Like Home” bond program to construct projects aimed at the mentally ill that was authorized in 2005, said Yolanda Chavez, an assistant city administrative officer. Linkage fees, where developers pay impact fees to support affordable housing, are also being contemplated. The ordinance has already passed through the planning committee and will be discussed by the City Council in July or August, she said.

Another revenue source could come from marijuana dispensaries, though the City Council has yet to decide how that money will be spent, because it is assessing how much revenue that source will bring, Chavis said.

The city housed 30% more homeless individuals in 2016 than in 2015, and “we want to build on that success, now that there is a dedicated source of funding,” Harris-Dawson said.

The city was able to set its first bond sale just seven months after the election, because “we told people long before this November election to get ready, because we knew L.A. needed, wanted and deserved a solution to this crisis,” Harris-Dawson said. “We were going to find a way to get it done.”

City leaders were able to identify eight projects that will deliver 615 units of housing by identifying shovel-ready projects in the city’s current Affordable Housing Trust Fund, he said. The first round of new projects from Proposition HHH will begin to come online in the next two to three years, he said.

Natalie Brill, the city’s debt manager, affirmed that holding a bond sale several months after the passage of a bond measure is fast.

“We passed the bond measure in November, by January they were putting a committee together to identify projects and a citizen’s bond oversight committee,” Brill said.

The debt manager’s office works closely with the Housing Department, Brill said, and knew if the measure passed the turnaround would be quick.

“We were pretty much working on the bond documents as they were going through approval of the projects,” Brill said. “If they weren’t ready, we still would have done the refunding, because we are saving almost 10% on the tax-exempt side.”

The developers who are receiving gap funding needed to assure the city the money will be spent on construction within two years, she said.

“We do not want this money sitting around,” Brill said. “They have 24 months to spend the money, so they better be ready to go by the time they come to us.”

In addition to upgrading the city’s GO bond rating, S&P also raised the city’s lease revenue and judgment obligation bond ratings to AA-minus from A-plus.

“I am excited about the upgrade,” Brill said. “Our bonds have been pricing as double-As, now the ratings reflect that.”

Moody’s Investor’s Service upgraded the bonds a few years ago, then Kroll Bond Rating Agency and now S&P, Brill said.

The city’s GO ratings of AA-minus, AA, and Aa2 were affirmed by Fitch Ratings, Kroll and Moody’s ahead of the deal. All four assign stable outlooks.

The city has positive momentum economically and demonstrated a strong ability to manage through the recession and to make mid-year budget adjustments as needed, said Jenny Poree, an S&P senior director.

The city has achieved balanced budgets despite lawsuit risk, pension risk and other factors, Poree said.
S&P has been monitoring a lawsuit challenging an annual transfer from the Los Angeles Department of Water and Power to the city’s general fund. The rating agency looked favorably upon the fact the city will not have to refund money on any of the transfers as part of the settlement agreement reached a few weeks ago.

The lawsuit challenged the transfer as an unlawful tax based on Proposition 26 approved by voters in 2010, which required a super-majority vote to pass new fees and taxes. The fear was the city might have to refund the transfers going back to 2010 as part of the settlement.

Instead, the city agreed to a transfer rate based on LADWP’s water and electricity rates in 2008, so the amount will not grow.

“It is slightly less than what LADWP was paying before, but it’s $25 million more than the last five-year high,” Poree said.

The rating agency does consider the city’s pension liability, which comprises more than 20% of the general fund budget, as a challenge.

But while the city has some of the highest pension costs relative to other cities, Poree said, the amortization rate is also significantly more rapid than other cities. The plan amortizes over 15 years, the shortest, while other cities amortize over 20 years. The city’s pension funds reduced the assumption on its rate of return to 7.25% from 7.5%, she said.

The rapid amortization, reduction in the investment rate, and the city’s tiered pension plan, which requires higher contributions from new employees, leave the city well-positioned over time, Poree said.

The city doesn’t expect too much price differential from having to sell the $86.6 million as federally taxable debt as opposed to tax exempt, given yield compression between taxable and tax-exempts from continued low interest rates, Brill said.

In consultation with bond counsel Chuck Wolf, a partner at Nixon Peabody, the city decided the bonds had to be sold as taxable bonds federally, though differing laws in California mean they are exempt from state taxes.

“Under federal tax rules, you can’t have more than a de minimus amount of private ownership,” Wolf said. “But state tax law dictates that if bonds are issued by a municipal entity, it’s tax-exempt.”

The city is providing gap financing on projects that will be owned by private developers with a 55-year agreement that they remain either affordable housing or permanent supportive housing, depending on the project.

“It protects us,” Brill said. “What if something changes hands? Taxable, when we are not the landlords, just makes more sense, unlike a library or fire station that we know will always be city-owned.”

The city has a preference in its debt management policy of issuing GOs competitively, because the bonds are backed by the city’s ad valorem property tax.

But Eddie McRoberts, a financial advisor on the deal, said he would have recommended the city sell competitively in any case, because there is a strong market for the city’s debt.

“There has been aggressive and competitive bidding for the city’s GOs in the past,” McRoberts said.

Unlike lease revenue bonds, the GOs are not exposed to the construction risk of the projects the bond proceeds will fund, which makes them easier to market, said McRoberts, a managing director with Omnicap Group LLC, the co-financial advisor with Public Resources Advisory Group.

“California’s ad valorem tax is comfortable for investors,” he said. “Investors are not as concerned about what project the bonds are funding when they are buying GOs.”

In this case, the city’s general credit and properties support the taxes that cover the debt service, he said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.