BRADENTON, Fla. — Nashville’s consolidated government next week is selling between $575 million and $775 million of new-money and advance refunding general obligation bonds to finance capital projects and restructure outstanding debt to avoid tax hikes and budget cuts.
The Metropolitan Government of Nashville and Davidson County will use bond proceeds to take out about $275 million of commercial paper, provide $125 million in new money for capital projects, and restructure outstanding GO debt within existing maturities.
The transaction is currently structured as $275 million of tax-exempt Series 2010A GO improvement and refunding bonds, $250 million of taxable Series B GO Build America Bonds, and $50 million of taxable Series C refunding GOs. However, the Metro council has authorized the issuance of up to $775 million.
The Series A bonds are expected to have serial maturities between 2016 and 2026 while the Series B BABs will be sold with a single term maturity in 2035.
The $50 million of Series C bonds mature between 2014 and 2016 and are being sold as taxable GOs because they are restructuring outstanding tax-exempt debt that cannot be refunded again.
Goldman, Sachs & Co. will be the book-runner for the retail order period on Wednesday, followed by institutional pricing the next day.
Recent revelations that the Internal Revenue Service has offset BAB subsidy payments in several areas of the country raises some issues about their use, Metro finance director Richard Riebeling said, though he indicated that he still feels comfortable using BABs in next week’s offering.
“We’ll continue to study [the offset issue]. We don’t have any ongoing issues with the federal government,” he said, noting that BABs were prominently used in last month’s financing of Nashville’s new convention center.
The convention center deal sold as $51.7 million of tax-exempt Series 2010A-1 revenue bonds, $152.4 million of taxable Series A-2 BABs, and $419 million of taxable Series B subordinate BABs.
The Series B bonds priced to yield 4.86% in 2016, 6.21% in 2025, and 6.73% in 2043.
Meanwhile, the restructuring associated with next week’s sale pushes debt service payments out several years and will provide the Metro government with $75 million in debt-service relief in fiscal year 2011 and $50 million in fiscal 2012.
Metro expects to pay an estimated $47 million in increased interest and other costs associated with the debt over the life of the deal to seek budgetary relief, Riebeling said. There will be no present-value savings.
However, the restructuring is designed to coincide with the finalization of Nashville’s fiscal 2011 budget. It is the choice the mayor and City Council — by a vote of 33 to 3 — made to deal with budget issues instead of raising taxes or cutting government services, such as schools and public safety, Riebeling said.
He noted that in addition to budget relief, the deal is also urgently needed to help with the unprecedented floods earlier this month from which the area is now recovering.
“I think [we] were of the belief that this is not the year to raise taxes due to the economy or to balance the budget on the backs of our citizens,” Riebeling said. “This will generate significant debt relief in the next two fiscal years and hopefully we’ll grow out of the current economic conditions and get back to historical growth.”
“As I told the council, this is not something I would do in the ordinary course of business, but based on our choices it seemed the right thing to do,” he said.
Councilwoman Emily Evans, who is a former municipal bond underwriter, opposed the restructuring and said it is a divergence from the conservative debt management policy the Metro government historically has used.
“We have traditionally issued through competitive bid, 20-year, level-debt, fixed-rate bonds and avoided a lot of the problems with respect to what you see around the country,” Evans said. “This is a significant departure from using debt to simply — and in a very conservative way — manage the construction and acquisition of capital projects to now solve a political problem.”
“It was very politically expedient and offered the council a way not to lay people off and not to raise taxes,” she said. “When we come to pay for that restructuring, what roads are we not going to do? I think its bad policy.”
Evans said she also is concerned about the theory that there will be a strong economic rebound by 2013 and 2014 when Nashville will be faced with years of much higher debt-service payments under the restructuring.
She noted that the structure of the convention center financing depends on the economy turning around in 2013 and 2014 as well. That’s when hotel and tourism tax revenues expected to support the project’s debt are anticipated to begin rebounding from their current depressed levels.
“We’re counting on big changes in the economy for the convention center financing and for the debt restructuring,” Evans said. “I hope we’re right.”
Next week’s deal prompted Moody’s Investors Service to place most of Nashville’s debt on watch for possible downgrade, including the Aa1 rating assigned to the GO credit as well as approximately $1.87 billion of outstanding parity debt. Standard & Poor’s assigned a AA rating and a stable outlook to the bonds.
Moody’s said its action was based on an already-narrow financial position, marked by low reserves, and the potential for significant tax-base damage due to the recent flooding that could add further stress to Metro’s finances.
The first weekend in May, the Cumberland River adjacent to downtown Nashville crested at 12 feet above flood stage due to historic rains.
Metro officials have estimated damages to government buildings at about $20 million and school damage at $2 million. Debris removal and damages to bridges and roads are estimated to be an additional $25 million.
While various forms of insurance plus assistance from Tennessee are expected, Moody’s said Metro could experience financial strain due to the disruption of various revenue streams, including hotel and motel taxes, sales taxes, and possibly property tax revenues as reassessments take damaged property into account.
Other underwriters on next week’s deal are Bank of America Merrill Lynch, Fifth Third Securities, Jeffries & Co., JPMorgan, Loop Capital Markets LLC, Mesirow Financial, and Morgan Keegan & Co.
Nashville’s financial adviser is First Southwest Co.
Bass, Berry & Sims PLC is bond counsel. Charles E. Carpenter PC is representing the underwriters.