New York City plans jump into the new qualified school construction bond market with $1.4 billion of these tax-credit bonds over the next two years, but not until federal government provides more guidance, city officials said.
The federal American Recovery and Reinvestment Act allocated $22 billion of the QSCBs under the new program to states and the 100 largest cities. New York City was allocated $699 million of the tax-credit bonds for this year and next.
Fiscal deterioration led the city in January to cut back on its bonded 10-year capital plan by 30% - excluding bonds backed by state school building aid - and to set a goal of keeping debt service growth at the rate of revenue growth.
Rather than slash the city's $11.3 billion capital school construction program for fiscal 2010 through 2014, officials expect to achieve the same result through interest cost savings through the use of QSCBs and to a lesser extent, qualified zone academy bonds.
"In the 10-year window that we're looking at in trying to bring city debt service within the sort of average annual growth of resources - our fixed costs are eating us," city budget director Mark Page said in testimony before the City Council on Monday. "We were able to eke out something approaching a 30% reduction over the 10 years in our debt service for that continuing $11.3 billion program by assuming that we're going to utilize the federal bonding programs."
Under the QSCB program, the issuer does not pay interest, rather the investor receives a tax credit from the federal government. The city expects the reduced costs will be roughly equivalent to the savings that they needed to meet their target.
"We figured we were in the ballpark and we were going to maintain the school investment without cutting it," Page said. "Losing the interest costs helps us out on the debt service calculation."
Those calculations, however, assume that the program won't disappear after 2010. Mayor Michael Bloomberg's executive budget said that "maintenance of the proposed level of the education five-year capital plan depends on reauthorization and market acceptance of QSCBs."
The city's $11.3 billion school capital plan assumes the state government will provide half of the funding while the city's half will be primarily debt-financed. The executive budget also assumes that the city will use QZABs to the tune of $25.8 million in 2009 and $90 million in 2010.
The city is waiting for the U.S. Treasury to provide guidance on "stripping" the tax credits from the bonds before going to market, deputy director for finance Alan Anders said. With stripping, the tax credits can be separated from the principal payments and potentially attract different types of investors.
The city is considering issuing the QSCBs as part of larger general obligation deals but could also issue the debt through the New York City Transitional Finance Authority, Anders said.
The market for QSCBs is still forming. The San Diego Unified School District brought the first QSCB deal to market last month with a $38.8 million offering. Guggenheim Partners LLC, an investment management and wealth management firm, picked up the entire issue, said Scott Minerd, the firm's chief strategist.
"The yield was very attractive, I think it was about 7.87%, which for a taxable equivalent basis for a double-A bond in 15 years, that's probably almost 200 basis points cheaper from where we would expect to buy double-A paper in 15 years," Minerd said.
The tax-credit element was also attractive to their customers, a number of which are insurance companies.
"They have fairly predictable payment streams, for them basically being able to reduce their tax bill especially at a tax equivalent yield that approaches 8% is an extremely attractive option," Minerd said.
What makes these tax credits especially attractive is that investors aren't relying on the opinion of counsel, he said.
"The Treasury has basically affirmed upfront these credits are valid credits as opposed to something like maybe an energy tax credit deal where you take some risk that something is or isn't going to acceptable as a credit," Minerd said.
Guggenheim has an investor allocation of more than $1 billion for these deals as they come to market, he said.