DALLAS - Phoenix is considering using a swap structure for the first time in itsfinancial history as part of a $500 million bond program for a new light-rail system.
The city has issued a request for qualifications for a swap adviser who could serve asthe first member of the project's bond finance team. The deadline for the RFQs is March28.
"Once we have them on board and have some preliminary analysis, then we will considerhiring the rest of the team," said Kevin Keogh, finance director for the city ofPhoenix. "Our focus is on trying to manage our interest-rate cost and hedge our risk."
With tax-exempt interest rates at a 35-year low, swaps and other derivatives would givePhoenix the flexibility to save money through variable rates that could be exchanged forfixed-rate debt in the future.
"It's just one of the tools we are considering," Keogh said. "We are trying to limit ourinterest-rate costs so we can maximize the amount of revenues. What we want to do isevaluate using swaps, as well as the timing of our bond sales."
One key element for financing the starter system for Maricopa County's $1.03 billionlight-rail starter system is the timing of federal funds for the project, Keogh said.Based on current information, Congress is likely to provide less funding than originallyhoped for in the early stages of construction, with amounts increasing as the workprogresses. Through 2011, the cities building the starter line - Phoenix, Tempe, Mesa,and Glendale - expect federal grants totaling $550 million.
The pace of federal funding would require the cities to provide a financial bridge inadvance of the bulk of the federal grant revenue kicking in. Phoenix plans to issue itssales tax-backed revenue bonds over a three-year period, with an upward limit of $500million authorized by the city's voters in 2000.
With a much smaller piece of the project, Mesa is seeking to finance its share on a pay-as-you-go basis, while Tempe, located between Phoenix and Mesa, plans to raise funds forthe project through bonding. The first segment of the rail system will run from centralPhoenix to Mesa, in the East Valley of the Sun. Glendale, in the West Valley, has alsoagreed to join the project, with each city levying its own taxes for the project.
Plans call for construction to begin in 2004. Environmental studies on the light-railsystem have been conducted, with land acquisition as the next phase.
Keogh said Phoenix plans to have its swap adviser on board in April, with a goal ofissuing the first debt in the next six to nine months.
For Phoenix, the total bond program for light rail would rank as the third largest inthe city's history. The largest, a $1 billion program for capital projects, was launchedin 1988. A $753 million general obligation bond program was approved by voters in 2001.
Phoenix, which will carry $3.3 billion in debt if all the bonds are issued, expects topay off the rail project bonds by 2020. The 20.3-mile starter segment of the rail linewill operate under the name Valley Metro Rail, with the mayors of the four partnercities serving as the governing board. There are no plans to create a regional authoritythat could issue debt in its own name, officials say.
Earlier this year, the Federal Transit Administration ranked the Phoenix-area's light-rail project as one of the best new rail projects in the country. The project receivedthe highest possible federal rating from the FTA in its annual "New Starts" report toCongress. The report is used by Congress to evaluate projects for federal funding.
