CHICAGO — Rapid City, S.D., will enter the market Tuesday with $44 million of water revenue bonds, a relatively large borrowing for the single-A rated home of the Mt. Rushmore National Monument.
The city plans a retail order period Tuesday and will open the deal for institutional sales Wednesday. RBC Capital Markets is the underwriter. Dorsey & Whitney LLP is bond counsel, and St. Paul-based Springsted Inc. is the city’s financial adviser.
Proceeds from the transaction will finance construction of a water treatment plant and a reservoir. The project comes after the Environmental Protection Agency warned that there was a chance the city’s existing water galleries could be contaminated by surface water, according Jim Preston, the city’s finance officer for 14 years.
The bonds will be paid with a surcharge based on usage. If the revenue is not enough to cover debt service, rates can be raised, noted Moody’s Investors Service, which assigned an A2 rating to the bonds in advance of the sale.
“Moody’s recognizes that though net revenues of the system as a whole are not pledged, the system enjoys a health fiscal position,” analyst Iliana Beltran wrote in a report on the deal.
Noting that the system’s reserves equal nearly 125% of operating revenues, Beltran added, “The utility is well positioned should usage decline, allowing for time to make rate adjustments if needed.”
The city has roughly $87 million of outstanding debt. Of that, about $58 million is sales tax revenue bonds. The transaction will increase the city’s debt to about $131 million.
“Forty-four million [dollars] is fairly significant for Rapid City — it’s a lot of money,” Preston said.
The finance team considered issuing taxable Build America Bonds but opted for traditional tax-exempts as more economical, Preston said. “Based on the analysis, we would have higher debt service, have to maintain a higher reserve, and the [debt-service] coverage would be higher,” he said.
Of the $44 million, $26.5 million are term bonds due Nov. 1, 2039, while the rest are serial bonds that mature from 2017 through 2029.
With a population of roughly 60,000, Rapid City is the second most populous city in South Dakota and is the tourism center of the Black Hills area. It enjoys a strong and growing tax base of $5.1 billion that is anchored by the Ellsworth Air Force Base, which employs 3,600 and recently completed a $30 million housing project and a new call center that is expected to create up to 800 new jobs. The air base is the water system’s largest customer.
Rapid City has enjoyed a relatively stable local economy in recent years. It escaped much of the fallout from the national recession and collapsed housing market. Preston estimates that while some houses may take longer to sell, there has been no significant drop in value.
The city’s sales tax revenue, which makes up 40% of the general fund, is expected to stay flat in 2009 instead of growing at a rate of around 5% as it has in recent years, according to Preston.
“The city of Rapid City has seen stable growth, and we’ve been somewhat sheltered from national economic concerns,” he said. “It has affected us, but not to the extent of the rest of the country.”