Rapid growth spurs Nashville's largest-ever GO deal
Nashville’s consolidated government next week will sell its largest-ever general obligation bond deal, a high-grade issue to fund the fast-growing city's increasing capital needs.
The Metropolitan Government of Nashville and Davidson County will competitively issue $775 million of double-A rated improvement GOs Tuesday.
Bids will be taken at 10 a.m. central time on Ipreo’s BiDCOMP/PARITY System. The city’s financial advisor is Hilltop Securities Inc. Bond counsel is Bass, Berry & Sims PLC.
Metro will use the proceeds to take out $650 million in commercial paper that provided short-term financing for capital projects. Another $125 million of new-money proceeds will be used for projects in the city’s rolling capital spending plan, according to Treasurer Tom Eddlemon. The 20-year deal will be structured with maturities between 2019 and 2038.
Alan Schankel, managing director at Janney Montgomery Scott LLC, said he believed the deal will be well received by the market.
“Population and economic trends have been favorable, supporting tax base growth,” he said in an email. “Although the debt load has been inching higher, it’s prudent for the city/county to invest in capital projects to support this growth.”
Moody’s assigned its Aa2 rating to the unlimited tax GOs and S&P Global Ratings assigned its AA rating. Both have stable outlooks.
Nashville’s bond issues have typically attracted “good participation and lots of different buyers,” said Eddlemon. “We’re pretty pleased with what we had in the past and look forward to that in this sale too.”
The size of Metro’s GO bond deals has increased in recent years because of a change in the city’s financing structure to meet growing capital needs, he said.
In the past few years, he said the city raised the amount of its commercial paper program to $700 million, from $500 million. When the outstanding CP reaches a certain level, it’s refinanced.
In 2010, the city de-authorized all outstanding authorized-but-unissued bonds, and reauthorized funding for its five-year capital program. Each year, the council reviews the program and can approve additional capital spending plans.
About $3 billion of GOs were outstanding as of June 30, 2017, according to the city's comprehensive annual financial report.
Eddlemon said much of the city’s financing program has been spurred by rapid growth.
Nashville and Davidson County have operated as a consolidated government since April 1963. Nashville is known as the Music City, an affiliation that officials say has driven a "vibrant" tourism industry.
Metro’s estimated population was 667,500 in 2017, according to the U.S. Census Bureau. That’s a 9.36% increase since the 2010 census.
“We’re making sure infrastructure and parks are taken care of because the citizens expect a world-class city, and that’s what we’re trying to give them,” he said.
After next week’s bonds close on Oct. 25, Nashville will have about $1.3 billion remaining in authorized but not yet issued GO financing. The city expects to return to the market in two years to issue $650 million of GOs.
Moody’s said its rating reflects Metro's favorable overall economic factors, which are supported by the city's position in north-central Tennessee as the state capital and as a regional economic center.
“Debt levels for the Metro government are above-average and expected remain at higher levels given the rapid tax base growth and therefore sizeable capital needs,” said Moody’s analyst Christopher Coviello. “Nashville's financial position remains stable, however reserves and liquidity have declined to more narrow levels in recent years.”
The city’s $99 billion tax base will remain stable over the medium term given its large and diverse economy, which continues to experience growth, he said.
The primary sectors of Metro's economy include services, with a strong tourism component; trade; auto manufacturing; health care; and government.
Diverse employers and large institutions stabilizing the local economy include the state of Tennessee, Vanderbilt University and Medical Center, and federal government offices.
“Metro's tax base continued to grow, albeit at a more moderate pace, throughout most of the recession,” Coviello said. “However, since the recession growth has been significant and is expected to continue over the medium term.”
Assessed value growth over the last five years has averaged 10.2% annually. Average housing prices have shown consistent growth year over year. The unemployment rate was 2.2% in May 2018, well below 3% for the state and 3.6% for the nation.
Family and per capita income have remained above state averages, with median family income at 108.6% of the state and 92.4% of the nation. Per capita income was 117.6% of the state and 102.6% of the nation.
Nashville’s operating fund balance declined by $50.5 million in fiscal 2017, to a still-satisfactory $188.1 million or 9.4% of annual operating fund revenues, Moody’s said.
The primary driver for the decline was a decrease in the available general fund balance of about $38 million. While the city originally budgeted to use $51 million of fund balance, Moody’s said strong revenue performance resulted in using less than anticipated.
The city has a 4% general fund reserve that’s set aside as a special revenue fund that can be used for emergencies. At the end of fiscal 2017, the reserve balance was $55.1 million. Combined total reserves were $243.2 million or 12.2% of revenues.
Moody’s said Nashville’s debt position will remain manageable, despite an extensive $3 billion capital improvement program that includes issuing debt for schools. Debt levels will be partially mitigated by ongoing tax base growth, as well as the extensive use of water, sewer and electric enterprise system revenue bonds.
The city’s defined benefit pension plan covers all Metro government except teachers and was 92% funded as of fiscal 2017. The city paid $82 million or 100% of its annual contribution.
Under its methodology for adjusting pension data Moody’s said the city’s net pension liability is $2.4 billion, or a “moderate” 1.21 times operating revenues.
Other post-employment benefits are funded on a pay-as-you-go basis. Metro had a $2.9 billion liability as of June 30, 2017.
The city has a history of adopting budgets that require using the assigned fund balance to balance expenditures to revenues, S&P said, adding that “conservative budgeting generally results in better-than-expected performance reflected in year-end surpluses.”
In 2017, a reappraisal of property resulted in an “unprecedented” 30% increase in real property values.
As a result, Metro adopted a 2018 budget that proportionately reduced the tax rate to $3.155 from $4.516 to maintain property tax revenues consistent with previous years.
There were an unexpected number of successful tax appeals that resulted in property tax revenues that were $26 million under budget in fiscal 2018 – a gap that was “somewhat mitigated” by other revenues that performed stronger than budget, S&P said.
The fiscal 2019 budget includes using $9.4 million in fund balance, although it also includes conservative revenue estimates and departmental savings of $11.5 million from ongoing tightening of budgets that began in fiscal 2018.
“The Metro Council has established a committee to review Metro's operations for potential budget savings, which we believe is a strong indicator that management is focused on stabilizing operations,” S&P analyst Kristin Button said. “We believe that Metro will remained challenged to increase revenues or reduce expenditures to levels that support strong budgetary performance and ongoing structural imbalance could result in downward pressure on our ratings.”
Eddlemon said the city’s ratings speak for themselves.
“We’re a stable, double-A rated city that is growing,” he said. “We’re proud and want to make sure we are doing the things necessary to move forward. We think our capital spending reflects doing that.”
Nashville will be back in the bond market to issue $225 million of revenue bonds for a new Major League Soccer stadium. The Metropolitan Nashville Sports Authority will issue the bonds, using proceeds to build a 27,500-seat stadium at Nashville’s fairgrounds in the Wedgewood-Houston neighborhood.
On Oct. 5, S&P raised its rating to AA from AA-minus on the Sports Authority’s $140.2 million in outstanding bonds.
The soccer stadium bonds will be secured primarily by MLS team rents and sales tax revenues from soccer-related sales, but will be supported with a general fund revenue back-up pledge as additional security, according to bond documents.
Another $50 million of GO proceeds have been authorized for infrastructure improvements at the fairgrounds.
Nashville was awarded an MLS expansion club in December 2017. The team is owned by the investment group, Nashville Soccer Holdings LLC, led by John R. Ingram, chairman of Ingram Industries Inc.
Ingram’s partners in Nashville SC include Minnesota Vikings owners Mark, Zygi and Leonard Wilf, and the Turner Family, managing partners of Nashville-based MarketStreet Enterprises.
The Sports Authority is in the process of hiring a construction manager for the soccer stadium.
The last time Metro Nashville was in the market to issue new GO improvement bonds was in January 2017 to sell $455.5 million at a true interest cost of 3.15%.
The bonds priced to yield 1.24% with a 5% coupon in 2019, 2.32% with a 5% coupon in 2025, and 3.47% with a 4% coupon in 2036.