DALLAS – Four months after winning voter approval of a record bond proposal, San Antonio is taking $205.4 million of top-rated debt to market this week.
The package, which includes certificates of obligation, general improvement bonds, and tax notes, will price through negotiation Tuesday with book runner Piper Jaffray, led by managing director Tim Kelley.
Co-managers are Loop Capital Markets, Drexel Hamilton, Estrada Hinojosa & Co., Bank of America Merrill Lynch & Co., and Raymond James.
The city’s financial advisers are Jorge Rodriguez of FTN Financial Municipal Advisors, and Ann Berger Entrikin of First Southwest Co.
This issue represents an auspicious start for the new bond program with triple-A ratings from three ratings agencies.
“It is kind of milestone for the city of San Antonio,” said Troy Elliott, deputy chief financial officer for the city. “Hopefully, it will be favorable for us when we enter the market.”
After this sale, the city will have $1.76 billion in limited tax debt, according to Moody’s Investors Service.
The Aug. 1 issue is expected to include $101.1 million of general improvement bonds, $84 million of combination tax and revenue certificates of obligation, and $20.2 million of tax notes.
The city goes to market with strong support from voters, who approved a record $850 million for various civic projects on May 6. None of the six proposals on the ballot received less than 67% support. Bonds for drainage and flood control were approved by 79% of the voters.
The strong voter support is typical for the Alamo City in recent years. Propositions in 2012 passed with better than 60% approval, while those in 2007 were favored by 68%.
In outlining plans for the 2017-2022 bond program the city touted the value of its triple-A rating that has stood for seven years.
“For every $100 million of property tax supported debt issued, the City saves about $1.4 million in interest costs when comparing the City’s ‘AAA’ rating to bonds issued with a ‘AA’ rating,” according to the voter information guide. “Lower interest rates mean more money for capital construction.”
The 2017 bonds will not require a tax increase, as the current debt-service rate is sufficient, officials said. Texas law caps the tax rate for debt service at $1.50 per $100 of valuation. San Antonio’s tax rate for debt service is $0.21 per $100, which is well below the state limitation.
The bonds were approved the same day that voters set up a runoff between incumbent Mayor Ivy Taylor and city council member Ron Nirenberg. In the June runoff, Nirnberg defeated Taylor with 55% of the vote.
Taylor was one of the strongest advocates for affordable housing bonds, which appeared on the San Antonio ballot for the first time in May.
Required by state law, the housing plan identifies 12 geographic areas targeted for affordable housing development using $20 million of Neighborhood Improvements bond funds.
The Office of Urban Redevelopment San Antonio will buy parcels of land in each of the 12 target areas as recommended by city staff. The city will prepare the land for redevelopment, which could include demolishing structures, environmental remediation, or installing sidewalks. The city will then put out a request for project proposals and sell the parcel to a nonprofit or for-profit developer at a fair price.
According to Fitch Ratings, San Antonio homes are overvalued by 18.6%, the highest rate in the nation.
"The macroeconomic factors are positive, strong," according to Fitch analyst Samuel So. "Home prices are just growing too fast compared to the fundamentals."
Fitch considers 27% of the 412 housing markets it tracks overvalued, with home prices at least 5% above fair local value.
Despite continued weakness in energy prices, San Antonio continues to expand rapidly with development in high technology, medical and healthcare, higher education and financial services, according to Fitch analyst Jose Acosta.
Stability comes from Lackland Air Force Base, Randolph Air Force Base, and Fort Sam Houston, which account for more 80,000 military and civilian personnel.
“These facilities benefited from very large investments and additions to troop strength in past base realignments and include high-value missions such as the sole medical school for all military medical personnel,” Acosta said.
Growth in the labor force has been fueled by strong migration patterns to the nation’s seventh most populous city, according to Moody’s. In 2010, the U.S. Census reported a 16% increase over the prior year. Since then, city estimates reflect an increase of 11% reaching 1.5 million residents.
“Despite the boost, the city's wealth indicators are below the average, reflective of high institutional presence and urban population,” observed Moody’s analyst Sarah Jensen. “The 2015 median family income was significantly lower than peers at 81.8%, per the American Community Survey estimate.”
To expand its role as a tourism and convention site, the city is pursuing plans to expand air service, grow professional sporting events, restore the Alamo Plaza, and maintain the five historic Missions including the Alamo, which have been designated World Heritage Sites.
Convention and meeting space remains in high demand with bookings through 2025, Jensen said.
“The strong local economy has fueled gains in the tax base, with assessed values growing an average of 7% annually over the past five years, well above its Aaa peers,” she noted. “Longer term, Moody's Analytics, per the March 2017 report, expects above average population gains, low cost of doing business, and relatively high housing affordability should contribute to above-average overall performance.”
In fiscal year 2016, property taxes provided 38% of operating revenues, with city-owned utilities providing 28%, and sales taxes delivering 22%, according to Moody’s.
Moody’s considers San Antonio’s elevated debt profile is a weakness in the rating category, “but fixed costs will remain affordable supported by ongoing tax base growth and conservative debt management practices.”
“Ongoing conservative debt management and a descending debt service schedule should allow the city to layer in future debt without negatively impacting the direct debt burden,” Jensen wrote. “Additionally, the city maintains significant margins under the tax cap providing additional debt management flexibility.”
