The South Carolina Jobs-Economic Development Authority has wrapped up the first round of funding for a bond liquidity program to aid local governments impacted by the COVID-19 pandemic.
JEDA created
The liquidity program is designed to help financially stressed local governments in South Carolina close budget gaps caused by lost revenue, delayed tax collections or increased spending due to the coronavirus pandemic.
The program's first two bond sales, which totaled over $11 million, closed in the fourth quarter of 2020.
RecoverSC has up to $100 million in total bonding authority that can be made available to qualifying municipalities and counties across the state.
While JEDA was no stranger to the municipal bond market, this program was unprecedented, said Brent Robertson, managing director at Stifel, Nicolaus & Co., the placement agent for the first two issues.
“COVID-19, being an extraordinary healthcare issue nationwide, certainly has had an impact on local government finances throughout the country and in South Carolina is no exception,” Robertson said. “RecoverSC represents a true collaboration of bond counsel (Parker Poe), JEDA as the conduit issuer, and the entire transaction team to create a unique and easily accessible liquidity option for liquidity for South Carolina cities and counties that are feeling the strain in the current environment.”
Since its creation in 1983, it has sold over $12 billion of bonds in 548 issues. Since 2010, it has sold about $3.4 billion of debt with the most issuance in 2018 when it offered over $1 billion of bonds.
Under RecoverSC program, JEDA issues a bond on behalf of a local government and provides it with the proceeds. The funds can be used for a variety of purposes including operating expenses, capital improvements or debt service payments.
Municipalities repay the debt through an annual appropriation. Since participation in RecoverSC is treated as a current operating expense, the bonding doesn’t count against the state constitution's limit of 8% debt capacity. There is a 10-year time limit for repayment, with the first five years being interest only. However, a local government can prepay at any time without penalty.
The first round of funding last year included two taxable bond issues, which were purchased by Rosemawr Management, an alternative investment management firm focused on investing in the municipal, not-for-profit and sustainable infrastructure sectors.
Participating in the first round of program funding were the City of Columbia ($10 million) and the County of Bamberg ($1.325 million.) Rosemawr didn't require a rating on the bonds, just an affirmation of what the current rating level was for each participant.
Columbia general obligation bonds are rated AA-plus by S&P Global Ratings and Aa1 by Moody's Investors Service, according to the city's disclosures on the Municipal Securities Rulemaking Board's EMMA website. Bamberg County carries S&P's A issuer credit rating.
"That's a significant aspect of this program," Robertson said. “The investor (Rosemawr) doesn’t require a separate rating for any bonds issued under RecoverSC. Instead, the existing underlying ratings of the local governments who are applying serve as part of the consideration for how much they can borrow under RecoverSC and also what their interest rate will be. Notably, the lack of an underlying rating does not automatically exclude a city or county from participating. That aligns well with RecoverSC’s goal of being as broadly accessible as possible to local governments in need.”
He said that helps make the program unique and particularly well suited in the current environment.
“If it was incumbent upon them to go through a rating process, it would have slowed down — and understandably so when you get a public rating — slowed down execution, and one of the things that JEDA was trying to put together was a program that was very accessible and very quickly put money in the hands of these local governments that needed it.”
Robertson said the program was never intended to be a one-size-fits all solution for local government problems.
“It’s just another arrow in the quiver for local governments to address decreased revenues or increased expenditures stemming from COVID. Stifel is proud to have been a part of helping to create a unique approach to addressing unprecedented challenges facing local governments.”
For 2021, Robertson said JEDA will look to see if there will be a continuing need to use the remaining $89 million of authorized bonding, depending on if there will be federal aid or relief for states and local governments and the duration and severity of the COVID-19 virus.
There is no doubt that municipalities across the state are hurting economically.
In November, the South Carolina Board of Economic Advisors forecast only a modest revenue increase for the state’s next fiscal year, saying “the COVID-19 pandemic has increased economic uncertainty and will continue to constrain the state’s growth.”
The BEA projected that state general fund revenue would rise 1.7% in fiscal 2021-2022, about half of its historical levels. In fiscal 2018-2019, growth was reported at 8%.
The board cut its revenue estimate for the current fiscal year by $49.7 million. With November’s adjustments, the BEA has reduced the revenue estimate for fiscal 2020-2021 by $803.7 million since February due to the impact of COVID-19 and the resulting recession.
“The uncertainty about COVID-19, the diminishing impact of previous federal stimulus funds, a slowing of the economy, and a poor tax filing season anticipated in April are significant concerns for the rest of the fiscal year,” the BEA said.
However, the board said there was resiliency in the state’s economy and noted that “South Carolina is positioned to recover quicker from the effects of the COVID-19 pandemic than the rest of the nation. To date, South Carolina has recovered 70% of its COVID-19-related job losses, but the remaining jobs are expected to return slowly.”
The board expects a return to February 2020 pre-pandemic employment by February 2022 and assumes slower than normal growth through the rest of fiscal 2021-2022. In addition, it does not expect any new federal stimulus. The BEA will revise its forecast again next month.
The state’s general obligation bonds are rated Aaa by Moody's Investors Service, AAA by Fitch Ratings and AA-plus by S&P Global Ratings.
