CHICAGO — Officials in Columbus, Ohio, are hoping the city’s gilt-edged ratings will stand out next week when they bring $212.5 million of general obligation refunding bonds to market for interest-rate savings.
The refunding comes as the state capital enjoys its strongest financial position in years.
A recent income-tax increase generated more than double the amount of revenue expected in 2011. Rating agencies and city officials say 2012 will bring several high-profile developments to the city, including a new casino and an Ohio State University expansion that is the largest construction project in the state.
The good revenue news could help offset a handful of challenges facing Columbus, and all Ohio cities, this year. The biggest pressure will come from Gov. John Kasich’s current two-year budget, which includes steep cuts in local government aid.
“It’s good to be Columbus right now,” said assistant city auditor Megan Kilgore. “This is a very, very financially healthy year for us.”
Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all affirmed their triple-A ratings on the city’s credit ahead of the bond issue.
The financial team, led by senior manager JPMorgan, will hold a retail orderperiod Monday and institutional period Tuesday. Huntington Investment Co. is co-senior manager and five additional firms round out the team. Bricker & Eckler LLP is bond counsel and Prism Municipal Advisors LLC is financial advisor.
Part of the reason the city tapped JP-Morgan is because of its large Ohio presence, Kilgore said. The banking company employs 18,000 in the Columbus region.
The transaction is divided into two series: $182 million of unlimited-tax GOs and $31 million of limited-tax refunding bonds. The refunding will feature the same maturities as the original debt following the city’s policy not to extend maturities on refundings.
Net present-value savings are expected to total just under 7%, or $15.5 million, according to Kilgore, who said she has already gotten several phone calls from investors interested in the deal.
“It’s the heaviest week of supply to date in 2012, but we’re the best-looking credit in the first part of next week,” she said.
From an investor point of view, the city’s solid economics make it a safe but not very lucrative buy.
“It’s certainly not an issue from a credit point of view,” said Howard Cure, director of municipal research for Evercore Wealth Management LLC.
“Besides being the state capital with a relatively stable employment base — though not nearly as stable as a few years ago — there is also Ohio State University,” he said.
“It’s more an issue that the yield is not that attractive, as it shouldn’t be trading much over the triple-A scale,” Cure said. “Unless we have a client interested in something ultra-safe, it’s not going to get people very excited.”
In the transaction, Columbus will shift $23.2 million of variable-rate bonds issued in 1995 and 1996 into a fixed-rate mode. The move will allow the city to shed a standby bond purchase agreement from JPMorgan that was purchased in early 2008 and is set to expire this summer.
The city is paying a fee of 10 basis points for the current agreement, but would be forced to pay much higher fees in the current market if it opted for renewal. To avoid the higher fee, the city decided to fix the bonds out, in part because they are maturing fairly soon, in 2016 and 2017.
Columbus has a total of $3.3 billion of debt. Roughly $1.3 billion of is backed by the city’s full faith-and-credit pledge, and of that more than 70% is repaid within 10 years. The city will have $112 million of variable-rate bonds outstanding after next week’s offering.
The sale is likely the city’s only refunding deal of the year, Kilgore said.
“Prism, JPMorgan and the city have painstakingly gone through all of the candidates and pared that down to candidates that fit the level of savings we want to achieve,” she said. “There are other candidates on the fringe of working that could work if interest rates shift, but that would take a good shift.”
City officials plan to come to market in the third quarter with its annual new-money borrowing for capital projects.
Credit analysts warn that Columbus faces some pressure from the impending state cuts, but say that the city’s management is expected to work to offset the losses with careful budgeting.
Analysts praise the city for its 2009 voter-approved 25% income tax hike, which pushed the rate to 2.5% from 2%. Like many Ohio cities, Columbus relies heavily on income taxes for its general fund, which makes its vulnerable to recessions. The income-tax increase helped the city weather the post-2008 recession.
Last year, Columbus officials budgeted for a 2.5% revenue increase but instead saw a 6.3% rise. The additional revenue helped the city end fiscal 2011 with a nearly 3% general fund operating surplus.
Kasich’s two-year budget features cuts to local government aid, the phase-out of tangible property taxes, and the 2013 elimination of the estate tax, which goes to municipalities.
Columbus officials estimate altogether the cuts will mean the loss of $12 million in 2012 and $20 million in 2013.
“Prospectively, Fitch expects the city will address any structural imbalance fully and, pursuant to a 2009 resolution, will continue to replenish its rainy-day fund to $50 million by 2014 year end,” analyst James Mann wrote in a report on the upcoming deal.
Kilgore said the city plans to rebuild its reserves throughout the year. The rainy-day fund totaled $23 million at the end of 2010 and is expected to reach $40 million by the end of this year, with the goal of $50 million by the end of 2014.
S&P echoed Fitch’s warning about state cuts, but analysts there also expressed confidence in the city’s ability to manage the losses. “Given the city’s strengthening reserve levels, our view of the management’s strong financial practices, and the area’s deep and diverse economic base, we do not anticipate the rating changing during the two-year outlook horizon,” the agency said in its report.
The development projects on the city’s horizon will create thousands of jobs, analysts said. The Hollywood Casino is expected to open west of downtown Columbus by the end of 2012 and create around 2,000 new jobs.
The city is not budgeting for any casino revenues, either from casino taxes or income taxes tied to the jobs. But it does plan to partner with Franklin County and the Franklin County Convention Facility Authority to purchase Nationwide Arena, which is home to the National Hockey League’s struggling Columbus Blue Jackets. The city’s pledge toward the arena purchase is limited to a portion of expected casino revenue through 2039, according to Standard & Poor’s.
Ohio State University has launched Project One, a $1.1 billion expansion of its medical center that is the state’s largest construction project and will create up to 5,000 new jobs.
