CHICAGO — Triple-A rated Columbus plans to enter the market next week with $432 million of general obligation bonds in a deal that marks its annual outing to raise funds for capital projects.

The size of the issue remains tentative until the day of pricing, officials said. The city plans a retail order period for July 28 and will open the deal to institutional buyers on July 29.

The transaction includes taxable Build America Bonds as well as plain-vanilla taxable municipal securities and tax-exempt bonds.

Columbus opted to enter the market now in part to avoid future competition that could occur from a possible “oversaturation” of BABs as issuers rush to sell the federal stimulus bonds before the program ends at the end of 2010, officials said. Congress is considering extending the BAB program but at a lower interest-rate subsidy level.

About $376 million of the borrowing will be new money. The largest chunk of the proceeds will be used to finance construction of a new above-ground drinking water reservoir.

The rest will finance various capital projects, including water and sewer upgrades that are part of the city’s $2.5 billion, 40-year project to meet environmental mandates.

The city also expects to refund roughly $56 million of bonds ­issued in 2002 as part of the transaction, officials said.

The borrowing comes as Columbus — Ohio’s capital and one of its highest-rated credits — enjoys its first revenue boost in two years.

General fund revenue so far for 2010 has climbed to $663 million from the previously estimated $658 million, according to the auditor’s office. The improvement is the result of a voter-approved income tax hike that took effect last October, officials said.

“For the first time in two years, [city auditor Hugh Dorrian] just increased the revenue estimates,” said assistant city auditor Megan Kilgore. “We’ve had a much better year than last year, because we’re now seeing the benefits of that income tax increase.”

Fitch Ratings affirmed the city’s AAA rating and stable outlook ahead of the sale. Analysts said conservative financial management, “sophisticated debt and fiscal policies,” and reserves have helped offset sharp revenue declines in 2008 and 2009. The income tax increase is another key strength, Fitch said. 

Moody’s Investors Service and Standard & Poor’s both maintain triple-A ratings for the city, but had not released their ratings on the upcoming bonds as of Tuesday.

The borrowing is divided into five series of general obligation debt, including $129.2 million of unlimited-tax bonds, $16.3 million of limited-tax bonds, $266.4 million of unlimited-tax backed BABs, $14 million of limited-tax BABs, and $5.7 million of limited-tax taxable bonds.

Stifel Nicolaus & Co., which was senior manager for the city’s last GO sale in November, is senior manager on the deal. JPMorgan is co-senior. Blaylock Robert Van LLC, Fidelity Capital Markets, Fifth Third Securities Inc., Huntington Investment Co., M.R. Beal & Co., PNC Capital Markets LLC, and RBC Capital Markets round out the underwriting team.

Prism Municipal Advisors LLC is the city’s financial adviser, and Bricker & Eckler LLP is bond counsel.

Most of the debt matures between 2025 and 2028.

All the debt carries Columbus’ full faith and credit pledge. Debt service will be paid from a variety of sources, including water, sewer, and storm system revenues as well as income tax revenue, which is the city’s chief revenue source.

Columbus dedicates one-fourth of its 2.5% municipal income tax to GO debt service.

The deal is the city’s second BAB sale, following last November’s issue of $252 million. The city paid a true interest cost of 3.17% on that transaction, Kilgore said.

“You’ve seen a lot of concern with BABs, but at this time the city doesn’t have any concerns moving forward with BABs as planned,” Kilgore said, referring to increased federal scrutiny of BAB trading and the possibility of Internal Revenue Service audits. “We’ve done all our due diligence and still firmly believe BABs are of great benefit to the city.”

The largest piece of the borrowing will finance a $178 million above-ground drinking water reservoir that will be built in northwest Delaware County.

The reservoir will supplement Scioto River, the city’s water source, during “various drought situations,” according to Richard Westerfield, administrator with the Columbus Division of Power and Water

The reservoir will hold 9.6 billion gallons of water.

The reservoir project is required by the Ohio Environmental Protection Agency but is not part of the city’s consent decrees with the OEPA regarding upgrades to its sewer system.

The OEPA and Columbus signed consent decrees in 2002 and 2004 mandating the sewer system improvements. The 2002 consent decree requires a halt to sanitary system overflows into rivers and streams. The 2004 order calls for a reduction in combined sewer overflows.

The Columbus sewer system serves more than one million people throughout the city as well as 23 suburbs.

“Our capital plan for sewers and water over the next six years is tremendous,” Kilgore said.

After next week’s transaction, the city will have issued around $900 million to finance complying with the consent decrees.

User fees will be tapped to repay the debt, requiring rate hikes but keeping the city’s direct debt burden down, according to credit analysts.

Most municipalities with combined sewer systems are expected to develop long-term overflow control plans to comply with a 1994 federal Environmental Protection Agency order.

The agency estimates that 762 cities across the country are required to develop plans to control overflow for combined sewer systems. Upgrading sewer systems is a particular need in the Midwest, where systems can be more than 100 years old.

Next week’s sale will likely be Columbus’ last large borrowing for the year. Kilgore said the city plans to enter the market in December to refund about $38 million of notes

After the, deal Columbus will have $1.9 billion of GO bonds outstanding. It is contemplating issuing up to $2 billion of GO debt through 2012, including a maximum of $889 million of enterprise debt and $1.1 billion of income-tax backed debt, according to bond documents.

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