BRADENTON, Fla. - Triple-A rated Fairfax County, Va., plans to bring $316.8 million of voter-approved general obligation bonds to market in a competitive deal that is likely to see aggressive pricing in part due to the lack of supply, according to muni experts.
The deal, pricing Thursday via Bidcomp/Parity's bidding system, comes after Moody's Investors Service recently revised the outlook on Virginia's most populous county to negative. That, too, is likely to be of little concern to buyers seeking the diminished supply of available high-grade paper, experts said.
The offering is structured in a single series to provide $289.6 million of new money GOs for various capital improvements.
Bond proceeds and other revenues will refund about $54.5 million of 2004A and B and 2005A bonds for an estimated net present value of $3.3 million or 8.2% of refunded par. County policy sets 3% savings as a minimum threshold for refundings.
The initial amortization schedule called for serial maturities from 2014 to 2033, though bidders can designate two or more consecutive maturities as term bonds. The structure is designed to provide annual level principal payments, according to Fairfax County Debt Coordinator Joseph LaHait.
Municipal bond issuance in January has been lower than market expectations, resulting in an imbalance in the supply of bonds versus demand, which favors municipal issuers by pushing yields down, Municipal Market Advisors said Monday.
"Competitive deals were very well received last week and we expect the same this week," said MMA. "Early on, underwriters were aggressive on last week's competitive deals and this helped strengthen the tone for the entire market."
If the market holds steady this week, a trader watching the county's deal said the bonds will look cheap. She predicted that the GO bonds will price at five to seven basis points through the implied MMD spot on the scale.
"I think every trader and underwriter is waiting to see what the winning scale is," the trader said. "It will help MMD price the market. Of course, it will also depend on how much follow through there is once the deal is bought."
Since there is not much supply in the bond market this week, the trader said, "people will overlook the negative outlook from Moody's."
All three rating agencies affirmed their triple-A ratings on the county's approximately $2 billion of outstanding GOs.
Fairfax County has held gilt-edged ratings from Moody's since 1975, Standard and Poor's since 1978, and Fitch Ratings since 1997.
In reviewing this week's offering, analysts cited Fairfax County for adherence to its "Ten Principles of Sound Financial Management," fiscal policies adopted in 1975 that are reaffirmed annually as part of the budget adoption process.
The principles serve as a "blueprint" to guide budget decisions, said LaHait.
"We feel the principles reflect the county's deep commitment to fiscal discipline," he said. "We like to think that it helped us make ground with the rating agencies."
Fitch and S&P said their rating outlooks are stable, and noted the county's healthy reserves, strong management and fiscal policies, as well as its strong and diverse economy in the northeast Virginia and Washington, D.C., metropolitan statistical area.
Moody's revised its outlook to negative from stable based on reserve levels lower than similar Moody's-rated Aaa issuers, and potential pressures from additional pension costs as the county increases its funding to meet the annual required contribution, or ARC.
LaHait said the county "respectfully" disagrees with Moody's action, and pointed to a lengthy statement on the county's website.
"The county has demonstrated strong financial flexibility through a combination of reserves, budgetary cuts and tax rate changes," the statement said. "The county believes Moody's approach has overemphasized reserves as an indicator of financial flexibility in their analysis, and that the county's existing reserve structure is adequate based on the various other forms of financial flexibility available to the county" as well as the county's conservative budgeting practices for both revenue and expenditures.
The county's fund balance totaled $424.8 million or an "adequate" 12.1% of general fund revenues in fiscal 2013, according to Moody's analyst Jennifer Diercksen. She added that Fairfax's reserve level is "inconsistent with the medians of like-rated entities," including the state's median reserve level at 18.5% and the national level at 34.1%.
Moody's also said Fairfax County underfunded the ARC for its pension funds by $48.3 million in fiscal 2013, though the agency acknowledged that the county has made required contributions at rates determined by the fund's actuary and in accordance with the "corridor" approach the county adopted in 2002.
In this method, a fixed contribution rate is assigned to each pension system and the county contributes to the ARC at the fixed rate unless the system's funding ratio falls outside the corridor, or range, of 90% to 120%.
The methodology was designed to decrease year-to-year volatility of the county's annual contribution rates as a percent of payroll. Since fiscal 2008, the county has funded the pension systems above the minimal annual amounts, county officials said.
The county's online statement said that Moody's changed its rating criteria for the evaluation of pension funding levels last year, and it believes the negative outlook reflects a change in rating methodology as opposed to "any deterioration in the strength of the county's pension funding given that funding ratios improved in 2013 for all three county pension plans."
Marketing efforts did not reveal that the negative outlook would affect pricing, LaHait said
"Based on initial conversations with investors we remain a strong credit," he said.
Fairfax has 1.1 million residents within its 407 square miles. The median household income is $107,096, according to the U.S. Census Bureau. Only 6.8 % of the population is below the poverty level.
Since the school board cannot levy taxes or incur debt, operating costs of the public school system are provided by transfers from the county, state, and federal government. The county also sells GOs for school construction.
Fairfax enjoys support of its voters, who have consistently approved general obligation bonding nearly every year. The last referendum that failed was in 1992.
In odd numbered years, voters are typically asked to vote on GO financing for public schools, while the county seeks approval for special projects and capital funding needs in even-numbered years.
In November, voters approved $250 million bonds for school construction and land acquisition. The county tentatively is planning to put another referendum on this fall's ballot to request about $100 million for transportation projects.
Some $29.5 million of this week's bond sale will go toward Fairfax County's annual allocation to the Washington Metropolitan Area Transit Authority to support transit improvements, including the 23.1-mile Silver Line Metrorail extension to Dulles International Airport.
Fairfax typically sells GO bonds for various capital needs at this time each year.
In January 2013, $334.34 million of new money GO debt was sold to JPMorgan at a true interest cost of 2.23%, "one of the county's lowest interest rates recorded in recent history," county documents said.
A refunding component consisting of $128 million generated net present value savings of $12.21 million or 9.49% of the refunded bonds.
LaHait said he anticipates higher costs this year, despite the lack of muni supply, based on current market conditions, which reflect a shift in rates based on the reduction in quantitative easing measures. The county estimates this week's deal could be sold at a true interest cost of 3.5%.
Public Financial Management Inc. is the county's financial advisor. Sidley Austin LLP is bond counsel.
