Kansas City, Missouri, heads back into the market with an appropriation-backed issue this week as city officials deliberate how best to use $195 million of new federal aid to weather the COVID-19 fiscal storm that last month drew a rating downgrade.
The city will receive the money in two tranches over the next year under the American Rescue Plan signed by President Biden. “The thinking is to replenish the [budgetary] fund balance” that was tapped to counter tax losses and then also to consider what actions could be taken to offset budget cuts, said city Treasurer Kim Carter. “It’s a huge plus and a relief.”
The $186.4 million deal being sold Wednesday comes in four series including $64 million of new money special obligation paper, $68.4 million of taxable special obligation new money and refunding bonds, $49.1 million of taxable special obligation refunding bonds for the downtown district, and $4.9 million special obligation main streetcar extension bonds.
Proceeds will finance bridge, garage and other projects — including an extension of the city’s streetcar system — and refund debt for about $4.5 million in savings. Citi is the senior manager. Hilltop Securities Inc. and Moody Reid are advising the city. Kutak Rock LLP and Hardwick Law Firm LLC are co-bond counsel.
The city will take refunding savings upfront, Carter said. The city will also push off maturities coming due for its KC Live project from 2022-2026 to 2034-2040, which will provide budgetary relief.
The issue follows the competitive sale March 23 of $75 million of new money and refunding general obligation bonds under a 2017 $800 million voter-approved authorization.
Ahead of the March GO sale, Moody’s lowered the city’s GO rating one notch to Aa3 from Aa2 and the appropriation bonds to A2 from A1. The outlook is stable. The appropriation bonds carry a two-notch distinction from the city’s GOs given the less essential nature of some projects.
“The downgrade … reflects the material disruption to the city’s economy due to the coronavirus pandemic, particularly with regards to economically sensitive revenue streams and the severe contraction of operating reserves that will occur through fiscal 2022,” Moody’s said.
The fiscal pressures from the pandemic are heightened given the city’s “deepening leverage comprised of a high debt burden and growing pension liabilities,” the rating agency added.
The city suffered declines of between 5% and 70% in key revenue sources that make up about $1.15 billion in annual revenues resulting in a $50 million deficit for the fiscal year that runs through April 30 ,after taking into account savings from budget cuts and reserve draws, according to offering documents.
The city implemented furloughs and a hiring freeze for some positions, cut $21.5 million in expenditures and raised $2.1 million from ambulance fees. The federal CARES Act helped close the gap, providing $30.5 million to the city from county government to cover COVID-19 expenses. The City Council late last month passed a $1.7 billion budget for the next fiscal year.
The city will head into the market with the fate of its earnings tax to be decided by voters Tuesday. The earnings and profit tax generates about $244 million annually making it the city’s top revenue source. Sales taxes that generate about $240 million to the city’s $1 billion-plus of revenue collections.
The earnings tax goes to voters every five years and in recent elections it has easily won renewal. If voters were to reject it, the city would begin phasing it out in the next calendar by 10% reductions annually over 10 years. That gives the city breathing room to make up for the lost revenue.
S&P Global Ratings last week affirmed the city’s AA GO rating and AA-minus special obligation rating, which is one notch lower due to the annual appropriation requirement. The outlook is stable.
“The stable outlook reflects our view of the city’s very strong management and broad and diverse economy,” said S&P analyst David Smith. “Kansas City has historically shown strong managerial capacity to maintain reserves consistently at its policy level, coupled with balanced or positive general fund operations. Based on recent performance and management projections, we expect this trend will likely continue as COVID-19 recedes.” The city has about $1.5 billion of GO and special obligation debt outstanding.