After a 16-year gap, Phoenix plans regular bond elections
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Phoenix is gearing up for what would be a general obligation bond program every five years for capital projects to accommodate the city’s growing population.
The nation’s fifth-largest city is an infrequent issuer of new full faith and credit debt with just under $741 million of bonds currently outstanding.
Last week, the city council approved a $500 million bond package it will put before voters in 2023 after initially greenlighting the debt plan in June.
“This is a bond for our entire city from our young people and the great investments for them all the way to our older adults at senior centers,” Mayor Kate Gallego said at the Dec. 13 council meeting.
She added the decision to put the city on a five-year cycle for debt approval is a good one.
“We’ll be issuing bonds and thinking about the next bond at the same time,” Gallego said.
The last trip to the ballot was in 2006 when Phoenix voters approved $878.5 million of GO bonds. The 16-year gap — which will be 17 by the November 2023 bond election — is the longest in the city’s bond program history that dates back to 1957 and includes $4.6 billion of debt.
Since 2012, which marked the last new money issuance under that authorization, the city has funded some general fund capital projects with excise tax-backed bonds, along with operating and grant funds, according to the city’s emailed response to questions. Phoenix has $620.4 million of excise tax revenue bonds outstanding.
“By doing smaller, more frequent bond programs, we can most likely deliver $2 billion of assets and infrastructure over the next 20 years without raising property taxes or jeopardizing our credit rating,” Chief Financial Officer Kathleen Gitkin told the council.
Phoenix’s GO debt is rated AAA by Fitch Ratings, AA-plus by S&P Global Ratings, and Aa1 by Moody’s Investors Service. The city levies a primary property tax for operations, while a secondary tax pays principal and interest on GO bonds.
Peter Phillippi, a managing director at Piper Sandler, who has served as an advisor and an underwriter for Phoenix, said its GO debt burden is relatively low compared to other big cities, with a final maturity in 2034 and annual debt service that “declines dramatically” after 2027, allowing for the phase in of additional debt.
He also told the council the primary risks for the bond programs would be a dramatic rise in interest rates and a steep decline in assessed property values, noting annual average value growth is forecast at about 4%, which is in line with historical growth. Phillippi said a 5% interest for bonds approved in 2023 was used for planning purposes, while 6% was used for bond programs in 2028, 2033, and 2038.
A Phoenix fiscal capacity committee found seeking voter approval for about $500 million of GO bonds every five years would “continue to be sustainable without any material increases to property tax rates, assuming no significant legislative or economic changes.”
In her presentation to the council, Phoenix Budget Director Amber Williamson pegged ongoing operating costs to the general fund related to the bond program at about $27 million.
“Those costs will be incorporated into the proposed general fund each year and the appropriate year once the facilities are completed and operational to the community,” she said, adding the costs will also be included in five-year forecasts.
Public safety projects, including new fire and police stations, account for the biggest allocation of bond proceeds at $132.5 million under a plan approved by the council last week.
Street and storm drainage were allocated $81.5 million, parks and recreation $64 million, and housing and human services $63 million. The remainder would go to arts, economic development, environmental, and other projects. Phoenix staff originally identified $1.2 billion in capital needs for the growing city.
Between 2020 and 2021, Phoenix’s population rose by 13,224, the second largest gain among big cities behind San Antonio, Texas, the U.S. Census Bureau reported in May.
That brings Phoenix’s population to more than 1.62 million, trailing only New York, Los Angeles, Chicago and Houston among U.S. cities. Its population increased by more than 11% between 2010 and 2020, according to the Census.
Rating analysts said Phoenix is well positioned for an additional $500 million of bonds.
“It does appear that the city has been making recent refundings and prepayments of obligations that have helped to reduce its debt burden over the last two years,” said Alyssa Farrell, a S&P analyst. “So that does create more of a cushion for future issuances without material impact to credit quality.”
Phoenix last refunded $146.4 million of 2012 Series A and C bonds in the spring, following refunding deals in 2014, 2016, and 2017.
Farrell also said the city has adopted a policy for paying down its nominally large unfunded pension liability that is expected to grow, given assumed investment return rates exceed 6%.
Citing a “meaningful increase” in pension contributions and the likelihood of continued revenue growth, Moody’s in April revised the outlook on Phoenix’s Aa1 GO rating to stable from negative, where it had been since 2016 after fixed budgetary costs fueled primarily by pensions accounted for 29% of operating revenue in fiscal 2015.
Steve Murray, a Fitch analyst, said the size of Phoenix’s resource base and a long-term liability burden that was 12% of total personal income “give the city a fair amount of capacity to take on new debt without a negative credit impact.
“If Phoenix gets voter approval for new GO debt and issues it over a period of years, the resource base (population and per capita personal income) likely would also increase over this timeframe and help absorb the additional debt,” he said in an email.
With a successful November 2023 referendum, the preliminary plan is to sell about $250 million of bonds in spring 2024 and the remainder in spring 2026, the city’s email response said. A decision on selling the debt on a competitive or negotiated basis would be made closer to the sale dates to account for market conditions.
Taxable bonds are expected to be included to fund land purchases that may be used for private development or leases or for city-owned cultural facilities managed or used by non-governmental entities, the city said.
