Polk County sets GO deal for Des Moines Airport Authority

The first piece of a general obligation bond authorization for a new Des Moines, Iowa, airport terminal is coming to market.

The county is issuing $113 million of general obligation capital loan notes, Series 2024A, on behalf of the Des Moines Airport Authority. The debt will finance the design, construction and equipment of a new terminal.

Polk County, Iowa, voters passed a $350 million bond measure in November that puts them on the hook for the debt should airport revenues falter.

The Series 2024A notes, which are federally tax-exempt but subject to the alternative minimum tax, are secured by an ad valorem property tax throughout the county. Debt service payments are to come from airport net revenue. The final maturity is in 2044.

J.P. Morgan is senior underwriter on the deal, with Wells Fargo Securities as co-manager. Piper Sandler & Co. is municipal advisor. Bond counsel is Ahlers and Cooney P.C.

The bonds are slated to price May 8.

Moody’s Ratings and S&P Global Ratings both assign triple-A ratings to the deal, with stable outlooks.

U.S. passenger airport projects are typically funded by revenue bonds, with no recourse to taxpayers. Issuing triple-A GO debt, however, should lower interest costs.

Fitch Ratings, for example, in its January review of U.S. airports, had none rated higher than AA. Of the 98 airports it rated, 77 were in the single-A rating category or lower.

“This [bond] measure will save an estimated $70 million in interest costs, securing the airport’s competitiveness and its pivotal role as an economic engine for central Iowa,” said Kevin Foley, executive director of the Des Moines Airport Authority. “Our team is excited to push forward with design and construction of the terminal with the support of the community. We extend our heartfelt gratitude to the Polk County Board of Supervisors for their leadership on this issue, the countless business and community leaders who championed this effort, and the community for their vote of confidence in the vision for the future of DSM.” 

Thirty percent of the first phase of the three-phase terminal development program has been bid and awarded. The authority plans to bid and award the remaining 70% of phase one this fall.

In its rating report, S&P also affirmed its AAA long-term rating on Polk County’s outstanding GO debt.

The rating agency pointed to the broad economic base of Polk County — with its seat at the state capital, Des Moines. About 500,000 people live in the county. S&P also cited the county’s strong financial management practices and “a long run of budgetary outperformance.”

That outperformance includes strong surpluses over the past two years from rising property values and ongoing economic growth. In 2023, Polk County’s taxable property valuations jumped by 9.78% (or a 22.47% increase in actual valuation). 

Over the next two years, S&P said, the county plans to draw down reserves, which had reached 70% of expenditures last year, to bring them in line with its target of 20-25%. 

The increase in the county’s available general fund balance in fiscal 2023 was mostly the result of nonrecurring federal pandemic relief such as American Rescue Plan Act funds, said Andrew Bredeson, director at S&P.

“The county will spend those monies in fiscal 2024 — so part of the apparent spend down is more so a timing issue — [with] revenues received and recorded in fiscal 2023, expenditures made the following year,” he said.

Additionally, a new state law, HF 718, placed restrictions on annual increases to municipalities’ levy rate caps, Bredeson noted.

“This new law is part of the reason the county is shifting some capital costs previously funded from its general fund to its debt service fund, as the debt service fund is not subject to the rate caps related to HF 718, whereas the general fund is subject to those provisions,” he said.

Among the key provisions of the loan from Polk County to the airport authority are a requirement that the airport deposit funds to cover principal and interest payments 15 months before they are due, giving the county time to raise its debt service levy if necessary.

“If airport net revenue is unexpectedly and substantially insufficient, causing the county to increase its debt service levy to pay airport GO bond debt service, that could somewhat constrain its borrowing capacity to fund additional capital projects,” Bredeson said. “We do not expect this to occur.”

Also important to the AAA rating are a rate covenant requiring the airport to set rates and charges so as to provide maximum annual debt service coverage of no less than 1.25x, and a requirement that the airport keep at least 400 days’ cash on hand. 

There is a springing debt service reserve requirement if liquidity falls below that by year’s end. And there is a 1.25x MADS additional bonds test using historical revenue. While the notes have balloon payments in their final year, the payments are levelized for the rate covenant calculation, S&P said.

The county’s growing debt burden and planned debt additions are offset by low pension and other post-employment benefits pressures, the rating agency added. 

“So long as the county’s long-term forecast continues to demonstrate a return of balanced operations that we view as credible, and so long as available reserves remain no less than the range required by the fund balance policy, we believe the county’s finances will remain supportive of the ‘AAA’ rating,” S&P said.

Moody’s likewise affirmed its Aaa issuer rating on Polk County and on the county’s previous general obligation unlimited tax debt, which is backed by its general obligation tax pledge. The outlook is stable. 

The rating agency estimated Polk County will have around $550 million in total debt outstanding after its upcoming issuances.

While Moody’s noted that the county’s leverage ratio will rise to about 170% of revenue from its current level of 90%, it said Polk County “will remain in line with Aaa medians.”

“The increase in leverage is primarily the result of general obligation debt that the county is issuing on behalf of the Des Moines Airport Authority to finance construction of a new airport terminal,” Moody’s said. “The county’s primary credit challenge is a revenue structure that includes caps on property tax revenue growth, and some reliance on airport and gaming revenue to support debt service, though there is a backup levy in place should those revenues fall short of expectations.”

Servicing the airport are American Airlines, Allegiant Air, Delta Air Lines, Frontier Airlines, Southwest and United Airlines.

By December, the airport’s enplanements exceeded pre-pandemic levels. Its net position has been rising steadily since 2018, reaching $393.7 million at the end of 2022.

The airport authority is governed by a five-member board whose members are appointed by the mayor of Des Moines and approved by the Des Moines City Council. It has been planning for a new terminal — which will include over a dozen new gates, bringing the total to 20 gates — since 2013.