Phoenix is making a return to the municipal market with its first new money general obligation bond issue in over a decade. Chief Financial Officer Kathleen Gitkin expresses high expectations for the $238.8 million tax-exempt and taxable deal scheduled to price through a Piper Sandler-led underwriting team. The city has not issued new money GO bonds since 2012, making this deal highly anticipated by investors. The $500 million authorization approved in November will fund a variety of public projects, including safety, infrastructure, and economic development initiatives.
The city of Phoenix is looking to be a more frequent borrower in the municipal market going forward. Gitkin stated that the vision is to implement smaller bond programs more frequently, with $500 million programs planned every five to seven years. This approach aims to deliver critical projects efficiently utilizing available city and industry resources. The plan is to maintain the same property tax rate by strategically layering in new debt to fund future bond programs.
The upcoming bond issuance consists of $133.6 million of tax-exempt bonds and $105.18 million of taxable debt. The tax-exempt series is structured with serial maturities from 2032 to 2047, while the taxable series carries maturities between 2028 and 2032. Phoenix’s outstanding GO bonds total $545.62 million, and the new debt is integrated to maintain the current property tax rate. The city’s credit ratings of Aa1, AAA, and AA-plus from Moody’s, Fitch, and S&P respectively showcase its financial stability and creditworthiness.
Investor Interest and Redemption Features
With issuers redeeming their taxable Build America Bonds, the taxable bonds in the Phoenix deal are expected to be well-received by investment-grade investors. The performance of tax-free debt will depend on the call feature, potentially impacting demand. Notably, the city is considering an optional redemption for the tax-exempt bonds in 2034 and a make-whole call for the taxable series. The interest rate on the deal is projected to be under 5%, with plans to sell the remainder of the 2023 bond authorization in the following year.
Population and Economic Growth
Phoenix’s healthy financial profile and population growth contribute to its credit strength. With an estimated 1.65 million residents in 2023, the city has experienced significant growth over the years. However, rising pension costs present a challenge, with long-term liabilities increasing due to population growth-related capital needs and pension obligations. Despite this, Phoenix has been proactive in making pension payments above required contributions.
Potential Climate-Related Risks
One area where the Phoenix bond issuance lacks transparency is in climate risk disclosure. With increasing focus on environmental factors, the absence of climate risk disclosure in the deal’s POS is notable. S&P’s rating report highlights natural capital risks such as drought conditions and water-supply stress, emphasizing the need for climate action. Phoenix’s development of a Climate Action Plan in 2021 indicates a recognition of these risks but more robust disclosure is needed.
Phoenix’s return to the bond market signifies its commitment to funding essential projects and maintaining financial stability. The city’s strategic approach to bond issuance and its creditworthiness make it an attractive investment opportunity. However, challenges such as rising pension costs and climate-related risks underscore the importance of proactive risk management and transparency in municipal financing. As Phoenix continues to grow and evolve, addressing these challenges will be crucial in ensuring long-term fiscal health and resilience.