Phoenix is making a return to the municipal market after a 12-year hiatus with its first new money General Obligation bond issue. Kathleen Gitkin, the city’s chief financial officer, expressed high expectations for the $238.8 million tax-exempt and taxable deal set to price through a Piper Sandler-led underwriting team. The city plans to become a more frequent borrower using this credit source in the future due to the extended gap since its last issue.
Feedback from the syndicate indicates that there is significant excitement surrounding Phoenix paper. The long absence from the market has created some pent-up demand, making this new bond issue highly anticipated. The upcoming deal taps into a $500 million authorization approved by voters in the city’s first GO bond election since 2006. This four-part bond program will fund various public projects like safety, infrastructure, culture, and human services.
According to a Phoenix fiscal capacity committee, seeking voter approval for $500 million of GO bonds every five years would be sustainable without property tax rate increases in normal economic conditions. The bonds are payable with Phoenix’s 81 cents-per-$100 assessed valuation secondary property tax rate and are highly rated by Moody’s, Fitch, and S&P. The structure of the bond program ensures that the city can maintain the same property tax rate without significant changes.
With issuers redeeming their taxable Build America Bonds, the market is expected to readily absorb the taxable bonds in Phoenix’s deal. Investors are showing interest in the tax-exempt debt, with the performance hinging on the call feature. Retail and separate managed account demand tends to favor bonds with shorter maturities. However, Phoenix’s credit scarcity should broaden the appeal to out-of-state investors. The city anticipates an interest rate below 5% for the deal.
Phoenix’s healthy financial profile is attributed to its population and economic growth, according to rating agencies. The city’s operating reserves and stable budget are supported by diverse revenue streams aligned with its expanding economy. However, rising pension costs pose a challenge, with a notable long-term liability burden tied to rapid population growth-related expenses. Unfunded pension liabilities have been a growing concern for Phoenix, reaching $5 billion in fiscal 2023.
The deal’s preliminary official statement does not address potential climate-related risks, despite Phoenix’s exposure to natural capital risks like water-supply stress and extreme heat. A Municipal Market Analytics report highlighted the lack of climate risk disclosure among Phoenix-area issuers in 2023. S&P’s rating report emphasized the city’s vulnerability to long-term physical climate risks. Phoenix developed a Climate Action Plan in 2021, but disclosure on climate risks remains limited.
Phoenix’s return to the market with a new bond issue marks a significant milestone for the city’s financial future. With high expectations and positive feedback from the market, Phoenix aims to become a more frequent borrower to fund critical projects. Despite its strong financial profile, the city faces challenges related to pension liabilities and climate risks that warrant careful consideration moving forward. Improved transparency and disclosure on these risks will be vital for investors and stakeholders to make informed decisions about Phoenix’s bonds.