Phoenix is returning to the municipal market after 12 years with a new money general obligation bond issue. The city’s chief financial officer, Kathleen Gitkin, has expressed high expectations for the $238.8 million tax-exempt and taxable deal, which is scheduled to price through a Piper Sandler-led team of underwriters. According to Gitkin, there is a sense of excitement for Phoenix paper among investors and a pent-up demand for the city’s bonds. This new issue comes after a long gap since the last new money GO bond issue in 2012, with some debt from that deal being refunded in a 2022 issue.
The upcoming bond deal taps into $500 million in authorization approved by voters in November and will fund a wide range of public projects, including public safety, street, storm drainage, library, park, arts, culture, economic development, environmental, housing, and human services projects. Gitkin emphasized that Phoenix has been strategic in its approach to financing these projects, opting for new GO authorization to leverage available city and construction industry resources.
The bonds are payable with Phoenix’s secondary property tax rate and carry high credit ratings from Moody’s, Fitch, and S&P. The $133.6 million of Series A tax-exempt bonds are structured with serial maturities from 2032 to 2047, while the $105.18 million of Series B taxable debt has maturities between 2028 and 2032. The debt service decline after 2027 has been factored into the structure to maintain the same property tax rate.
With issuers redeeming their taxable bonds, the taxable bonds in the Phoenix deal are expected to be in high demand among investment grade investors. The performance of the tax-exempt debt could depend on the call feature, with shorter call periods potentially undermining demand. The city aims to keep the interest rate for the deal under 5% and plans to sell the remainder of the 2023 bond authorization in the following year.
Rating agencies have cited Phoenix’s population and economic growth as key strengths, with a healthy financial profile supported by operating reserves and stable revenue streams. However, rising pension costs pose a challenge for the city’s long-term liability burden. The unfunded liability in the city’s retirement systems has been increasing, highlighting the need for careful financial management.
Despite its economic growth, Phoenix faces climate-related risks such as persistent drought conditions and water-supply stress. The city has developed a Climate Action Plan, but there is limited disclosure on potential climate-related risks in the bond deal’s POS. This lack of disclosure has raised concerns among market analysts about the city’s vulnerability to climate risks and the need for more comprehensive risk assessment and disclosure in future bond issuances.