Cleveland returns to market with GO, water revenue bond deals

Cleveland will return to market Wednesday with the first of two bond deals slated for this month. That deal, an approximately $64.395 million general obligation offering, will fund improvements to public facilities, parks and recreational buildings and bridges and roadways.

The second deal, $90 million of water revenue bonds to finance capital projects and purchase outstanding bonds via tender offer, is slated to price Oct. 16.

The lead underwriter on the Series 2024A GO bonds is Huntington Capital Markets. The municipal advisors are Government Capital Management and Phoenix Capital Partners. Squire Patton Boggs, LLP is bond counsel.

Betsy Hruby, debt manager for the city, said the pricing dates for both the GO and the water revenue bonds are firm.

"The only thing that could change the dates is a significant event in the markets," she said.

Moody's Ratings assigns a Aa3 rating to the GO bonds. S&P Global Ratings rates the bonds AA-plus. The outlook from both rating agencies is stable.

According to an Oct. 2 investor presentation, the tax-exempt bonds are secured by a pledge in the general bond ordinance of ad valorem property taxes within the ten-mill limitation and municipal income taxes of the city.

Roughly $24.92 million of GO bond proceeds will be used for bridges and roadways; $14.495 million will be used to build, renovate or enlarge public facilities; $10.555 million will be used to acquire heavy duty trucks and equipment; $8.815 million will be used to improve parks and recreation facilities; $4.61 million will be used to acquire vehicles for the Departments of Public Works and Public Safety; and $1 million will be used to improve city cemeteries, according to the investor presentation.

Cleveland had a general fund balance of $46.3 million in 2023, down from $48.3 million in 2022 and $131.7 million in 2021. But its 2023 ending fund balance was above pre-pandemic levels, which were in the $43 million range.

The bulk of Cleveland's general fund revenue comes from its 2.5% income tax. General fund income tax receipts are expected to rise by $14.1 million in 2024 compared to 2023.

Moody's said in an Oct. 2 rating report that "the credit is somewhat constrained" by a resident income ratio that is just over half of the national median, elevated poverty levels in the city and persistent population losses.

"This is partially mitigated by the city's taxing structure, which captures revenue from non-resident commuters, many of whom have higher incomes than Cleveland residents," Moody's said.

Moody's Vice President Coley Anderson noted that while the strong financial performance of recent years was due in part to significant pandemic relief aid, the end of that aid is unlikely to be a material challenge.

"Cleveland passed a balanced budget for fiscal 2024, and midway through the fiscal year, operations are tracking better than budget, partially as a result of positive expenditure variances and because of the continuation of solid revenue trends, particularly for income taxes," Anderson told The Bond Buyer. "Cleveland's financial operations have been very strong for most of the last decade. The city has recorded general fund surpluses every year since 2016, in large part because of a voter-approved income tax rate increase in 2015."

S&P said in its rating action that its rating reflects "the strength and stability of the pledged revenue as well as the general credit quality of Cleveland," with the priority-lien ratings on the bonds limited "by our view of Cleveland's creditworthiness," and remaining constrained unless the city's creditworthiness improves.

Hruby said Cleveland has no current plans for additional GO debt, but the city tends to issue GO bonds on an annual basis.

The Series 2024HH water revenue bond proceeds will fund improvements to the waterworks system and to purchase and cancel bonds purchased via a tender offer, according to an investor presentation. Specifically, Hruby said, they will go toward treatment plant improvements and secondary site improvements.

Hruby noted they are targeting a minimum of 3% savings from the tender.

Moody's rates the bonds Aa2 with a positive outlook. S&P rates the bonds AA-plus with a stable outlook.

The senior manager on the deal is Goldman Sachs (GS). The co-financial advisors are Government Capital Management and Phoenix Capital Partners. Squire Patton Boggs, LLP is bond counsel, according to the preliminary official statement.

While the bonds are not secured by a debt service reserve fund, Moody's noted ample liquidity and solid debt service coverage.

"The system's historically extremely strong reserves somewhat mitigate this concern," S&P said.

"In our view, unrestricted liquidity is the primary credit driver given the flexibility it provides to navigate operational and capital related uncertainties," Jenny Poree, senior director and sector lead at S&P, told The Bond Buyer. "Cleveland's healthy system liquidity and sound overall credit quality offsets the lack of a debt service reserve fund. A DSRF is generally viewed as more critical for utilities with narrow liquidity positions or extreme operating or event risks."

It's the nation's 10th largest regional water utility system, serving about 1.4 million people.

Poree noted the combination of rate increases and the city's elevated poverty rate "could pressure more vulnerable communities," but management is addressing that concern through targeted programs.

The system has $376 million in outstanding revenue bonds, including the current sale. S&P said the system also plans to issue an additional $74 million in state revolving fund loans.