Columbus navigates through Treasury’s SLGS decision

Looking at the market’s choppiness and heavy supply, Columbus decided last week to push of its new money and refunding to this week, but little did officials know that the U.S. Treasury would throw a curve ball by suspending the sale of State and Local Government Series securities.

City Auditor Megan Kilgore said the city’s $443 million triple-A rated paper fared well in the market Tuesday and she was pleased with the healthy book of orders that included local governments, but the finance team did have to engage in a retooling of the refunding piece.

“The SLGS window closed after we released the pre-marketing wire and had already signed off on the cashflows,” which assumed the use of SLGS, Kilgore said. “I’ve had the SLGS window close the same week, even within a day or two of pricing, but not without any advance notice.”

The Treasury Department suspended the sale of SLGs in what it characterized as a necessary move to ward off the threat of a default. Talks surrounding lifting the debt limit cap have been ongoing for months, but in a move that is somewhat unusual for Treasury, it left the SLGS window open until Tuesday.

The announcement of its closure came as Treasury Secretary Janet Yellen said the government won’t be able to pay its bills by June 1 if Congress doesn’t act.

“It wasn’t the worst thing we’ve had to work through, but it did take a lot of fast planning to keep the refunding on track. The entire financing team had to quickly pivot” and shift to using open market securities, or OMS, to build the escrow attached to the refunding, Kilgore said. The team had to “rebuild cash flows to consider an OMS-funded escrow, and then get the OMS priced.”

SLGS are special purpose securities that Treasury issues to state and local governments to assist with compliance of federal tax laws and IRS regulations governing the investment of cash proceeds generated from a tax-exempt bond issuance. OMS are U.S. Department of the Treasury and agency securities purchased in the open market. The last time Treasury suspended SLGS was in July 2021 and the window has been closed 15 times since 1995.

The deal offered a mix of new money and refunding bonds with $367 million of tax-exempts sold and $76 million of taxables.

BofA Securities and JPMorgan served as senior managers. PFM Financial Advisors advised. The deal raised $421 million in new money for capital projects and refunded $22 million from 2012 and 2013 issues for at least 4% in net present value savings, Kilgore said.

Refinitiv said the 5s of 2024 paid a yield of 3.03%, 3 basis point to interpolated, 5s of 2028 landed at 2.45%, plus 7 bps to interpolated, 5s of 2033 at 2.51%, plus 14 bps to interpolated, 5s of 2038 at 3.10%, 15 bps, and 5s of 2043 at 3.44%, plus 27 bps.  

“Orders came in from a state government and some local governments” including one county and a few cities,” Kilgore said.

The city originally had eyed a sale date last week but would have competed with a larger calendar of more than $7 billion and less reinvestment cash available, compared to a $6 billion calendar this week. “We felt good about being a featured high-grade transaction in today’s market and were happy to get ahead of ensuing debt ceiling headlines” in moving to this week, Kilgore said.

Ahead of the sale, Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings affirmed the city’s top credit marks.

“The ‘AAA’ long-term rating reflects our view of the city’s dynamic and growing local economy, robust reserve and liquidity position, institutionalized and comprehensive financial management practices and policies, and manageable debt and retirement liability position,” said S&P analyst Randy Layman.

The city’s income tax, which accounts for 85% of general fund receipts, increased 4.8% or $37 million last year. 2022 collections were $837.7 million with refunds of $27.3 million for a net of $810.4 million. The fiscal $1 billion 2023 budget assumes 3% income tax growth.

The city budgets for elevated levels of income tax refunds given that Ohio passed legislation in 2021 that allows for refunds of municipal income tax paid on behalf of remote workers to the municipality where the business was located rather than where the employee was physically working.

“Although the future of remote work patterns is an unknown that will continue to weigh upon the city’s primary general fund revenue source, Fitch believes that Columbus is well-positioned to withstand near-term pressures given both ongoing growth in the city’s population and per capita personal income and its sizable general fund reserve levels,” analysts wrote.

The city has about $1.8 billion in debt outstanding. “The stable outlook reflects the expectation that the city’s economic, financial, and governance strengths will continue to mitigate challenges inherent in its elevated leverage and fixed costs,” Moody’s said.

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