Raytheon Targeted as Pima County Plans Record Bond Vote
Tucson, Arizona, the sixth-poorest U.S. big city, stands to gain protection from federal defense-spending cuts as its home county plans a record bond package, in part to entice Raytheon (RTN) Co. to expand missile production.
Pima County, bordering Mexico, expects to ask voters to approve the $650 million debt plan as soon as next year. Some proceeds may target Raytheon, whose 10,500 workers make it the area’s largest private employer, and also finance a move of part of the University of Arizona to downtown Tucson. The metro area’s 20.4 percent poverty rate is about 5 percentage points above the national average, according to the U.S. Census Bureau.
With about 1 million residents, Pima is planning the debt offer after winning an 11 percent drop in borrowing costs in its latest sale. The county, which collaborates with local jurisdictions to finance capital projects, has also withstood a Tea Party challenge resulting in an audit of its bond programs.
The municipality “is almost like a bond bank, where they decide how to deploy the money by committee and determine what’s best for the county,” said Michael Hamilton, who oversees about $331 million of Arizona muni debt at Nuveen Investments in Portland, Oregon. “It’s a good thing, and that’s what came out in the auditor’s report.”
The state’s Republican-controlled legislature ordered an audit of Pima’s bond programs last year amid allegations of inequitable spending and incomplete work. The auditor general’s January report found that $735 million in projects since 1998 benefited residents countywide with 93 percent of the work done on time.
Investors rewarded Pima with a yield of 2.55 percent on 10-year notes as part of an $89 million general-obligation issue in May, data compiled by Bloomberg show. That was about 0.63 percentage point more than benchmark debt.
In a sale a year earlier, the 10-year segment was priced to yield 0.71 percentage point more than top-rated securities.
The municipality has issued bonds almost annually since 1998 and had about $456 million in general obligations as of mid-April, according to Fitch Ratings. Only two other counties in the state had any general-obligation debt as of June 2011, totaling $54 million in principal, according to the auditor.
The county Bond Advisory Committee is evaluating $1.2 billion in projects, with about half expected to be put before voters, said Larry Hecker, its chairman.
The economy of Tucson, Arizona’s second-largest city after Phoenix, is closely tied to defense spending. In addition to Raytheon, Davis-Monthan Air Force Base employs 8,566, according to Fitch.
Automatic federal spending cuts, known as sequestration, have focused attention on protecting the base and the county’s Raytheon plant, which makes guided missiles, air-to-air missiles and precision-guided munitions.
“There is concern on how the sequester cuts will play out and how the winding down of the wars will affect employment,” said George Hammond, an economist at the University of Arizona in Tucson. “Federal civilian and military activity is a larger share in the Tucson area. The impact on procurement spending on the local economy is a much bigger deal.”
Among projects proposed by the county administrator is a $30 million plan to buy land and continue noise abatement around the base and $90 million to relocate a road and build a stretch of highway as a technology corridor near Raytheon.
The county wants to give the company room to expand or potentially consolidate programs in Tucson from elsewhere if its defense contracts are reduced, administrator Chuck Huckelberry said. In 2010, Raytheon chose Alabama when it needed to build a new facility.
“We could rub our hands together and worry, but we are more interested in taking the action to protect those two facilities,” Huckelberry said of Raytheon and the air base.
Jon Kasle, a spokesman for Waltham, Massachusetts-based Raytheon, declined to comment on the county’s plans or possible expansion.
Among the biggest proposals in the bond plan is $176 million to move part of the University of Arizona, the county’s largest employer with 10,681 workers, to downtown Tucson, a few miles from the main campus. The project would relocate two museums and build a 10-story small-business incubator and classroom building.
The effort mirrors those in other communities that have attempted to leverage universities as economic drivers and populate downtown streets that empty after business hours. In Phoenix, voters approved $223 million in bonds in 2006 and the city put up 20 acres of land downtown to move some Arizona State University programs from nearby Tempe.
“Being able to attract people to the core has economic-development value beyond just what the programs themselves bring,” said Mike Proctor, the University of Arizona’s vice president for regional development. “The sense is that if the county, university and others could come together to make a difference down there, that would be a great opportunity.”
Metropolitan Tucson’s poverty rate in 2011 was above the nation’s 15.9 percent, according to Census data. The level was sixth-highest among metropolitan areas with 500,000 or more people.
A January report by the University of Arizona’s Economic and Business Research Center attributed the high rate in part to chronic poverty on American Indian reservations and low wages in many occupations.
The county’s general obligations are graded AA, third highest, by Fitch. The county has a debt ratio at 2.3 percent of fiscal 2013 property values, compared with 5 percent to 7 percent for some issuers, said Steve Murray, a senior director in U.S. public finance at Fitch.
The county also pays off its bonds more quickly than the typical issuer, with amortization of 91 percent in 10 years, compared with the average rate of 50 percent, Murray said.
“We are constantly turning over our debt so we can issue more debt so we can build infrastructure for a growing community,” Huckelberry said.
In the biggest offer scheduled by an Arizona issuer in the $3.7 trillion municipal market, Tucson plans to sell about $27 million of munis as soon as next week, Bloomberg data show. The securities will be federally taxable and will go toward refinancing.
Benchmark munis maturing in 10 years yield about 2.8 percent after the interest rate reached 2.96 percent last month, the highest since April 2011, Bloomberg data show.
With similar-maturity Treasuries yielding 2.64 percent, the ratio of the yields, a measure of relative value, is about 106 percent. The average since 2001 is about 92 percent. A higher percentage means local debt is cheaper relative to federal obligations.
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