Blight-Fighting Bonds Revived in Philadelphia Plan: Muni CreditRomy Varghese
Philadelphia wants to create its first blight-fighting district in eight years, financed by a type of municipal debt for which sales have dwindled to a fifth of the pre-recession pace.
The securities, called tax-increment financing bonds, fell out of favor as the financial crisis derailed projects and eroded public support for subsidizing developers. Localities have sold $958 million worth this year, compared with $4.7 billion in 2007, data compiled by Bloomberg show. The obligations are backed by increased revenue, usually from property taxes, in districts marked for redevelopment.
Munis tied to real estate have lost some appeal after property prices tumbled during the credit crisis. While home values have rebounded to a five-year high, the S&P/Case-Shiller index of property prices in 20 U.S. cities is still 22 percent below the 2006 peak. Meanwhile, the Federal Reserve said last week that the housing recovery has slowed.
Some investors have lost confidence that real-estate holdings will maintain their gains, said Richard Ciccarone, chief research officer in Oak Brook, Illinois, for McDonnell Investment Management, which handles about $8 billion in munis.
“There’s been a general reluctance to look at them as safe vehicles,” he said of the tax-increment bonds.
Investors’ limited appetite crimps officials’ ability to revitalize neighborhoods amid a reluctance to borrow for capital projects. Even with yields more than a percentage point below their 50-year average, cities and states have sold about $255 billion of fixed-rate, long-term debt this year, 15.5 percent less than a year earlier, Bloomberg data show.
“Governments and political leaders are not wanting to load up borrowing,” said Joseph Rosenblum, director of municipal credit research in New York at AllianceBernstein LP, which manages about $30 billion in munis. “It’s hard to justify in hard economic times.”
In some cases, opponents have mobilized against the financing. Several hotel owners in Philadelphia created a coalition to fight a new tax-increment district in the nation’s fifth-most populous city. A city council committee today may consider a bill establishing the subsidy.
“People are much more leery about essentially the perceived giving away of what could be tax dollars to what they perceive to be rich developers,” said Maureen McAvey, senior fellow in Washington at the Urban Land Institute, a nonprofit research organization.
Under the financing method, municipal officials freeze the assessed value of a designated area. Any increase in tax receipts goes toward repaying debt that funded the development. Some communities may guarantee payments, which are usually exempt from taxation for investors, if the revenue falls short. In Philadelphia’s case, developers must make up the difference.
Cities use the approach “as a catalyst to spur the first few projects in a development area to get it going and then hoping the private sector would be able to carry the rest,” McAvey said.
During and after the 18-month recession that ended in June 2009, municipalities hesitated to engage in such financing, Rosenblum said.
“You need to see excess revenue, that increased revenue being there to pay off the debt,” he said. “It’s hard to project that when values are declining. It would be tougher to sell that kind of debt.”
Issuers from Colorado were the most active in tax-increment financing bonds this year, driven by development of a former Denver airport into residences, offices and shops, a process that began in the 1990s, Bloomberg data show.
To help with the costs, the Denver Urban Renewal Authority in March issued $171.3 million in debt graded A-, seventh-highest, by Fitch Ratings. Securities maturing in December 2021 were priced to yield 2.51 percent, or about 0.8 percentage point above benchmark debt, Bloomberg data show. They last traded Nov. 4 at an average spread of 1.02 percentage points.
Some investors have avoided this type of debt after California Governor Jerry Brown, a Democrat, and legislators eliminated redevelopment agencies effective Feb. 1, 2012, to divert about $1 billion to schools. The authorities had almost $30 billion in debt as of June 30, 2010, the state controller said.
The move was “destabilizing to a bond holder,” Ciccarone said.
After the state enacted the legislation, Moody’s Investors Service cut California tax-allocation bonds that were investment grade to junk.
Issuance has also tapered off as some cities aren’t seeing real-estate projects return to levels from before the credit crisis.
“We’ve seen very little large-scale financing in our market,” said John Grady, president of the Philadelphia Industrial Development Corporation, which assists economic development.
In Philadelphia, tax-increment districts help with construction costs of projects that have already secured private funds, Grady said. The city created 13 such districts that have issued $119 million in debt since 1995, with about $79 million outstanding as of Dec. 31, according to the agency.
Philadelphia wants to create the first district since 2005 to help develop a 700-room facility for Starwood Hotels & Resorts Worldwide Inc., which is based in Stamford, Connecticut.
Increased collections from taxes the city levies on real estate, sales and business receipts would comprise $33 million of the financing over 20 years in the district encompassing the venture.
Once the city pledges the revenue, the developer would use it to secure financing for the $280 million project, Grady said. There’s no municipal guarantee of the incremental funds, he said.
The site, a block from City Hall, borders another hotel, the Ritz-Carlton, and meets the test for blight as it’s been a parking lot since 1991, Grady said.
“It’s in the middle of our downtown,” he said. “It’s a highly underutilized property.”
The project would create about 1,800 construction jobs and 450 permanents posts, Grady said. After diverting receipts for the financing, Philadelphia would garner $25.8 million from the project and the school district $12.3 million, compared with doing nothing, according to legislation before city council.
Yet a group called Concerned Hotel Owners of Philadelphia wrote to Mayor Michael Nutter and city council urging them to reject the subsidy.
The facility, which would receive an additional $42 million in state and federal grants and a federal loan, would take business from other hotels and may not generate the taxes projected, the group said.
The 10 hotels, including the Ritz-Carlton and the Four Seasons, say the area isn’t blighted, a determination needed for the financing.
“It’s a lively, active, vibrant area,” Maureen Garrity, a spokeswoman for the coalition, said by telephone.
The developer, Brook Lenfest, didn’t respond to a message left at his office in Lansdale, Pennsylvania.
In the municipal market this week, localities nationwide are selling about $6.2 billion in long-term debt, up from $4.9 billion last week. They’re borrowing with benchmark yields close to the lowest lowest since June.
Top-rated 10-year munis yield 2.69 percent, compared with 2.64 percent on similar-maturity Treasuries.
The ratio of the interest rates, a gauge of relative value, is about 102 percent, close to the lowest since June 21. It compares with an average of 94 percent since 2001. The smaller the number, the more expensive munis are compared with federal securities