Did Philly Just Get Hosed?
On September 1, the city of Philadelphia sold a bond worth $300m. Underwritten by Wells Fargo, the interest rate was 4%.
You read that correctly. 4%. The city will have to pay almost $9m in interest on that loan, due next year. That’s a pretty high rate given the city’s A2 credit rating. By comparison, the last tax revenue anticipation notes the city sold in 2018 got a 2% rate.
The reason for the issuance? COVID.
The bond issue itself is a fascinating political document. I found myself reading it on a Friday evening, like a murder mystery with some unexpected twists.
Lay of the land
Of course I expected the context. The pandemic has shut things down, but in Philly the impact is particularly bad: 40% of wages and earned income tax come from non-residents, i. e. commuters. Since the professional-managerial class has been working from home more and more they can ask not to pay this tax more and more.
Taxes on retail and restaurant sales are also decreasing. At the same time, the city’s expenses are increasing to respond to the pandemic itself. They’re expecting at $749 million shortfall next year.
Usually bond issuances are dry statements of a city government’s situation, painting things in a good light and detailing the particular use of the money. But this issuance is like a lay of the land for Philly’s financial present and future.
And it’s not looking good. In this issuance there’s a grim section at the climax of the statement of purpose.
The loss projection is for $749m, but there’s real uncertainty: “the complete fiscal impact of COVID-19 on the City is likely to change significantly as the situation further develops and cannot be fully quantified at this time.”
Who knows what’ll happen as things get colder. The virus apparently spreads more in lower temperatures. People can’t go outside and hang out so they’ll go inside. And the presidential election could create a constitutional crisis with Pennsylvania at ground zero of the shenanigans.
So the city’s going to tighten its belt. That means plans to ‘enhance revenue’ by $40.6m (paltry compared to the projected losses) by freezing business income and receipt tax (BIRT), freezing resident rate wages/earnings taxes, raising those non-resident rates, increasing parking rates, and getting rid of the earlybird discount for real estate tax payments (at least Philly doesn’t have to worry about real estate, which is booming right now).
Questions
I have some questions. The big one is the interest rate. It’s high.
Readers of this blog know I’m looking into the Federal Reserve’s municipal liquidity facility, particularly as an option for school funding. At first I thought Philly could have gone to the Fed for this loan. After all, an A2 rated entity could get 2% on the same deal right? And isn’t that exactly what the MLF is for?
Wrong. Amanda Kass told me that the rates are actually basis points on top of what a government could get on a standard overnight lending deal.
I’m not sure City CEO Brian Abernathy and Director of Finance Robert Dubow, and the consultants they paid to put this bond together, explored that idea. Maybe they could’ve gotten something better than 4% and saved the city money. But it wouldn’t have been 2%. (Which is why I think we should organize to demand the Fed improve their rates!)
The next question I have is how hard did that office shop around? Could they have gotten a better deal on the private market? Why Wells Fargo?
My conspiracy antennae went to those consultants. Maybe they’d worked for WF before and had connections at their old bank. Financial advisors are listed as PFM Financial Advisors LLC and Phoenix Capital Partners, LLP.
Connections to Wells Fargo were hard to find/maybe not there. So were the fees these consultants charged the city to prepare the bond issuance. How much was it? I imagine I’d have to file a FOIA to find out. (When we go back to campus for in person classes, I’ve got a date with the business school’s Bloomberg lab to find out who’s underwriting these bonds. Who owns Philly’s debt?)
Mixed messages
The bond issuance puts the official date of the sale on Sept. 1. A few days before that, The Inquirer ran a story about the Sixers basketball team possibly building a new stadium on the Delaware waterfront. The announcement made a big splash and everyone was talking about for it a few days until it was clear that the deal was not going to happen.
Juxtaposing the two things—the bond issuance with a strangely high interest rate and the strange stadium announcement—is interesting, if only for the dissonant sense of the messages each sends.
There was a “Philly’s a city on the move!” kind of feeling to the stadium announcement, absurd as it was. The bond issuance on the other hand is clearly saying the city’s in trouble, doesn’t know what’s going to happen in the future, and is tightening up on everything. It’s even losing money on the rate of the bond sales.
As a coda, the target for interest rates on the 10 year treasury note, set by the Fed through monetary policy, is super low. It’s near zero. And yet the rate on this bond is 4%. Why? Putting our capitalist hat on, state and local governments just aren’t as good a bet for investors right now. So Philly suffers.