Ohio capital brings triple-A deal amid adjustment to remote work trend

Columbus heads into the market this week with a $423 million deal riding tailwinds from a rebounding revenue picture and the resolution of a lawsuit tied to 2020 remote work income tax collections.

The triple-A-rated city will take indications of interest on $98 million of taxable bonds in two series on Monday with pricing to follow Tuesday on both the taxable bonds as well as two series of tax-exempt new money paper totaling $297 million, and one series of tax-exempt refunding bonds for $28 million. The final maturity on the new money debt is 2042.

BoA Securities is running the books with Citigroup Global markets as co-senior manager and four other firms rounding out the syndicate. PFM Financial Advisors LLC is advising the city and Brickler and Eckler LLP is bond counsel. The new money will fund various capital projects.

Remote work in the aftermath of the COVID-19 pandemic looms as a long-run challenge for the city’s tax structure but the city’s recovery is well on its way based on revenue collections.

“Nothing could have ever prepared us for the last couple of years but I feel like now we are entering a new era because of organic economic growth and our fiscal foundation remains the strongest part of our economy,” said City Auditor Megan Kilgore, who manages the city’s debt issuance.

While income tax collections rose by 10% for the first quarter and key revenues have surpassed 2019 levels, remote work and its impact on income tax collections that account for nearly 80% of the city’s $1 billion annual budget pose a chronic pressure as it does for cities across the state.

The city tells investors in a presentation that “remote work remains the largest threat to the city’s future tax collections” but also stresses its ability to manage those strains.

“COVID-19 threw a brick on the gas pedal. We knew it was coming but thought it would take longer,” Kilgore, who won re-election to a second term last year., said about remote work. “We’ve budgeted conservatively for the impact” that’s based on detailed modeling “and we are triple-back-stopped” on internal debt coverage ratios, healthy reserves, and the ability to levy a property tax if needed to cover the city’s debt.

In response to the pandemic, the state approved emergency legislation that temporarily allowed municipalities to continue to collect income taxes from non-residents who worked from home in 2020. The state last June passed legislation allowing for residents to seek refunds for 2021 when they file their returns this year so the city expects a hit but won’t have final numbers until filings are totaled.

Rules that require a resident be taxed based on the location where they are working from reverted back January 1.

“Remote work dynamics remain a headline risk, though Columbus has considered this in its 2022 budget,” S&P Global Ratings said in its report affirming the city’s AAA rating. “We view the city’s reliance on income taxes from commuters as an emerging social risk given that the pandemic accelerated remote working trends.”

The city dodged a bullet in the potential repayment of remote work collections when the Ohio Supreme Court on March 29th declined to take up an appeal of rulings dismissing a lawsuit filed by the Buckeye Institute, a Columbus-based right wing think tank. The litigation challenged the constitutionality of the state’s emergency legislation and the city’s ability to collect income taxes from remote workers during the mandatory stay-at-home order and sought those taxes be refunded.

“The state Supreme Court’s denial to hear an appeal is a positive development that limits contingent risks to the liquidity position,” S&P said.

Several county-based lawsuits remain pending so the threat has not fully lifted should any rulings contradict the ruling of the Tenth District and make their way to the high court.

The city’s general obligation bonds are backed by a property tax pledge but the city has not levied one for debt service since 1957 instead repaying debt with income tax and enterprise system revenue.

The city had a $305 million fund balance at the end of 2021 including an $88 million rainy day fund. The city this year made a $2 million deposit bringing the rainy day fund to the $90 million target it had set for 2024.

Revenue from the city’s 2.5% income tax levy has a compounded five-year average growth rate of 4.2%. After steadily growing over the last decade, taxes fell by .92% in 2020 to $933 million from $941 million in 2019. The city closed out 2021 with $1.03 billion of which $258 million goes to repay debt while the remainder goes into the general fund.

Ahead of the deal, Fitch Ratings and Moody’s Investors Service also affirmed triple-A ratings and stable outlooks on $3.4 billion of debt including the upcoming sale.