Adviser: Downturn shouldn’t impact bonds
Debt service on bonds secured by the Hot Springs Advertising and Promotion Commission’s hospitality sales tax and the city’s utility ratepayers isn’t likely to be interrupted during the COVID-19 economic downturn, the city’s financial adviser said last week.
Collections of the 3% hospitality tax levied on prepared food and lodging in the city are expected to drop significantly. February numbers the ad commission reported foreshadow the looming revenue crunch, dropping almost 9%, or $46,875, compared to the previous February.
Since then the state has limited restaurants to take out and drive-through service only, forcing many to suspend operations, and hotel rooms are sitting empty during what should be a busy time on the city’s event calendar.
Hospitality taxes restaurants and hotels collect service about $9 million in debt the city of Hot Springs issued on behalf of the ad commission for construction of the Majestic Park baseball complex and expansion of the Mid-America Science Museum.
Bob Wright, senior managing director for Crews & Associates, the city’s financial adviser, said the more than $600,000 required to
annually service both debt issues shouldn’t be affected by the downturn. The ad commission reported the tax raised almost
$7 million last year, providing what Wright said is more than enough coverage to pay principal and interest.
“It’s not going to drop down to a point where there’s an inability to pay,” he said
A reserve included in the
$7.87 million bond issue for the baseball complex can pay bondholders in the event of a disruption in sales tax proceeds, paying about six months of principal and interest.
Wright said cities saw a 10% decrease in sales tax collections during the 2008 economic downturn.
“It’s hard to gauge what the impact will be,” he said. “We don’t know how long this is going to last. But there will be an impact. There’s no doubt about it.”
Utility rates secure millions of dollars of debt, including more than $60 million the city is obligated to pay over the next
20-plus years for improvements to the regional water system. Wright said the effect a downturn has on utility revenues is negligible. People may not wash their vehicles or water their lawns as much, but they’re still taking showers and using appliances, he said.
The city chose to hold off on refinancing $37.25 million in wastewater debt and issuing
$19 million in new debt for improvements to the wastewater collection system and Davidson Drive treatment plant. The bonds were scheduled to be sold earlier this week, but Wright told the Hot Springs Board of Directors that the volatility of interest rates for municipal debt made locking in favorable terms problematic.
“Almost overnight rates jumped up 300 basis points,” he told the board. “They’ve come back down 250 basis points almost overnight. But just today they’ve gone back up 10. It’s fear. It’s liquidity issues. There’s not really a market. Everybody is sitting on the sidelines.”
The public hearing held Tuesday at City Hall authorizes the city’s underwriters to market the bonds when the uncertainty subsides.
“This is going to save us two weeks,” Wright said. “If and when the market turns around we can pull the trigger immediately. It doesn’t take much more of a movement back in our favor. Now that the public hearing is out of the way we can move very quickly.”