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Despite Turbid US Markets, Fla. County Plans To Issue $39M In Bonds for Max Planck Deal

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Officials in Florida’s Palm Beach County still plan to issue $39.4 million in bonds next month to help pay for infrastructure improvements and facility construction as part of the deal that brought Germany’s Max Planck Society to the state, though the recent seizure in credit markets has prompted them to discuss its plans for future borrowing with the three credit rating agencies.
 
Palm Beach County will market the first of five bonds set to be issued over nine years. Combined, the bonds will total the $86.9 million in infrastructure improvements and operating costs that officials promised Max Planck as part of the $194 million economic incentive package hammered out by the society, the county, and the state of Florida over the past year to help lure the Society [BRN, July 28; Oct. 8, 2007].
 
Max Planck, a Germany-based nonprofit network of 80 institutes, research units, and smaller working groups, anticipates it will break ground in Florida by the end of 2009 or early 2010.
 
“We’re obligated by contract to issue those bonds. With the first issuance, as we see it, we don’t think there’s going to be a problem,” Shannon LaRocque-Baas, a deputy county administrator for Palm Beach, told BioRegion News last week. “Based on our level of reserves, and our triple-A [bond] rating, it’s not going to be a problem.”
 
The first set of bonds, totaling $39.4 million, are anticipated to be sold starting Oct. 20, with the issue closing Nov. 1.  The schedule for the remaining bond sales and their amounts, according to a county bond resolution approved last month, is:
  • Nov. 1, 2011 — $15.6 million
  • Nov. 1, 2013 — $13.1 million
  • Nov. 1, 2015 — $13.4 million
  • Nov. 1, 2017 — $5.3 million
It just really doesn’t make sense for us to go out and issue $87 million when they’re not going to use quite a bit of that money for a long time to come,” LaRocque-Baas said.
 
The county will repay the bonds by making annual debt-service payments over 20 years. Over the next five years, debt service payments will start at $836,795 in FY ’09, then rise to just over $3.18 million in both FY ’10 and ’11, then $3.55 million in FY ’12.
 
Palm Beach County’s Board of County Commissioners has appointed Loop Capital Markets senior manager for the bond sale. The board has also named two co-managers, Raymond James and Jackson Securities; a bond counsel, Holland and Knight; and a disclosure counsel, Ruden McClosky.
 
Of the $86.9 million that will eventually be borrowed, $60 million will cover construction costs, to be drawn by Max Planck gradually as it submits expense documents to county officials. The Society “is not in a position to cover some of that expense on its own,” Berthold Neizert, head of Max Planck’s international relations division, told BRN in July.
 
The $26.9 million balance will fund facility operations and be released to the society over 10 years. Current disbursements include:
  • $4.1 million starting in fiscal year 2009 toward the purchase of equipment for the temporary facility;
  • $4.1 million in FY 2013;
  • $10.4 million in FY 2015;
  • $3.0 million in FY 2016; and
  • $5.3 million in FY 2017.
As part of the deal, Palm Beach County will make annual payments to Max Planck. The disbursements started at $3 million for the current fiscal year, which began Oct. 1, will reach about $4 million in five years, then grow afterward to $6 million.
 
Asked what effect current market volatility would have on future Palm Beach County bond issues beyond Max Planck, LaRocque-Bass referred the question to county finance director Liz Bloeser, who did not return a telephone message left by BRN.
 
LaRocque-Bass and other officials have said, however, that the benefits they anticipate from the Florida Max Planck facility justify the cash incentives that the county and state have agreed to spend for Max Planck. Over the next 20 years, Max Planck is projected to create 1,800 direct and indirect jobs paying a total $2 billion in wages, and generate $5 billion in gross state product, including $1.2 billion in economic activity for Palm Beach County.
 
The county figure includes $354 million in employee compensation and profits, $175 million in disposable personal income, and $30.5 million in cumulative sales tax revenues.
 

“Several factors are stressing the county’s financial profile.”

The Society is evaluating responses to a formal request for proposals it issued for architect-engineers and a program manager interested in overseeing the building of the society’s $60 million, 100,000-square-foot permanent facility within six acres at Florida Atlantic University’s MacArthur campus in Jupiter. The deadline for RFPs was Sept. 30.
 
“We are in the review process and hope to have the teams contracted by the end of this year,” Neizert told BRN last week.
 
The Society has also hired Claudia Hillinger, as its representative in Florida, and hopes to hire a chief scientist for its Florida institute in November [BRN, Sept. 29] In all, Max Planck plans to create about 180 jobs at FAU — 135 to be filled by Max Planck staffers, the rest by organizations it partners with.
 
Max Planck’s facility would be adjacent to the Scripps Research Institute campus, now in late construction stages within FAU. Until its permanent site is completed, Max Planck will occupy a 75,000-square-foot space at a temporary, two-building research facility at FAU. Max Planck will replace Scripps, which in February 2009 plans to celebrate the completion of its $200 million, 350,000-square-foot, three-building campus.
 
The Florida facility will focus on bioimaging of molecular processes, toward improved understanding of the structure, dynamics, and function of molecules and tissues. Neizert said that the market upheaval of recent weeks will result in “no change to the timetable on part of Max Planck Florida Corporation,” referring to the Society’s entity for its Florida institute.
 
Because of the credit crunch, Palm Beach County officials are seeking to reassure the three agencies that rate municipal bonds that the county is managing its finances well enough to maintain its largely good ratings. To that end, a delegation of Palm Beach County officials led by County Administrator Robert Weisman visited New York City earlier this month to meet with representatives of Moody’s, Standard & Poor’s, and Fitch Ratings.
 
“We’re moving forward with [the Max Planck bond issue]. That was one of the purposes of the meetings,” LaRocque-Baas said.
 
In Debt to the Max
 
The New York visit came the week that the Dow Jones Industrial Average lost 7.3 percent of its value — the biggest one-week loss since the terrorist attacks on Sept. 11, 2001 — and as credit markets worldwide have all but seized up.
 
Kelly McGary, a senior director at Fitch Ratings, told BRN last week her agency expressed concerns in part about Palm Beach County’s dipping into its cash reserves to balance its budget for the fiscal year that began Oct. 1. The county used one quarter of its fund balance, or $31 million, leaving it with a cash reserve of $92 million.
 
Even before the credit market began heaving last month, Fitch had publicly voiced concern about Palm Beach County’s near-future financial picture. On July 30, Fitch retained the county’s top-tier AAA bond rating but downgraded its outlook — from “stable” to “negative.” Fitch’s range for an outlook is typically one to three years.
 
Fitch downgraded its outlook on Palm Beach County bonds in a report issued soon before the sale last August of $180 million in Series 2008A Public Improvement Revenue Bonds, issued to help, build, and equip new county criminal justice facilities. Those bonds are set to mature in 2031.
 
“Inability to quickly restore structural budgetary balance and maintain ample financial flexibility could jeopardize the ‘AAA’ rating,” Fitch said in the report.
 
In retaining Palm Beach County’s triple-A bond rating, Fitch cited confidence that “the wealthy, diverse economy will benefit from the increasing presence of the biotech industry, including the Scripps Research Institute.”
 
But in lowering its outlook on Palm Beach County bonds, Fitch expressed concerns that the county may be unable to raise taxes and other revenues it would need enough to cover rising expenses.
 
“Several factors are stressing the county’s financial profile, including: statewide property tax reform measures, which, coupled with the political unwillingness to increase the operating millage, will reduce ad-valorem revenue available to fund countywide operations in fiscal 2009; a weakened economy and housing market; and rapidly escalating operating costs, most notably for sheriff operations,” Fitch said in its most recent report on the county, issued Aug. 15.
 
The tax-reform measures cited by Fitch are within an amendment to the state constitution approved by voters in January. Aimed at cushioning the effect of expected future property tax hikes — savings to homeowners was projected statewide at $10 billion — provisions of Amendment 1 included raising the homestead exemption between $50,000 and $75,000 by exempting the assessed value from all property taxes except those levied by school districts; a “portability” option allowing homeowners to transfer to their new homestead the homestead benefits they accumulated under the state’s Save-Our-Homes law; exempting from property taxes the first $25,000 in assessed value of tangible personal property; and limiting assessment increases to 10 percent each year for non-homestead property, with school taxes also being the exception — a provision set to expire Jan. 1, 2019 [BRN, Jan. 14].
 
“Save-Our-Homes” limits to 3 percent the annual increases allowed in the assessed value of homesteaded residential properties in the state.
 
“Amendment 1, as well as legislative reforms that occurred last fiscal year that had longer-lasting effects, limits the revenue the county can raise. And when you look at that, and you have rising expenditures, it’s more difficult to structurally balance the budget,” McGary said. “Our concern focused on the county’s ability to maintain financial flexibility.”
 
Standard & Poor’s will not publicly discuss its conversations with the Palm Beach officials, spokesman Edward Sweeney told BRN last week. A Moody’s spokesman had no answer at deadline to a BRN question about talks with the officials.
 
On Aug. 8, S&P assigned its second-highest rating of AA+, with a stable outlook, for the $180 million criminal-justice bond. S&P cited a 2.3 percent decline in Palm Beach County’s main revenue streams for the year to date compared with the same period in 2007.
 
“The decline reflects an overall weakening of the economy at the state and local levels as evidenced by declines in state revenue sharing (8.1[percent]) and sales tax revenues (4.2 [percent]),” S&P wrote, adding that “Increases in utility fees should boost franchise fee collections and mitigate, in part, the effect of declining sales tax and state revenue-sharing receipts in fiscal 2008,” which ended on Sept. 30.
 
S&P also reaffirmed its AAA rating and stable outlook for $315.5 million in existing county general obligation debt, as well as its AA+ rating for six other bond issues totaling $811 million — including the $102.2 million in bonds issued last year to finance the construction of the new Scripps campus at FAU MacArthur.
 
The prospect of more life-sciences activity in coming years should swell the county coffers, S&P concluded: “Both Scripps' and Max Planck's move to Palm Beach County is expected to bode well for the local economy since it creates high-paying jobs and attracts other related businesses to the county.”
 
In a July 30 report, Moody’s also retained its second-highest rating of Aa1 on the Scripps and five other bond issues. Moody’s and S&P both noted that those bond issues were backed by sales and other “covenant” taxes rather than “ad valorem” taxes on real and personal property.
 
Moody’s in its report said it was told by Palm Beach County officials they expected Amendment 1 to cost the county $46 million, expected to be partially offset by $11 million in new construction.
 
Moody’s also warned Palm Beach County that while it has more affluent residents and a stronger tax base than other areas, the county would weaken its ability to repay future bonds if it kept dipping into state revenue-sharing funds, sales taxes, and other non-property taxes that have stagnated over the past two years. In addition to the dip noted by S&P, Moody’s reported that county sales taxes fell 4.9 percent in the fiscal year ending Oct. 31, 2007.
 
“Planned continual leveraging could weaken this security's credit quality given that key non-ad valorem revenues have stagnated and budgetary demands on those resources are increasing as property tax growth is pressured by tax reform and a depressed housing market,” Moody’s cautioned.

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