Army Cutbacks Add Pressure to Military Housing Bonds, Communities

Local communities that enjoyed stability from nearby military installations after the 2008 recession are facing the reality that those bases are not immune from Congressional austerity measures designed to shrink federal government.

With the U.S. Army’s announcement of plans to reduce the ranks by 40,000 soldiers, or about 8% of the active force, local leaders last week began to assess the impact on individual posts. About 17,000 civilian jobs will also be eliminated over the next three years.

For the bond industry, the most immediate concern is likely to focus on taxable bonds used to finance privatized military housing since 1997. Today there are 205,000 privatized military housing units, mostly apartments and townhouses but also single-family homes.

Ratings analysts said they are studying the issue, with reports on the credit impact possible later in the week. Generally, however, ratings have held up through the federal budget sequester, government shutdown and threats of another round of base closures. On a $115 million Ft. Carson, Colo., housing project whose A1 rating was updated last week by Moody’s Investors Service, the outlook remained positive after the force reductions.

“The small troop cut recently announced for Fort Carson — 365 soldiers by 2017 — is unlikely in and of itself to significantly impact occupancy level or the current debt rating,” Moody’s analyst David Teicher told NMN sister publication The Bond Buyer.

The biggest cuts targeted the largest bases, with Ft. Benning, Ga., losing 3,402, Ft. Hood, Texas, dropping 3,350, Joint Base Elmendorf-Richardson, Alaska, shedding 2,631, Joint Base Lewis-McChord, Wash., eliminating 1,251, and Ft. Bliss, Texas, down 1,219. Schofield Barracks, Hawaii, will trim 1,214. No other U.S. post will lose 1,000 or more, though more than 30 are affected.

“These were very difficult decisions to make as all of our installations and their communities offer tremendous value to our Army and the nation,” said Lt. Gen. Joseph Anderson, Army deputy chief of staff. “In the end, we had to make decisions based on a number of strategic factors, to include readiness impacts, mission command and cost.”

The force reductions are designed to shrink the Army from its current 490,000 soldiers to 450,000 by the end of fiscal year 2018. However, with sequestration measures in place from the 2011 Budget Control Act, the ranks could fall as low as 420,000, officials said.

“Budget constraints are forcing us to reduce the total Army,” Anderson acknowledged. The Army expects savings of $7 billion over four years, with more funding available to modernize its ground vehicle and helicopter fleets.

Also looming are prospects of a sixth Base Realignment and Closure round that would consolidate forces across all branches of the military, leaving a number of bases closed.

U.S. Rep. Adam Smith, D-Wash., the top Democrat on the House Armed Services Committee, said July 9 that other members of House, including Republicans, were easing their resistance to another round of BRAC in 2017.

“The hostility, the notion that this was completely unacceptable, which existed about a year ago is not there anymore amongst my fellow members is the way I would put it,” Smith told reporters.

The Association of Defense Communities that represents the interests of stakeholders around military bases has gone on record as supporting another round of BRAC. Five previous BRACs, including the last in 2005, have closed numerous bases while expanding others.

“We’re not in the least concerned about a BRAC,” said Lt. Gen. Pete Taylor (retired), former commander of Ft. Hood and now chairman of the Heart of Texas Defense Alliance. “We’re advocating for a BRAC all the time. It’s the only way Ft. Hood can grow.”

While Ft. Bliss near El Paso is the world’s largest Army post in area, Ft. Hood is the largest in Texas in terms of personnel with 39,000. Even with the planned 8.5% reduction, the post will continue to dominate the economy of Central Texas between Waco and Austin.

Ft. Hood delivered an economic impact of $25.3 billion in Texas during fiscal 2011, according to the Texas Comptroller’s Office. More than 68,000 jobs were directly attributed to Ft. Hood operations in fiscal 2011, up from about 67,000 jobs in fiscal 2007. Employees at Fort Hood consist of active duty military, federal civilian workers, contract personnel and Killeen Independent School District workers.

Even during military downsizing, the economy of Bell, Coryell and other counties affected by Ft. Hood have continued to grow, said Taylor, whose organization is participating in a study of what is prompting the growth.

“I cannot tell you where it’s coming from,” Taylor said. “I can tell you where it’s not coming from — it’s not coming from Ft. Hood.”

To protect their bases from closure in 2005, state and local governments passed bond issues to improve infrastructure outside the gates or to buy and remove buildings that were encroaching on the perimeter.

The Texas Legislature this year added $30 million for infrastructure improvements around its military bases.

“Texas has invested nearly $2 billion since 2005 in roads and infrastructure to aid in the deployment of soldiers and supplies and improve access to our installations,” Gov. Greg Abbott wrote in a July 10 letter to National Commission on the Future of the Army.

The letter, coming after the announcement of the Army reductions, was submitted to the Commission that met for two days in Ft. Hood’s adjoining city of Killeen.

“The community support for troops stationed in Texas is unrivaled by any other state,” Abbott’s letter said. “Low costs of living, affordable off-base housing, and state-funded support to military families and retirees make Texas the gold standard in supporting our nation’s warfighters; active, guard and reserve. I encourage you to closely consider these factors as the commission develops its recommendations on the future of the Army.”

After a tour of bases around the country, the commission will report its findings to President Obama and to Congressional defense committees no later than Feb. 1, 2016.

On the bases themselves, the reduction in ranks may increase risks for holders of bonds used to finance privatized housing, experts note.

Privatizing military housing began in 1997, under the theory that private developers could build and maintain base housing more efficiently than the military. Today there are 205,000 privatized military housing units, mostly apartments and townhouses but also single-family homes.

In addition to fewer troops, the military housing is facing a reduction in the Base Allowance for Housing that took effect this year. Previously, the BAH covered 100% of the housing cost, but under the new provisions, that falls to 99%. The latest reductions were the first since 2005.

“The cuts to the growth in Basic Allowance for Housing rates are unlikely to have an immediate impact on taxable military housing bonds at their current levels,” Fitch Ratings noted in January. “However, if the U.S. Department of Defense continues cuts in coming years, Fitch Ratings expects that changes in the demand dynamics for privatized military housing transactions could potentially affect those projects’ bottom lines and their debt-service coverage levels over time.”

Moody’s Investors Service on July 9 affirmed its A1 rating and stable positive outlook on $115 million of taxable housing revenue bonds issued in 1999 for housing at Ft. Carson, Colo., in Colorado Springs. The outlook was revised to positive in 2014 and remained there, despite cuts in the BAH, force reductions and sequester.

Officials in Colorado Springs expressed relief when the post took a comparatively small hit of 365 troops in the latest cuts.

Colorado Springs Mayor John Suthers said the announcement “reflects positively on the case Colorado Springs has made on behalf of Ft. Carson.”

“However, we have to remain vigilant as there will likely be another round of proposed reductions next year and we must continue to make the case for maintaining troops levels here in the future,” he added.

In the 2005 BRAC, Ft. Carson added a brigade combat team from Ft. Hood and played a key role in the Iraqi Freedom combat.

Occupancy of the 3,368-unit Ft. Carson housing development has fallen to the mid-80% range this year from 95% in 2013. But Moody’s analysts attribute that mostly to deployments and competition from nearby private housing projects as well as military housing at other nearby military installations.

The project manager Balfour Beatty Communities has taken 114 units out of circulation for demolition and reconstruction, analysts note. The new development is to be financed with a $37.8 million equity contribution from the Army.

Even with the reduced occupancy rate, the revenue bonds that mature in 2029 enjoy strong coverage of three times debt service, according to analysts.

To fill vacant units, the Ft. Carson development has allowed retirees and civilian employees to sign leases. Complexes at other military bases have taken similar measures.

In rating housing bonds, analysts take special note of the essentiality of the base and its ease of replacement. Some, like Ft. Huachuca, in southern Arizona are considered safe from significant cuts or closures.

“We believe it would be inefficient and cost prohibitive for the Army to replicate the operations performed at Fort Huachuca elsewhere, Standard & Poor’s analyst Adam Cray wrote in a January report.

The base was minimally affected by the 2005 BRAC, which ranked Ft. Huachuca 21st out of a total of 97 bases.

In San Antonio, one of the most military-dependent big cities in the nation, Ft. Sam Houston dodged a bullet with the loss of only 329 soldiers in the latest round of cuts. The Army post is part of Joint Base San Antonio, which includes Randolph and Lackland Air Force bases.

The government sector employs 17.8% of the Alamo City’s workforce, largely due to the military presence. Joint Base San Antonio, the Department of Defense’s largest joint base, remains the largest employer in the region. The number of employees has risen by nearly 20,000 since 2011.

San Antonio benefited from the Base Realignment and Closure in 2005, gaining $3.4 billion in construction that provided an $8.3 billion economic impact. The BRAC also resulted in the consolidation of five military education training programs from across the country at the joint base and the creation of the military’s largest inpatient health care facility.

“While the city is regarded as a winner from the last realignment, future cuts in federal or military spending could present challenges,” Moody’s analyst Adebola Kushimo warned.

Fort Sam Houston LP, a single-purpose entity whose members are affiliates of Lincoln Property Co. and the Department of the Army, previously issued debt to replace 925 Army family housing units in San Antonio. Unit tenants pay rent based on the Department of Defense’s BAH rate for San Antonio, in accordance with their pay grade. Planned construction for all new and renovated units is complete, and 925 new and renovated units are currently online.

During the 2005 BRAC, the Defense Department’s medical joint cross service group ranked FSH sixth out of 223 bases in terms of military value. The JCSG recommended forming a joint enlisted medical training program for all FSH services, resulting in a projected net gain of 7,648 military and 1,624 civilian personnel at FSH.

Standard & Poor’s analyst Raymond Kim maintained a stable outlook of the Ft. Sam Houston housing project’s AA rating, citing strong debt service coverage, solid management and low competition.

“Ongoing governmental subsidies, other support, and oversight generally limit volatility, with the overall importance of the service delivered limiting the potential for negative government intervention,” Kim said.

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