by Eric Hagen
To save taxpayers’ money in the long term, the city of East Bethel is considering the short-term expense of refinancing debt.
Specifically, the East Bethel City Council is considering the refinancing of $1.43 million of debt remaining on general obligation bonds issued in 2005 following a referendum vote by East Bethel taxpayers to construct a fire station and weather warning sirens.
Kathy Aho, president of Springsted, Inc., the city’s financial consultant, said the city could save about $141,000 by refinancing to a lower interest rate. The interest rate market is at historic lows, so the time may be right to do this, she said.
The downside is that refinancing debt is not free, the debt service levy could not be lowered for another two years and the city could not refinance a few years from now if the interest rates continue to dip.
Aho said the city would be paying about $50,000 to get this refinancing done. City costs include issuance, underwriting, bond rating agency charge, printing costs, paying a registrar for new bond issue, paying an escrow agent that holds the securities and paying a third-party certified public accountant verifying the escrow calculations.
Councilmember Heidi Moegerle asked if the question the council faces is whether to spend $50,000 now in order to save $141,000 over the long term. Aho confirmed this is the question facing the council.
The debt service levy East Bethel taxpayers contribute to could not be lowered until 2014 because the 2005 general obligation bond had a call date of April 2014. A call date is the time when a regular refinancing could occur.
East Bethel is considering advance refinancing now because of the uncertainty of where the bond market will be in 2014, City Administrator Jack Davis said.
According to Aho, a process called crossover refinancing makes the most sense in this situation. The money from the bond sale would go into an escrow account, held by a bank. The money would be invested in U.S. Treasury securities and that money would pay the interest on the new bond issue.
The city would continue to make payments on the old bond issue through April 2014. At that point, the escrow pays off the remaining 2005 bonds and the city would start making payments on the new bond issue.
Aho said the bond repayment schedule goes out to 2026. Although Springsted plans to add a new call date to these refinanced bonds, Davis said there would only be a few years left on the payment at that point, so he could not see the purpose of refinancing again a decade from now. The city could not advance refinance again if it chooses that method now because this technique is only allowed once for a general obligation bond.
According to Davis, the city is still not at the point of no return. The council will see the terms and conditions of sale at its March 7 meeting. Should the council choose to not move forward with the bond refinancing at that time, Aho said the city would not be responsible for any fees.
If the council March 7 accepts Springsted’s terms and conditions and wants to seek bids, there would be fees the city must pay. Davis said the actual costs would be discussed March 7.
If the council is not satisfied with the refinancing bid results that could be available at the April 4 meeting, Davis said the council could decide not to move forward.
“We’re going to save taxpayers $140,000. That’s kind of hard to vote against for me,” Councilmember Steve Voss said at the Feb. 15 meeting.
Moegerle went back to the point of how they were essentially investing $50,000 to get $141,000 back. She said averaging out over the approximately 4,000 households would save a household only about $3 a year, so she was just wondering if the refinancing is worth the trouble.
Moegerle was fine with staff working with Springsted on preparing the evaluation of the bond sale for the March 7 meeting, but she could not say she would approve the bond sale at that time.
Should the city refinance this 2005 bond issuance, the city would need to have a review of its bond rating, Aho said.
Moegerle asked Aho if the bond rating reviewer would take into account that the city still has no businesses designated to hook onto the sewer and water system that the council in late 2010 issued general obligation bonds to pay for.
“The bonds that are outstanding are general obligation bonds and the anticipation will be that the city will pay those bonds,” Aho said. “You have not done anything that would indicate at this time that you would not pay those.”
“There may be questions. They were rated at the time based on the city’s general obligation pledge with less attention paid to the finance plan and certainly those are very key here. If you are anticipating that there would be a time where you would not honor those bonds, we need to know that and that would probably be the end of this discussion because we wouldn’t be able to enter the marketplace.”
Eric Hagen is at firstname.lastname@example.org