Two recent moves by Springfield City Council at the request of the city’s Finance Department staff will together recoup millions through the refinancing of bonds.
Council is scheduled to vote Nov. 29 on a proposal to issue $16 million in special obligation refunding bonds for a sewer system improvements project completed in 2012. The refunding bonds could save the city 11.5%, or about $2 million.
At the Nov. 15 council meeting, Finance Director David Holtmann explained the city’s debt policy allows for the refunding of outstanding debt if the present value savings is approximately 5% of the principal amount being refunded. All outstanding debt is reviewed periodically to determine if there is a cost-savings opportunity.
Additionally, on Nov. 1, council authorized the issuance and sale of refunding bonds of up to $3 million. At the Oct. 18 meeting of council, Holtmann explained these would refund bonds used to fund Springfield center city development, specifically for improvements to the Jordan Valley Park.
The Jordan Valley Park refunding bonds are expected to produce an annual savings of about 19%, or $500,000 over the remaining term of the bonds, as the previous interest rate was high, according to Holtman – about 7.5%. Holtmann said about $2.6 million remained outstanding on the bonds, and the city was able to save almost 19% of the total interest cost.
Holtmann said about $17 million of the sewer refunding bonds, which the city is currently working on, remain outstanding.
Municipalities market their bonds on the open market, which sets the interest rate, Holtmann explained. Springfield can take advantage of savings because of its high credit rating.
“We’re an AA1-rated entity, which is a very high credit-worthy designation – we can borrow at a lower interest cost than a lot of the corporations out there,” he said.
Interest rates now are historically low, according to Holtmann. The city’s borrowing cost for the refunding bonds is 1.7% for the Jordan Valley Park issuance and 1.6% for the sewer bonds. That’s well under what Holtmann called the “true interest cost” – the actual cost of taking out a loan, including all ancillary fees – of 2%.
This is not the first time the city has been able to recoup costs through refunding bonds, added Holtmann.
“This is kind of the second wave of refunding that the city has done,” he said. “We did some earlier in 2017 when rates started to drop. We did a series of five different bond issues, and we were able to save some significant money at that point on those five series, somewhere in the neighborhood of about $12.5 million interest.”
Bonds must be callable in order to be refinanced, according to Holtmann, and it will be two to three years before the city has another opportunity to issue refunding bonds.
“That is something that we try to look at – that is what Finance is charged with doing,” he said. “We work with our municipal adviser, and we look for when we can have those market opportunities. When they’re available, we try to do that to save as much as we can.”
Holtmann said there’s no guarantee the interest rates will be as low as they are now when the next refunding opportunity arises.
“Will the rates be as low as they are now? That’s anyone’s guess at this point,” he said. “I would hate to think that they’ll still be this low, but who knows?”
He noted there are good and bad sides to low interest rates. While the city benefits from getting to borrow at a lower cost, retirement plans and other personal savings instruments can take a hit.
County lockup comes in on time and under budget.