Thomas Breen photo
Acting Budget Director Michael Gormany and Controller Daryl Jones.
The city saved $3 million in debt service — and pocketed nearly $5 million — by refunding decade-old bonds. Without playing politics.
The city notched those savings last week following a negotiated bond sale at the most recent city Bond Sale Committee meeting.
According to the final bond sale statement, which can be read in full here and which was posted to the MuniOS website on Thursday afternoon, the city issued $28.94 million in refunding bonds and $60.7 million in new general obligation bonds. The former are slated to help pay down debt and, the latter are to be used for upcoming, budgeted capital projects.
Unlike the city’s largest ever bond refunding in Aug. 2018 — which “scooped and tossed” millions of dollars in debt for future generations to bear in order flatten out upcoming debt payments that were otherwise slated to spike, and to cover general operating expenses and avoid an election-year tax hike — last week’s nearly $29 million refunding will save taxpayers roughly $3 million over the life of the bonds. That’s because the city and its hired bankers successfully secured a lower interest rate and a more favorable payment schedule for existing debt.
The bonds that were refunded were initially issued back in 2010 at an average coupon, or interest rate, of 6.57 percent, City Controller Daryl Jones said.
Those bonds had initially been issued under a prior administration to refund existing debt and were “callable” — meaning that, a decade in, the city could go back and refund that old debt at a new, lower interest rate.
Which is exactly what the city did.
Jones and city-hired banker Rocky Query said, and the final bond statement bears out, that the city secured an all-in interest rate, or financing cost, of 2.3 percent on the refunding bonds.
The bonds were also sold with a 5 percent coupon at a price higher than the nearly $29 million “par amount”, thereby allowing the city to take in a $4.997 million up-front premium, without extending the final due date of the bonds — also known as their “maturity” — behind their initial final payment date of 2030.
“The premium was contributed to the refunding bond escrow account and resulted in the lower amount of new bonds required to pay off the outstanding principal amount of refunded bonds of $32.37 million,” Jones said.
“There was no extension of debt and debt service savings were realized in every year until maturity.”
The new general obligation bonds, meanwhile, were also issued at premium prices — generating a $10 million-plus premium, which Jones said will be combined with the par bond amounts to cover projects laid out in the city’s recently passed two-year, $70.7 million capital budget.
“Issuing sufficient bonds to cover two years of capital project needs was designed to lower the total costs of issuance paid by the City and allowed it to take advantage of the current low bond yields available in the market,” Jones said.
He praised the sale as being an unequivocal “positive story for the city” — with the interest savings on refunding, the cost issuance savings thanks to the new two-year capital borrowing plan, and the flattening out of annual debt payments over next five to 10 years.
“Borrowing is going down for the city,” he said, which “brings things to a state of good repair.”
Financial Review and Audit Commission (FRAC) Chair Mohit Agrawal (pictured) also applauded the bond refunding as a clear “sign of good financial management.”
The 2010 bonds held remarkably high interest rates for a municipality, he said. The city did the right thing — and, based on his reading of the refunding, the expected thing — in finding better interest rates for those bonds once they became callable.
Agrawal did raise a question, if not a concern, about the strategy of taking a higher interest rate than necessary and an up-front premium rather than taking no premium and locking the city into exceptionally low interest rates for the full 20 years of the new general obligation capital bonds.
The city could have issued new general obligation bonds for its capital projects with a market-level interest rate of below 3 percent, he said. It then could have kept those bonds non-callable, with no premium, and ensured that the city would be paying that low of an interest rate for the duration of the bonds. Instead, it chose to go with a higher coupon rate of 5 percent, and take a premium up front, and keep those bonds callable so that a new lower interest rate can be secured in a decade.
If interest rates increase over the next decade, he said, the city could find itself stuck with the current 5 percent rate and no better alternatives. Granted, he said, interest rates in this country have been remarkably low for decades, and are unlikely to skyrocket anytime soon.
“At the end of the day,” he said, “it’s good financial management that we refunded high interest-rate bonds.” And taking a premium is not a bad idea in and of itself, he said, so long as it is used in a responsible way — like invested in the pension funds, or used to pay down existing debt.
Jones said that using premium bonds makes financial sense for the city because, simply enough, major bond investors prefer premium bonds in low interest rate markets. “They want price protection from the risk of rising interest rates that could cause their bonds to trade at a discount,” he said.
“The effect on the City is it is able to issue a lower par amount of bonds to realize required proceeds. It also increases the likelihood that the City will have a refinancing opportunity in the future if interest rates stay low. Responding to this investor preference allows the CIty to achieve the lowest yield on the bonds through the combination of price and coupon. Achieving the lowest possible financing cost is one of the primary goals in every bond sale.”
Expenditure Controls In Place
Also last week, Jones and city Acting Budget Director Michael Gormany sent out an expenditure control memo to all City Hall staffers that ordered a freeze on all purchases of non-essential items such as furniture, office supplies, and new consulting and professional services. The memo further noted a freeze on all non-public safety overtime, and a tighter approval process for all contracts and requests for proposals (RFPs).
“Recent underlying assumptions and projections for the current fiscal year State budget and other City revenue sources are projected to be lower than budgeted or will not be received this fiscal year,” the memo read. “Recent personnel and non-personnel expenditures for various City and BOE Departments and programs are projected to exceed budget.”
Click here to read that memo.
Jones said that this memo was entirely “pro forma.” He and Gormany send out a similar memo every fiscal year, he said.
“Mike and I are just being proactive,” he said. “We’re being fiscally conservative, as we’ve always been.”
“There’s no rhyme or reason why we send it out in October or November,” Jones said when asked why the memo was distributed on the date it was, the day after challenger Justin Elicker handily defeated incumbent Toni Harp to become the city’s next mayor-elect.
They always do all they can to ensure that the city balances its budget at the end of the fiscal year in June, he said. This is one such measure that has become a key part of the stretched city financial staff’s toolkit to impose such citywide fiscal discipline.
FRAC Calls For New Deficit Projections
FRAC’s Agrawal, who is also a policy aide for Gov. Ned Lamont and a newly appointed member of Elicker’s mayoral transition team, told the Independent that FRAC has recently taken some proactive measures to up its scrutiny of the city’s fiscal health.
At the commission’s regular monthly October meeting, FRAC members unanimously passed a motion that encourages the city and the Board of Alders to fund a new independent study of short- and mid-term revenues and expenditures to give a better sense of the city’s structural deficit. The goal is to determine how much money the city will be in the red year over year at its current level of healthcare, pension, debt service, and public safety overtime funding versus its current level of property tax revenue collection and state aid receipt.
The motion that FRAC passed reads as follows:
“That there be an independent study or consultant engaged to create 1‑year, 5‑year, and 10-year projections of current services revenues and expenditures. If the city were to fund this study, then the RFP should be issued by FRAC, in accordance with the city’s charter and purchasing rules. The next budget should be accompanied by a five-year or 10-year plan to address the deficits, if any, that would be found by the independent study.”
Agrawal said the motion came out of his and fellow FRAC commissioners’ reading of the city’s five-year financial plan.
“We can’t use these tables to estimate the deficit the city is facing,” Agrawal said about the city’s five-year plan. “We don’t know where we are if we don’t know what are the deficits for the next five to 10 years.”
This resolution is not binding, he said, but is only a recommendation from FRAC to the city that it hire a consultant to take another look specifically at 1‑year, 5‑year, and 10-year revenue and expenditure projects. “We can’t mandate that the city do this,” he said.