What Happened?
Gretna, Louisiana, recently refinanced $6 million in bonds funding public works projects at a 2.05 percent interest rate. The refinancing push is expected to save the city $70,000 annually, or a total of $640,000.
Goal
Prior to the refinancing move, Gretna was paying interest rates between 3.5 and 4.5 percent on $6 million in bonds. The city repays these bonds with annual sales tax revenue. The bonds were originally issued to help pay for improvements to the city’s water and sewer plants. With the savings generated by the refinancing strategy, Gretna plans to offer 3 percent pay raises for more than 200 public employees, The Times-Picayune reported.
The city of San Antonio sold $233 million in bonds at a combined interest rate of 2.83 percent to help save taxpayer dollars on streets, parks and other capital projects. In addition, San Antonio refinanced $72.5 million in existing bonds and certificates obligated at a 1.68 percent interest rate to generate $6.7 million in savings. The city refinanced in an effort to maintain its AAA general obligation bond rating as well as free up capital to support improvement and maintenance projects.
Similarly, Aitkin, Minnesota, was able to refinance city bonds and generate $73,000 in savings. The city refinanced its utility revenue crossover refunding bonds at an interest rate of 1.89 percent, down from 4.20 percent prior, the Aitkin Age reported.
Evaluating Refinancing Measures
A recent study published in the State and Local Government Review analyzed state and local government debt refinancing measures to determine best practices for different circumstances. According to the research, debt refinancing has become a significant budget balance strategy in light of the recent economic downturn and slashes to local budgets. In Chicago, for example, refinancing debt was able to generate $142 million in budgetary savings – accounting for 22 percent of the city’s budget deficit in 2011.
To effectively refinance debt and generate savings, the report outlined some prudent debt refinancing principles that should be used to evaluate strategies before implementing them:
- Intergenerational equity: The incidence of a debt burden among different generations of taxpayers now and in the future
Does the refinancing benefit one generation more greatly than another?
- Economic efficiency: Related to the opportunity cost of refinancing the debt later at a greater savings amount.
Is this the best time to refinance?
- Measurability/certainty: Determines whether interest cost savings of a refinancing can be measured and guaranteed when the strategy is executed.
How much will we save on new and old bonds with the refinancing?
- Management flexibility: How much a refinancing has improved or constrained future financial decision making.
How much control does the refinancing transaction offer to the government?
After laying out a strategy for debt refinancing planning, the report offers recommendations for evaluating and implementing refinancing transactions. The tips include:
- Evaluate all possible debt restructuring strategies
- Identify which taxpayer generation will benefit from the refinancing
- Calculate and share when the best time would be to refinance
- Avoid risky arbitrage schemes or unguaranteed benefits
- Understand the differences between refinancing hard and soft liabilities
- Limit statutory constraints on debt managers from refinancing transactions
- Remain vigilant for new opportunities to refinance
The report emphasizes evaluating debt refinancing transactions thoroughly before making a decision, as each opportunity is unique to the circumstances.
Modern Bonds
Gov1 has reported on several bond strategies from refinancing transactions to social impact bonds.