City could save $1.6 million
By Stephanie Johns
The Madison City Council heard from Todd Barnes, a managing director with Robert W. Baird & Co. in Atlanta, regarding an advance refunding of the Series 2005 Water & Sewer Bonds during its recent work session.
“With the various scenarios, you could save anywhere from a little over $400,000 up to $1.6 million,” he said. “On an annual basis that’s anywhere from $23,000 to $93,000 a year annual savings.”
Madison Finance Officer Karen Guinn as well as Wayne Tamplin, a partner at Treadwell, Tamplin & Co. and the city’s auditor, took part in the discussion.
Barnes pointed out that interest rates are “extremely low” and that the city could re-invest its debt at a lower rate.
The city currently has a 2005 bond issue with a call date of July 1, 2015. Barnes explained that a call date is the earliest date that a bond can be called in from investors.
Barnes said that a refunding could lead to gross savings over the remaining term of the debt by lowering interest costs and therefore payments.
Barnes shared information detailing four refunding options and told council members that they could choose which option they prefer later or even closer to the call date.
As noted in an e-mail Barnes wrote addressed to City Manager David Nunn, one option would have the city “just refunding the callable maturities (2016-2030) of the ‘new money’ portion of the 2005 Bonds on a tax-exempt basis.”
The U.S. Securities and Exchange Commission defines ‘callable maturities’ as “bonds than can be redeemed or paid off by the issuer prior to the bonds’ maturity date.”
Another option would have the city refund all of the callable maturities (2016-2030) of the 2005 Bonds. He wrote, “The ‘new money’ portion is refunded on a tax-exempt basis and the ‘refunding’ portion is refunded on a taxable basis.”
A third option would have the city refund all of its outstanding bonds, “even the non-callable maturities in 2014 and 2015.”
For this third option Barnes wrote that the city’s debt service reserve in the amount of $852,562.50 would be used toward retiring the old bonds and a new reserve equal to half of what it was previously or $393,714.50.
The fourth option would have the city do as described in option three as well as insure the bonds and “contribute all of the old reserve to the retirement of the old bonds and fund the new reserve requirement with a surety bond.”
He said the fourth option would give the city interest rates savings and investors a sense of comfort that they will get paid in full and on time.
Barnes told them that Madison would have to pay between $10,000 and $12,000 to receive a credit rating on its water and sewer bonds, which he said would be necessary for them to pursue these options.
He said getting the rating would be “a pretty straightforward process” and that the rating received would help determine which option would be best.
He noted the possibility for “significant savings.”
Tamplin told the council that “it’s time to do this.”
“A few years ago it didn’t make any sense,” he said. “It’d behoove us to go ahead and exercise this.”
When asked by Councilman Michael Naples which option he’d recommend, Tamplin said he thought option three or four.
Printed in the February 28, 2013