The Hubbard County Board is eyeing approximately $270,000 in savings by refinancing two bonds into one debt service.
Two PFM Financial Advisors reviewed the board’s options at their Sept. 8 work session.
County Auditor-Treasurer Kay Rave noted that the refunding cost is about $50,000.
County commissioner Tom Krueger inquired how there could be savings when the interest rate would be higher than the original 2013 capital improvement plan bond and 2012 correctional facility refunding bonds.
Chuck Upcraft, a PFM senior managing consultant, said it’s “a little bit complicated and a little technical, but the overall yields in the municipal bond market are very low. They’re the lowest they’ve ever been. When underwriters purchase the bonds for resale, they do it in a way that what’s called the coupon rate – or the stated interest rate on the bonds – is higher than the yield on the bonds. What that means is you end up issuing a lower amount of bonds at perhaps a higher interest rate.”
In Hubbard County’s case, for instance, Upcraft said they could refund $4,565,000 of bonds with a new bond issue of $4,385,000. This reduces the principal by almost $200,000.
“The yields on your bonds will be lower than 1 percent and that’s really what effectively drives the savings,” he said. “In the first four years or so, you’d be saving roughly $40,000 a year, and the last few years roughly $20,000 per year in total debt service.”
County Coordinator Eric Nerness said, “These are historically low returns on the bonds, as you say. Is there a market for purchasers of these bonds?
Yes, replied Upcraft, saying there will be anywhere from five to 10 bids from underwriters. Investors want it, he said, “simply because there’s nowhere else to go. U.S. Treasury securities rates are very low, too. For ultimate purchasers of these bonds, their tax effective yield is higher than buying U.S. Treasury securities. The county has a very good credit rating, so they’re getting a very secure investment at a higher yield they can get from anything else in the fixed-income market.”
Rave pointed out that a lower debt also means a lower levy each year. “That’s a direct savings to the taxpayer,” she said.
Arcelia Detert, also a PFM senior managing consultant, said the board has two options: refinance the bond to realize a savings or shorten the bond term and make higher loan payments at a lower interest rate.
The board plans to take action in October.