The City of Rushford is once again looking at a refinancing opportunity for cost savings on an existing bond. Financial Consultant Michael Bubany, of David Drown & Associates, presented the option to the council at the September 13 meeting. He also provided details of a financial request that would net the city some unexpected revenue.
The bond up for discussion originated with a project in 2014. With the callable date of February 1, 2022 approaching, Bubany began looking at opportunities for advance refunding or refinancing of the bond to take advantage of interest rates. While advance refunding was an option, a tax law change in 2017 meant the city would be paying taxable rates. In his letter to the city, he noted it was “deemed to leave too much savings ‘on the table.’”
Bubany also noted the bond refinance would not be rated. While Rushford is an A-rated community, seeking a bond rating from Standard & Poor’s can take up to a month, keeping the city from locking in interest rates. In addition, the city would pay for the cost of the rating whether or not it went ahead with the refinance. “You’d just be out the money,” said Bubany.
With current refunding, the city can close on a new deal up to 90 days prior to the call date, locking in rates, “to avoid the uncertainty of the market.” He proposes refunding the new bond, $802,000, utilizing cash in the Debt Service Fund and through a Minnesota Rural Water Association MIDI loan. This option offers direct bond placement and lower issuance costs. The interest rate he’s confident he can obtain is 1.8%. The current projected savings are $132,000.
The term of the loan can be designed in a number of different ways, including mirroring the current note, saving some year to year and seeing some budget relief immediately, or shortening the term, seeing savings on the back end of the bond, as was suggested by Councilor Leigh Volkmann. Both Bubany and City Clerk Kathy Zacher cautioned the council that a new bond will be issued in 2022 for the state-mandated Highway 30 project on the west end of the city. “It might take a little of the sting off the new bond,” added Zacher.
Bubany offered to work with loan modeling to see if he can restructure the loan so the payment is as close to the current as possible and still shorten the term length. He noted the interest rate may shrink if the term is shorter, still he pushed for his initial proposal of mirroring the current note. “If we do it this way, staff could knock off $20,000 on the preliminary levy. If we do it your way, they can’t.”
Volkmann continued to push for shortening the term, noting it would free up the future, instead of right now. Councilor Sally Ryman pointed to project scheduling and the financial modeling Bubany has provided noting it keeps the tax rate steady, as opposed to spikes in the rate when new projects are undertaken. “There’s a process in place so taxes remain about the same. Our infrastructure is old and we need to make sure we have a plan in place. That’s the piece I want to look at before we discuss shortening,” stated Ryman.
“It’s not a bad practice [shortening]. What you’re weighing is freeing up money now or not. My only concern is we can’t move as fast as rates,” said Bubany. “As much as a half point change in rates and you could see $50,000 in savings.”
The council approved applying to Minnesota Rural Water Association, taking action when conditions are favorable. Bubany will be back at the October 12 meeting for further updates and later this fall for a complete financial review of all of the city’s ongoing bonds and upcoming projects.
He also recommended the city hold a public hearing for a request by Winona Health for Rushford to act as an issuer of conduit revenue bonds for Health Care Facilities Revenue Refunding Notes. According to Bubany, cities have the opportunity to “assist private-sector entities if the project is deemed to be in the public interest.” This was done previously in 2017. While the city is not liable for payments and the process has no impact on the city’s credit rating or debt limit, the city does receive an issuer administrative fee and a quarter to half of a point is common.
“The government has ways to borrow money in ways others can’t,” he added. “There are millions of dollars available – it’s a good chunk of change. Each community is allowed to issue up to $10 million each year for this non-bank qualified bond.” He stated he’d discussed the administrative fee with Winona Health’s rep, but received pushback on the amount, leading to repeating conversations between the two and himself and city staff. “I haven’t pushed a policy on it because it doesn’t happen that often. Maybe we need a policy to avoid this back and forth,” he suggested.
In Rushford’s case, he suggested the city request $40,000, which falls between a quarter and half per point. “I’m scared to tell staff to push it more than that because we could lose out on it. It’s $40,000 of unbudgeted revenue. I think it’s a fair deal.”
“I think it’s a valuable resource to the community to have Winona Health here. It’s good for them and it’s good for the community to get a little extra money.”
“We have a little trend with these folks now and they won’t hesitate to give Rushford a call in the future. That’s a positive,” said City Administrator Tony Chladek. “But, some kind of guidance would be good for staff in the future.” The public hearing on the request is October 12, at 6:30 p.m., at city hall.
Another item that was addressed was setting the 2022 budget and preliminary levy. At this time, the city is proposing no budget or levy increase for next year. A review of budget information led to a determination of not putting increases across the board, but really looking at where funds are needed. In Capital Projects, funds can be shifted between needs to keep things as consistent as possible.
While it was noted preliminary levies for other municipalities in the county seem “all over the board,” several were quick to note property valuations are up and it’s impossible to “know their stories” of needs and projects. As a reminder, both Zacher and Chladek noted tax increases come from three entities – the county, school districts, and municipalities. “It happens, but people need to read the fine print of where the money is going.”
“The reason we’re looking at no increase now is that we’re in a much better position,” said Mayor Terri Benson.
“It took us a while to recover from those years of no increases,” added Councilor Jim O’Donnell referencing the five years, 2011 through 2015, when the Rushford Council did not increase the tax levy.
“We’re able to carve off a reserve,” added Chladek. “Our folks do such a good job of saving and spending.” He also praised the city’s Public Works Department which has saved the city substantially during projects.
The council is expected to set the preliminary levy at the next meeting. The Public Comment Date (formerly called the Truth in Taxation hearing) will be December 13, with the final levy adopted December 30.
The next regularly scheduled council meeting is Monday, September 27, at 6:30 p.m., at city hall. It is open to the public.
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