$192,000 savings may not be enough for SR to refinance municipal center
By: Darrell Todd Maurina
Posted: Friday, November 14, 2008 11:46 pm
St. Robert Finance Committee members reviewed a proposal that might save $192,000 to prepay the city’s bonds for the municipal center that houses city hall, Drury University’s St. Robert campus, and the St. Robert post office substation, but decided not to present the proposal to Monday’s city council meeting until the city administrator can do additional review.
Herren said the idea dates back to contacts made back when Chris Heard was serving as the assistant city administrator.
“He got tied up with a financing consultant who does business with Security Bank and I think some other banks here in this area,” Herren said. “He made contact with me again and said that now might be the time to look at possibly refinancing the bonds here on the municipal center. He gave me a proposal and here I’m looking at how the interest rate kept dropping and dropping and dropping.”
Herren brought Mike Dunbar, a local attorney who works with Security Bank, to the Nov. 6 meeting of the finance committee to review the proposal. Dunbar said the proposal has some merit, but not as much as it would under different market conditions.
“Back in September it would have been much more feasible for you to refinance; it’s still a savings if you did it today of about $192,000,” Dunbar said. “I know everybody thinks with interest rates going down that means your rate would go down, and it’s actually the opposite. The bottom line is the market has been flooded with municipal bonds because they are a safe way to invest. It’s not really like investing in the stock market because you are looking at cities that typically have the ability to repay.”
The method being proposed would be an “arbitrage,” Dunbar said.
“In your terms, it’s just an escrow account where you deposit your $2 million into an escrow that prepays your bonds, and then as they come due, they pay them off and it works as cash collateral,” Dunbar said.
Rather than acting immediately, Dunbar recommended that city council members put the mechanisms into place to allow refinancing so it could be done quickly rather than having to wait three to four weeks for a council meeting and for bond attorneys to act.
The city’s next interest payment isn’t due until March, Dunbar said.
“It doesn’t cost you anything to get ready, and so if you move forward and get ready, then if it’s time to take advantage of it, you can,” Dunbar said.
“So we can do a little bit of preplanning in advance so we have the paperwork done all the way and then we can say the move when we’re ready, based on their guidance?” asked Alderman Theresa Cook, who chairs the finance committee.
Dunbar said that’s correct.
“There’s no downside to being prepared,” Dunbar said.
Herren said he wanted to present the proposal to the finance committee but said it’s probably not yet ready to go to the full city council at the Nov. 17 meeting, noting that if the city needs to borrow $2 million, bankers will ask the city to borrow an extra $200,000 to provide an added financial cushion.
“It has to be planned very careful. The margin is so tight that it is not to our benefit at this point,” Herren said. “I think we need to wait and look at the market and see what we need to do.”