AGENDA #10b

 

BUDGET WORKING PAPER

 

TO:                  W. Calvin Horton, Town Manager

 

FROM:            James M. Baker, Finance Director

 

SUBJECT:       Refinancing of Library and Other General Obligation Bonds

 

DATE:             April 2, 2003

 

 

This memorandum is in response to a Council member’s question regarding the potential refinancing of General Obligation bonds issued for construction of the Library or potential refinancing for other General Obligation bonds issued at interest rates higher than today’s market.

 

BACKGROUND

 

Normally, General Obligation bonds can be refunded (refinanced) when there is a reduction in interest rates on the refunding bonds that results in a reduction in interest costs over the maturity period of the bonds.  The Local Government Commission (LGC) establishes criteria (level of savings) that must be met to refund bonds.  The Commission requires local government units to use a financial adviser in refunding transactions to determine the feasibility of a refunding.  At various times, financial advisors may independently make recommendations to local units on refunding bonds based on the criteria established by the LGC.

 

DISCUSSION

 

The Town issued General Obligation bonds in 1988 ($500,000), 1989 ($1,150,000) and 1992 ($2,350,000) totaling $4,000,000 for construction of a new Library.  Based on refinancing feasibility and market interest rates last year, all of the Town’s outstanding Library bonds issued in 1988, 1989, and 1990 were refinanced in March of 2002.   Debt service savings on these bonds and other General Obligation bonds included in the refinancing totaled about $160,000 or about $20,000 annually over an eight year period from 2002.

 

We, along with independent financial advisors, review the Town’s outstanding General Obligation bonds based on the refinancing feasibility criteria.   In our most recent review, we have determined that currently there are no additional General Obligation bonds that meet the feasibility criteria that would result in annual debt service savings. Because of the refinancing completed last year, the Town’s oldest outstanding bonds were issued in 1996, and do not yet meet the established feasibility criteria that would result in annual debt service savings.