Refinance means savings for city
By Traci Chapman
Healthy sales tax collections and low interest rates could mean a savings for the city of Mustang of more than half a million dollars on bond debt over the next several years.
Mustang City Council unanimously approved a resolution refinancing several bonds during a Monday special meeting. The bottom line was the reduction of interest from more than 5 percent to 2.1 percent and a partial “lump sum” pay-down of the current $8.3 million debt, among other benefits, City Manager Tim Rooney said.
“It’s a real positive for Mustang for a lot of reasons – it’s a smart financial move,” he said.
Allan Brooks of Public Finance Law Group and Rick Smith of Mutual Finance Service, the city’s bond attorney and financial adviser, respectively, initially presented a possible scenario for Mustang City Council at its regular Tuesday meeting. Brooks returned for the special Monday meeting to provide updated figures and answer several questions posed by Ward 6 Councilman Don Mount before the meeting.
Mount voted with his fellow council members in favor of the refinance. The resolution required a “super majority” – six out of seven council members voting for it – because it involved financing.
What this means for taxpayers and for the city itself is the ability to get out from outdated and unattractive terms on the unpaid debt, Brooks said. The city’s debt was incurred by Mustang Improvement Authority. Over the years, the authority has accumulated surplus sales tax, which cannot be used for any other purpose, Brooks said. By refinancing the debt, the city can apply that surplus to the debt, shorten the debt term and save money, he said. It also allows the city the opportunity to pre-pay the bonds without penalty if it is able, Brooks said.
“The Authority/City has been saddled with outdated debt documentation since 1999,” he said. “We have been watching for an opportunity to rewrite the underlying documents for years, but it has never been cost effective to do so.”
The city issued bonds in 1999 for capital improvements. In 2006, city officials approved the refinance of those bonds, but they kept in place the original loan agreements, Brooks said. With those agreements came certain stipulations that were commonplace at that time but which are no longer necessary for the city. One of those requirements was the city must set up a debt service reserve.
“It was a common practice at that time – it guaranteed the city would have a year’s worth of payments in case there was a problem,” Brooks said.
Times – and financial prospects – have changed since that time, the pair said. Mustang would no longer need to hold the reserve, now totaling more than $2.66 million in its coffers and instead could use the funds to pay down the existing obligation. In order to do so, however, council would need to approve new contracts, Brooks and Smith said.
Financing the bonds with BB&T Bank, the notes would earn 2.1 percent interest, rather than the 2.2 percent interest originally thought by Brooks and Smith, resulting in a gross savings to the city over the old contracts of $973,019, Brooks said.
“The term of the 2014A Note would be approximately 3.33 years shorter than the 2006 Bonds being refinanced,” Brooks said. “This adjustment, together with a lower interest rate, results in a reduction of the principal amount of the 2014A Note from $8,305,000 to $7,740,000.”
Legal and other costs for the refinance would total $225,850, Brooks said.
“For lack of a better term, the stars have lined up,” Brooks said.