Lansdale Council OKs $10M Bond Borrowing at .75%
Council voted last week 8-0-1 to borrow $10 million to help fund $20 million in proposed infrastructure repairs. Interest rates are at a 47-year low, according to asset management firm Boenning & Scattergood
Lansdale Borough is going to do business like it’s 1965.
Last week, council voted 8-0-1 to approve the borrowing of a $10 million bond at an initial interest rate of .75 percent — a historic rate that hasn’t been seen in 47 years.
The bond will be put toward the funding of $20 million in capital infrastructure and building repairs and refurbishments.
The balance of the capital reserve funds in 2013 is proposed at $10.9 million; this amount is after a $2 million transfer to the general fund reserve balance, and $11.5 million in investments paid or to be paid.
The debt service in Lansdale at present stands at $1.6 million, or 5 percent of the entire proposed 2013 budget.
“The debt service will never go over that $2 million threshold,” said Ed Murray, managing director of the public finance team of asset management firm Boenning & Scattergood Inc.
“The structure of this indebtedness is a wrap-around debt. In 2010, you had one outstanding issue. It cleared up some of the old sewer debt, the parking debt, some of the electric debt and some of old general obligation debt. Most of that is going to go away in a relatively short period of time. This will wrap around that old debt. It never goes higher. There will never be an impact to the General Fund greater than what you see right away,” Murray said.
There will be no impact to debt service in 2013. In 2014, the debt service goes up $260,000 ($1.86 million) and $140,000 in 2015 ($2 million). All in all, that is $400,000 in three years.
The yield Lansdale will pay in 2014 is .75 percent, Murray said. The yield reaches a 1 percent interest rate in 2022, and a 2.8 percent rate in 2030. The total net interest rate on the entire issue is 2.86 percent, he said.
“It doesn’t get to 3 percent until the very last maturity of 2034,” Murray said. “These are some of lowest rates we have seen in over 47 years. LBJ was the president at the time.”
Murray said interest rates decreased $975,000 in a three-week period. The decline is due to economic malaise attributed to the financial cliff and the European crisis, he said.
“There was no time in the last 46 years that you could have gotten mortgage or borrowed,” Murray said. “As a matter of fact, the city of Philadelphia was borrowing for the school system in 1954, and it got approximately the same rates you got today.”
An auction on the bonds for each maturity for each year was held Nov. 28, Murray said, and purchasers purchased all bonds.
“If someone is voluntarily locking up their money, for that amount, for that duration, even if inflation is 2 percent, they are getting virtually nothing to buy the bonds,” Murray said. “If you adopt the motion, and accept it, you will lock in those rates in that debt service schedule.”
Murray said the $10 million borrowing maintains bank-qualified status for the bonds. This means local Pennsylvania banks can deduct the interest carry cost on their books. Murray added that there are a lot more interested parties now who want to purchase the bonds.
Futhermore, the bonds being bank qualified gives Lansdale the option to redeem the bonds in order to refund them to a lower interest rate in the future. If the bonds were non-bank qualified, then Lansdale wouldn’t be able to call the bonds for 10 years.
“Since the bond is under $10 million, it’s five years. You can call the bonds in half the time and enjoy $850,000 worth of saving and lower interest rates,” Murray said. “We thought this was a measured response to the $20 million of unfunded projects.”
Earlier in the meeting, resident Leon Angelichio requested the borough be prudent in its method of paying the debt service over time. He said the taxpayers could face a significant tax increase to cover the additional debt service over the two bonds.
“Are we really weighing what we need versus what we want to do, so it’s not on the taxpayer? Maybe we can slow the process down a bit. Are we really leaning on taxpayers too much?” he said.
Administration and Finance Committee Chairman Dan Dunigan said the borrowing is a prudent approach and the down economy is working to Lansdale’s benefit.
“Interest rates are ridiculously low. There is a benefit of not spending the dollars we have today. We’ll have the opportunity to use taxpayers’ dollars 10 years from now, worth far less, to repay those kind of things,” Dunigan said.
Dunigan said it was the ideal time for Lansdale, especially with its capital needs list, to take advantage of the rates.
Councilwoman Mary Fuller said the borough must plan for improvements and budget for them, and Lansdale is doing exactly that with the borrowing of $10 million.
“We are thinking ahead. We are planning for expenses. They are not a ‘wish list.’ These are things that need to be done and we are planning for it,” Fuller said.
Lansdale Bond Counsel David Nasatir, a partner with Thorp, Reed and Armstrong, agreed that it was a great time to borrow the funds.
“The debt service approved tonight is a contract that requires you to pay it back a certain amount of times, at certain rates. The borough has set money aside each year out of its general budget to pay the debt service over a lifetime of debt,” Anderson said. “It means you have full faith and credit that you stand behind.”
Most importantly, Lansdale must use the $10 million in funds in the manner described — for repair and refurbishments, he said.
The bonds are registered in the name of Cede & Co., a division of the Depository Trust Co. of New York.
Council Vice President Paul Clemente abstained from the vote, as he is a financial advisor at Boenning & Scattergood.