City finds fiscal silver lining in federal sequestration

by Emmitt B. Feldner of The Review staff

PLYMOUTH – The sequester may be squeezing some people and services, but it should provide a financial boon for the city and Plymouth Utilities.

The City Council Tuesday approved refinancing more than $3 million in utilities Build America bonds to take advantage of lower rates made possible by a sequester-triggered reduction in the tax rebate the city gets on the current taxable BA bonds.

Phil Cosson of Ehlers and Associates, the city’s financial adviser, explained that the switch from taxable Build America bonds to tax-exempt revenue bonds could save the city in the neighborhood of 5 percent in interest costs.

The BA bonds, $3.87 million worth, were issued in 2010 with an interest rate rising from 2.2 to 5 percent over the life of the bonds.

But, because those bonds included a provision to rebate 35 percent of interest costs to the city from the Internal Revenue Service each year, they worked out to be less expensive for the city than typical lower-rate tax-exempt municipal bonds.

“As part of the sequestration, one of the things that came out of that was a reduced payment of the interest rebate, to 8.7 percent,” Cosson told the council.

His firm had originally written the bond issue so it could be called and resold as tax-exempt if the interest rebate were lowered or eliminated, Cosson told the council.

“That tirggered the ability to refinance,” Cosson said of the reduced rebate, adding that his company has done similar refinancings for seven or eight other local governments. “They have worked well,” he noted.

The city had to wait until it officially got notice from the IRS of the reduced interest rebate payment for this year, Cosson explained. That notice did not come in until May 1.

He presented figures showing that with an interest rate of .75 percent rising to 3 percent on tax-exempt bonds, the utilities could save a total of from $181,000 to $318,000 in interest payments over the next 15 years, when the new issue would be paid off.

“At the end of the day, that’s a pretty significant savings,” Cosson said.

He explained that the resolution authorizing the new bonds, which would be sold next month, is written to ensure that the city will realize at leasta1percentsavingsininterestcostorthebondswillnotbeissued.

“That is sort of our safety net,” Mayor Donald Pohlman said of the resolution provisions.


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