City weighs options on refinancing TIF debt

by Emmitt B. Feldner of The Review staff

PLYMOUTH – The city is looking to refinance two outstanding bond issues in order to save money on its tax incremental finance district – but only if it doesn’t negatively impact the city’s bond rating.

The City Council Tuesday approved offering $8.65 million in general obligation bonds to refi- nance revenue bonds from 2006 and 2007 instead of $7.91 million in new revenue bonds – but only if the new bonding does not decrease the city’s bond rating from Moody’s.

Phil Cosson of Ehlers and Associates, the city’s financial advisor, explained that the city has three options for refinancing the bonds which are currently at 4 and 4.38 percent interest.

“Frankly, there’s not a clear-cut favorite,” Cosson said of the three choices. “It’s kind of like the Final Four, but it’s a final three – and we all have a clear cut favorite in the Final Four, I hope.”

Refinancing the debt as revenue bonds would likely earn the city a lower interest rate, though not as low as the general obligation bonds, but would still mean a savings to the city of about $40,000 a year in interest payments.

General obligation bonds would count against the city’s debt limit, unlike the revenue bonds, and would take that figure to about 80 percent of the state-set limit.

“As a result of that, I’m not saying it would happen, but you could see a downgrade,” in the city’s bond rating, Cosson warned. That would in turn mean the city would have to pay a higher interest rate for borrowing.

The general obligation bonds would sell at a lower interest rate than the revenue bonds, however, and would mean savings to the city of $135,000 to $140,000 a year, according to Cosson’s projections.

Most of the borrowing covered in the two bond issues was for projects in tax incremental finance district four, which is currently running in the red.

While revenue bonds are repaid out of proceeds of the entities borrowed for – in this case TIF 4 and the Plymouth Utilities – general obligation bonds are treated as an obligation of the city.

The third option, Cosson said, would be waiting until the current bond issues can be called in 2017 to refinance, but that would cost the city any potential savings this year and next as well as run the risk that interest rates would be much higher by then.

“They are three pretty viable options and they all have pros and cons,” Cosson conceded. “To me, all of them make some sense.”

He said the revenue bond option would be the safest for the city, but the savings would be greatest with the general obligation bonds.

“I’d hate to see our bond rating change, but it’s hard to deny the significant savings,” of the general obligation option, Alderman Shawn Marcom stated.

Going the general obligation route would also limit the amount the city could borrow in future years for major projects until the city’s debt capacity, currently at 57 percent, would be back around that number.

“This is a large issue and it would eat up a significant amount of your borrowing capacity,” Cosson told the council.

It could take three or four years to regain the current borrowing capacity, Cosson estimated.

City Administrator Brian Yerges and Public Works Director Bill Immich both noted that the city is not currently looking at any major projects that would require a large borrowing over the next several years.

“We do have a policy not to exceed 60 to 65 percent of our borrowing capacity, but we did exceed that the last time we did utility borrowing because it saved us money,” Yerges noted.

Cosson said he could contact Moody’s to determine if the general obligation bonds would indeed lower the city’s bond rating.

“I’ll do whatever possible to soften that number and persuade them that this is a blip,” he said of the impact on the city’s borrowing capacity.

The council voted to go ahead with the general obligation bonds, but authorized Yerges to move ahead with the revenue bond option instead if Moody’s indicates that the general obligation bonds would negatively impact the city’s bond rating.

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