Council mulls bond refinance to reduce debt
Gahanna City Council is considering legislation that would allow the city to refinance bonds from 2005 in an effort to reduce debt by about $65,000 annually.
Finance director Jennifer Teal said the bond refinance would be just like a home mortgage that one would refinance to reduce interest paid and monthly payments.
"If you think about your home mortgage, ... you got 6.5-percent interest and now can get 3.5 percent," she said. "We're not asking to buy more. ... We're asking to buy back at a lower rate."
She said Brad Sprague of Prizm Municipal Advisors identified the opportunity to refinance bonds that would achieve savings in excess of the minimum threshold for a refinancing.
Teal said the bonds issued in 2005 for various municipal purposes is ripe for savings of about $65,000 per year, and it also could be advantageous to refinance bonds from 2007.
At council's request, Teal will make a public presentation during the Dec. 3 regular council meeting concerning the steps taken to prepare for a refinance, including a visual diagram. The meeting will begin at 7 p.m.
Council is considering two separate ordinances: advanced refunding of the 2005 bonds not to exceed $11,300,000 and advanced refunding of the 2007 bonds not to exceed $8,850,000.
During the Nov. 13 finance committee meeting, Sprague requested the ability to refinance both the 2005 and 2007 bonds.
"If we were doing the deal today, we would not do the 2007," he said. "The savings are not at a sufficient level on that bond issue."
He said the federal government has established rules that provide the opportunity to do an advance refunding.
"What that is, your bonds can't be taken away from the investors on the 2005 bonds until 2015 and on the 2007 bonds until 2017," he said. "It's not like a home mortgage, where, when you refinance, you pay off the old one. The money you borrow now goes into an escrow account out to 2015 and 2017. That is called an advance refunding."
The government allows advance refunding only once during the life of the bond issues.
Sprague said the rule of thumb in the market is, if you can,t save 5 percent on your principal amount, don't do it.
"On the 2005 (bond) we are saving 10 percent, so everybody would do that deal," he said. "The 2007 we are saving about 4.5 percent. Your ordinance (requires) 5 percent. Most communities would do a 4-percent deal."
Sprague said he's requesting authorization to refinance the 2007 bonds in case rates drop.
"We want to be in a position to take advantage of it," he said.
Council member Dave Samuel asked Teal if this is the first time Gahanna has refinanced bonds.
"In the early 1990s, we did one related to a health-care facility," Teal said. "We partnered to help get it done."
Council also is considering debt policy legislation.
Council approved legislation in May, requiring Teal to complete a debt policy in 2012 for council's review and approval.
Since that time, the finance department has been working with Sprague to draft a policy and provide unbiased advice related to the city's debt portfolio.