Council approves $10 million capital project bond
Uncertainty in Washington, D.C., and talk of a fiscal cliff have created an unexpected bonus for Lansdale Borough taxpayers.
Bond borrowing rates have continued to decline this month and the savings have been hefty for the borough on a new $10 million capital project bond it approved Nov. 28.
“Between the 7th and today, interest rates have declined so much that the total debt service has gone down by $975,000 between the last time we presented and today,” said consultant Ed Murray of Conshohocken-based Boenning & Scattergood.
“We have now hit the historic 47-year low. There has never been a time in the last 4S years that you could’ve gotten a mortgage or borrowed” at rates lower than today, he said.
Borough council approved a $9.4 million bond issue in 2010 to fund long-term capital projects such as building and road repairs and other infrastructure upgrades, and set the borough’s debt service level at $1.S million annually for the duration of that bond.
According to Borough Manager Timi Kirchner, the borough currently has $24.4 million in various capital reserve accounts, of which $11.5 million in projects has already been spent or allocated. Subtracting a $2 million reserve leaves a $10.9 million capital reserve balance and an unfunded total of a little more than $20 million in future projects identified as essential needs.
Earlier this month, council’s administration and finance committee reviewed options for another $10 million borrowing in order to fund more work on the borough’s $42 million long-term capital project list. Of that $42 million, $11.5 million has already been allocated, and the $10.9 million already in reserves would be supplemented with the $10 million 2012 bond and possible future borrowings to finish that $20 million unfunded on the $42 million list.
Murray presented options for a $10 million bond borrowing in 2012 to council at its Nov. 7 meeting, and at that time discussed how the debt payments on the 2012 bond could wrap around the 2010 debt to create no budget impact in 2013.
His good news for council Nov. 28 was that global economic conditions have helped the borough get a better deal than it expected, even three weeks ago. Instead of debt service payments on the 2012 bond starting at $400,000 per year in 2014, market conditions now allow the borough to step up its debt service by $2S0,000 in 2014 and $1S0,000 in 2015 to pay for the new bond.
“The total net interest rate on the entire issue is 2.8S percent. So someone is voluntarily locking up their money for that amount, for that duration of time,” he said.
Those rates break down to a 0.75 percent interest rate starting in 2014, 1 percent starting in 2022, 2.8 percent starting in 2030 and a 3 percent interest rate at the last year of maturity in 2034 for the bond — terms that administration and finance chair Dan Dunigan said are almost too good to be true.
“Think about what the guy who buys this bond is saying. The first year he gets nothing back, and in the second year, for every dollar he lends us, he only gets a little more than $1.0075 back. It’s amazing the uncertainty that’s out there these days, but in this case it works for us,” Dunigan said.
Because of current market conditions, the borough saves $975,000 on decreased interest payments below the figures discussed at the start of the month, and an additional $850,000 in savings have already been realized by making the bond bank qualified, which allows banks to deduct the interest carried costs of bonds worth $10 million or lower, lowers their call time to five years from the 10-year period on the 2010 bond, and widens the market for those bonds thereby lowering rates, Murray said.
“I can’t tell you there will be a time I would think these rates will ever be this low again,” he said.
Bond counsel Dave Nasitier of Thorpe Reed outlined a 43-page debt ordinance that borough council unanimously approved and spells out the terms of the bond borrowing — “essentially the contract you would enter into” by approving the bond borrowing.
Council and public comment briefly debated the question of whether the $42 million project list consisted of needs or “wish list” items, and several council members pointed out that the capital project list was developed by borough department heads identifying their most pressing long-term needs.
Council President Matt West pointed out that several studies commissioned by the borough since the 2010 bond was issued have recommended projects that are on that long term list, including borough facilities and technology studies and the findings of the 311 W. Main task force — and Dunigan summarized by saying “the only reason it’s a ‘wish list’ is because we wish we could do it all tomorrow, but that’s not feasible.”
Resident Leon Angelichio said he was concerned that the added debt service from a 2012 bond could increase further by another subsequent bond issue, and asked council to keep in mind a tax increase could be necessary to cover those added costs.
“Are we leaning on the taxpayers a little too much, especially in this economic climate? It’s been a tough couple of years,” he said.
Resident Joe Cionzynski added that he hoped council could “separate the wish list from the need list, because it seems like you’re spending a lot of money,” and “sooner or later we’re going to have to pay the credit card bill and I’m afraid that might hurt the taxpayer.”
Council voted 8-0 to approve the 2012 bond borrowing, with Councilman Paul Clemente abstaining due to his employment with Boenning & Scattergood. “Although we work in two different departments of the same firm, I will abstain nonetheless so as to avoid the appearance of impropriety,” he said.
Kirchner and Murray said after the meeting that the debt service payment increases did not necessarily mean the township’s debt service millage would need to increase, and Kirchner said increased borough revenues — such as $1 million to $1.5 million more per year in wastewater treatment plant revenue from a recently connected sewer line connection to Merck facilities in Upper Gwynedd — could offset the higher debt payments.
“There is good luck, but if you plan well, the good luck tends to happen,” Kirchner said.