Sudden interest rate cut could spur $900K savings

Refinancing via bank loan could lower rates to near-zero

This month’s sudden cuts in interest rates by the U.S. Federal Reserve could result in unexpected savings for the North Penn School District.

Staff and the district school board held talks last week on refinancing two bond borrowings from 2018 and ‘19, to try to take advantage of interest rates now suddenly much lower than just months before.

“I’m very much in favor of giving guidance to move forward and exploring the options at this point. It sounds like it’s low risk to go forward,” said finance committee chairman Christian Fusco.

In October 2018 and January 2019, the board approved two $10 million bond borrowings in anticipation of a project to renovate and expand Knapp Elementary School, a project scheduled to start in summer 2020. Bond adviser Scott Shearer of PFM Financial Advisors told the board’s finance committee last week that, despite the relative recency of those borrowings, the sudden drop in interest rates could mean savings are now available.

“We can’t guarantee anything, but we at least wanted to see if you wanted to proceed,” Shearer said.

“Recently, with all of the rates dropping so much, we’re getting close to zero, as you’ve heard,” he said.

Standard practice for the district in the past has been to use tax-exempt borrowings to refinance when rates are low, but changes in the 2017 federal tax reform law have removed that option, and now require that districts only do so using taxable debt, Shearer told the board. Normally, that would mean higher interest rates and reduced savings, but rates have dropped so sharply and so quickly that savings may still be available.

“The taxable rates are low as well — even, in some cases, lower than the tax-exempt rates. All of the curves and ratios are getting out of whack,” Shearer said.

The average interest rate on the 2018 borrowing is about 3.67 percent and on the 2019 is about 4.2 percent, and a refinancing via a bank loan instead of a bond, at rates available on the market in early March, could produce savings of as much as $900,000 in reduced future interest payments.

“That’s about five percent of what’s being refunded. In many cases, we’ve been back and said if we can do two percent — of $10 million, two percent is $200,000 — and here we’re at five percent, well over the norm,” he said.

The school board, acting in their capacity as the finance committee, voted on March 10 to authorize the bond adviser to prepare a request for proposals seeking responses from interested bidders, with results due back March 18 and possible action by the board when they next meet on March 19.

“We could hit a home run with the bank loans, and maybe exceed these expectations. Or maybe they’re total duds, but at least we tried,” Shearer said.

Fusco asked if the district would benefit by holding off on any approvals until after further rate cuts, like one rumored in early March and subsequently announced by the Federal Reserve on March 16, bringing rates to nearly zero. Shearer said the RFP responses could take that second cut into account, and the board could authorize a parameters resolution giving permission to proceed with the loan only if certain market conditions are met.

“It would not get any worse than what we’re showing you: it could, potentially, only get better,” Shearer said.

North Penn’s school board is scheduled to next meet, as of press time, at 7 p.m. tonight, Thursday, March 19 at the district Educational Service Center, 401 E. Hancock St. For more information visit www.NPenn.org.