Board OKs refinancing, savings estimated at $600K
The numbers are in, and not quite as good as North Penn School District officials were hoping, but still good enough to proceed.
Updated estimates are that the district could save roughly $600,000 by refinancing two recent bonds, the school board members heard Thursday, March 19.
“Unfortunately, no one can time the bottom of the market perfectly. Had this RFP been out maybe 14 or 15 days ago, then in our meeting ten days ago we would’ve been able to lock in perhaps even greater than $1 million,” said Director of Business Administration Steve Skrocki.
“The timing just never works out perfectly, but still, $600,000 isn’t bad,” he said.
Earlier this month the board heard details of how sudden cuts in interest rates led the district’s bond advisor to take a second look at bonds issued in October 2018 and January 2019, two $10 million borrowings to fund renovations and expansion of 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 at that time that the sudden drop in interest rates could produce savings in the high six figures, and the board authorized the advisor to seek terms as fast as possible.
PFM analyst Garrett Moore reported on the results Thursday night, via streaming video: a total of roughly 40 financial institutions were contacted, to request terms on tax-exempt or non-tax-exempt bonds and/or bank loans so the district could evaluate possible savings.
“Over the past week, with all of the different things: the Fed cutting rates, with the Saudi and Russia oil conditions, as well as the coronavirus, and all of the uncertainties in the world, rates have skyrocketed,” Moore said.
“Just today alone, the tax-exempt benchmark to which the district would price a bond, if we were to do a bond issue — it rose 50 basis points, which is half a percent,” he said.
The $900,000 savings estimate was based on refinancing the 2018 and 2019 bonds at interest rates of two percent or below, Moore told the board, while the lowest response to the request for proposals came in at 2.28 percent, which would produce roughly $585,000 in savings by reduced interest payments. PFM typically advises refinancing when the possible savings are at or greater than two percent of the amount being refinanced, Moore told the board, and the $900,000 figure would have been roughly five percent, but the $585,000 is closer to three percent.
“While $600,000 is nothing to sneeze at, from an efficiency perspective, it’s not where we would like to see it,” Moore said.
Board member Christian Fusco asked where rates would have to be to secure the $900,000 estimated earlier, and Moore said that would likely require rates in the range of 2.05 to 2 percent. Board member Cathy Wesley asked if Moore and his firm expected that to happen in the next six months: “where’s your crystal ball?”
“Unfortunately, my crystal ball has been a little foggy here the last couple of weeks,” Moore replied; “Where it’s going in the future, I really don’t know.”
Fusco asked if staff had a recommendation, and Skrocki said his main concern was that the district’s draft 2020-21 budget began with a roughly $13 million deficit as of early February, and the recent interest rate cuts have dropped the expected interest earnings by another $1.5 million since.
Based on rates as of Thursday, Skrocki said, the refinancing would result in roughly $330,000 in reduced interest payments in that 2020-21 budget, which could offset part of the $1.5 million in lost investment income.
“That $1.5 million carved out: that’s a problem for next year. So if you’re dangling $331,000 in savings, guaranteed, in front of me, I’m kind of inclined to take it. It just depends on how risk-averse you are,” he said.
Board member Jonathan Kassa said the past several weeks have looked very similar to 2008, when he led a nonprofit that had to make similar choices.
“I remember seeing the markets melt down, and I remember how important it was for us to act quickly, and secure what we had, because you didn’t know what the next day was going to bring. I think it would be wise for us to lock in what we can now,” he said.
Skrocki then asked the board to pass a parameters resolution authorizing staff to proceed at those terms or better, and he and Superintendent Curt Dietrich said they’d keep the board posted if anything changes.
The board then voted unanimously to do so, via video streams, and Skrocki said he would announce the results at a future meeting. North Penn’s board is currently scheduled to next meet at 7 p.m. on April 7, with the finance committee next meeting at 6 p.m. on April 6, both at the district Educational Services Center, 401 E. Hancock St. For more information visit www.NPenn.org.