District could see $500K in savings
Savings to come from refinancing
LANSDALE >> Recent interest rate reductions by the Federal Reserve may have caused concern for global financial markets, but could lead to unexpected savings for the North Penn School District.
Bond counsel John Frey of PFM Financial Advisors outlined how North Penn could save roughly $500,000 by acting as quickly as possible.
“Rates really have plummeted, and why we’re here tonight is, a year ago, you did not really have any refinancing opportunities, but you do now,” Frey said.
In January 2019 the school board approved a $10 million bond borrowing meant for district capital projects, and secured interest rates of 2.55 percent, half a percentage point below the 3.05 percent secured with a similar borrowing in October 2018. Frey told the school board’s finance committee Tuesday night that the recent cuts by the Federal Reserve have brought rates down even lower, with an imminent cut expected to drop them to between 1.5 and 2 percent, so three bonds of roughly $10 million each from 2013, 2014 and 2015 could be worth refinancing.
“They’re all very short, you can pay them off very quickly, and all, really, at low rates, which is why they were not really refinancing targets — but the way the rates have fallen, they have become them,” Frey said.
“With rates as they are today, approximately, we think we can
save about half a million dollars, net, to the district,” he said.
Because North Penn has already done one borrowing in 2019, Frey told the board, certain provisions in tax codes require a onetime payment of roughly $440,000 when the refinancing is finalized. The new issue will also require payment dates be moved, from the current date on March 1 of each year to January 15, Frey said, and his estimate of $506,000 in savings is net of both of those changes. The net present value of those savings is roughly $470,000, and would take the form of lower debt repayments by roughly $171,000 in 2020, close to zero change in 2021 and 2025, and drops by roughly $250,000 in 2022, 2023 and 2024.
“We view it as a very significant savings to the district, meaningful savings, that wasn’t there six months ago. It’s there now, and we feel it would be an opportune time to go get that,” Frey said.
If the board votes to authorize the bond advisor to proceed on Sept. 19, a parameters resolution could be ready for board approval by their Oct. 17 meeting, and the auction would likely take place the following week, with settlement in early December, according to the advisor. Part of that process is a ratings call to confirm the district’s Aa1 rating, which Frey said should help secure rates as low as possible.
“The district has a very, very strong credit rating of Aa1, but we still have to go through that process for each bond issue,” he said.
Superintendent Curt Dietrich asked for details of the $440,000 payment, and why it’s necessary this time but had not been for prior borrowings. Frey said that payment would cover fees that typically are rolled into the new borrowing, but can’t be because of tax code provisions limiting the number of bond borrowings each year.
District Director of Business Administration Steve Skrocki said his recommendation is that the $440,000 come from the district’s budgetary reserve, a line item of $1.5 million included in the 2019-2020 budget for unexpected costs - or opportunities.
“Keep in mind, the savings are approximately $171,000 on this year’s debt service, so that would mean our net cash impact is about $270,000 this fiscal year,” Skrocki said.
Finance committee chairman Ed Diasio asked if the earlier repayment date would have any impact on the district’s finances, and Skrocki said the district has more than enough on hand either way.
“Quite honestly, it’s unlikely that there’ll be another opportunity like this, very unlikely. We never expected these three issues to even present an opportunity for refunding,” Skrocki said.
Dietrich asked if the refinancing would have any impact on the district’s current debt schedule, which shows payments dropping slightly starting in 2021-22 and then a major dropoff in 2027-28, and Frey said that pattern still holds.
“What we’re doing is consolidating those three existing bonds into one new bond, and trying to basically mimic your old debt service, but reducing it in each year as much as we can,” Frey said.
All calculations are based on the assumption that the Fed will reduce rates again in mid-September by another .25 basis points, Frey told the board, and market indicators have shown a roughly 96 percent chance of that happening.
“Certainly, there is volatility every week lately, so between now and Oct. 22 things will likely fluctuate, but this is our current estimate,” he said.
The board, acting as the finance committee, then voted unanimously to authorize staff to begin preparing documents, and a second authorization could come on Sept. 19 during the board’s next action meeting.
During his subsequent report, Skrocki did sound one note of warning regarding that expected interest rate cut: if rates do go lower, that could impact the 2019-20 budget line item for investment income, which produced roughly $1 million in unanticipated income above the budgeted amount last year. The savings from the refinancing will likely offset any potential losses from lower interest income if a September rate cut is the only one, Skrocki said, but further Fed cuts could tip the balance.
“That’s one downside of lower interest rates: it’s great when you are a borrower, it’s not so good when you’re a lender. When we invest money, we’re the lender,” Skrocki said.
North Penn’s school board next meets at 7:30 p.m. on Sept. 19 at the district Educational Services Center, 401 E. Hancock St. For more information visit www.NPenn.org.