Municipalities, school districts can save big when refinancing

| Saturday, Nov. 26, 2011

The Derry Area School District expects to get a nice little bonus when it jumps on low interest rates and refinances $13.6 million in bonds it issued in 2002: $400,000, maybe more, in a lump-sum payment.

"We knew rates were good. We always keep an eye on rates. But I do not ever remember seeing yields this low," said John Koluder, the district's business manager, who has worked in school finance for 27 years.

Neither does Vanessa Gleason, finance manager in Cranberry, where a recent refinancing of $30 million of bonds saved the township $3.4 million.

"We talk to our financial advisers constantly. Everyone does. So I knew rates were good. But even I was surprised by how much we saved by doing this," Gleason said.

Cranberry and the Derry schools are among the schools and municipalities across the state and the country eligible to refinance municipal bonds at a time of historically low interest rates. For municipalities adjusting to decreases in tax revenue and cuts in state and federal aid, savings from refinancing debt may be one silver lining in an otherwise gloomy economy.

"It's useful for the district. The money we get back from this will help with capital projects," said Koluder of the Derry schools, which has 2,200 students.

According to the Pennsylvania Department of Community and Economic Development, hundreds of taxing bodies in the state have refinanced municipal bonds this year and last, including Mt. Lebanon and Plum and the Seneca Valley and Pine-Richland school districts.

Mike Zubasic, managing director of public finance of PNC Capital Markets, has helped at least a dozen Western Pennsylvania school districts and municipalities with their refinancings — including Jeannette, Cranberry, Richland and the Wilkinsburg and South Park school districts. He cannot remember when interest rates were this low.

"Rates are now the lowest since at least 1990," he said. "Refinancing has been good for municipalities. They have all saved quite a bit."

According to FMS Bonds Inc., a Boca Raton, Fla., company that specializes in municipal bonds, the average yield of a 10-year AA bond is 2.85 percent, compared with 3.15 percent one year ago. Those rates are down from average municipal bond yields of nearly 5 percent in 2008, nearly 6 percent in the late 1990s and yields of more than 13 percent in the late 1970s and early 1980s.

"When rates are high, no one wants to refinance. With rates as low as they are now, everyone eligible is refinancing," said Kathy Clupper, a managing director at Public Financial Management Inc., a national independent financial company based in Philadelphia.

This year, Pine-Richland schools refinanced three sets of bonds worth nearly $23 million for a savings of about $1.6 million, according to the district, which is one of Allegheny County's fastest-growing.

Municipalities and schools cannot refinance debt whenever they want. Bonds typically cannot be refinanced until a stipulated number of years have passed. Refinancing can also require payment of fees and administrative costs.

"You can only refinance a bond one time. So governments are very careful about when they do it," Clupper said. "There are also many restrictions on when and how often bonds can be refinanced. It's like refinancing your home: Not every person is in a position to refinance a home whenever they might want to."

As profitable as refinancing can now be, Clupper said, it may not compensate for other problems municipalities and schools face, such as depressed tax revenue.

"It is a difficult time everywhere for municipal governments. There's not a lot of money coming to municipalities from the state or from the federal government. And unemployed people are not paying taxes, which strains every level of government," Clupper said.

Earned income tax is the second biggest revenue source for the state's municipalities, said Rick Schuettler, deputy director of the Pennsylvania League of Cities and Municipalities in Harrisburg.

"It is good and positive financial management to refinance when possible. But it probably does not make up for fewer people paying earned income tax or for depressed real estate values in many older cities," he said.

Even Cranberry's savings from refinancing were not enough to prevent the township's supervisors this week from proposing a 2.35-mill property tax increase to fund the township's library and volunteer fire departments — the first tax hike there in eight years.

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