Refinancing of bonds saving taxpayers tens of millions

  • Article by: HERÓN MÁRQUEZ ESTRADA , Star Tribune
  • Updated: October 13, 2012 - 10:03 PM

School districts across Minnesota are taking advantage of rock-bottom interest rates.

Lakeville school leaders have an $11 million surprise for property owners in their district.

With interest rates at historic lows, the district is the latest and biggest example of a refinancing boom that has Minnesota schools from Albert Lea to Pine City reducing the tax payments needed to pay off bonds used to pay for school construction.

Lakeville last week closed on a $43.9 million refinancing, and the resulting savings of more than $11 million over nine years is considered the largest in the state for a school district. In fact, the savings were $1 million greater than expected because interest rates have continued to fall, finance experts said.

The original bonds were in the 5 percent range; the refinanced rate is 1.49 percent.

Districts around the metro area and the state are jumping at the opportunity to save taxpayers tens of millions, according to financial experts.

"We're extremely busy," said Joel Sutter of Ehlers Inc., one of the largest public finance advisers in the country and the firm that handled the Lakeville refinancing.

Last year, the company did 14 such refinancings, also called "refundings," between October and December, Sutter said. This year, the company is doing 16 in October alone.

"This is significant," said Lakeville school board member Bob Erickson. "I think its exactly what our residents need. It certainly gives them a little bit of breathing room in these challenging economic times."

The refunding is expected to save owners of a $200,000 home about $34 a year in property taxes for the next nine years, Ehlers estimates.

Sharing the wealth

Earlier this year, the Rosemount-Apple Valley-Eagan school district saved $3.75 million, and West St. Paul saved $5.5 million by refunding. In August, the Marshall school district saved $2.8 million, and this month, the Winona district saved $1.1 million. All of the savings, by law, are passed on to property owners in the districts.

"Interest rates are currently near record levels," said Randy Anderson, executive director of business services for the Elk River school district, which expects to save $4 million when it refinances $34 million in bonds later this month. "This is a good opportunity to reduce future debt-service costs."

Also this month, school districts in Albert Lea, Rush City, Fridley, Pine City and Randolph, among others, will get in on the refinancing boom.

Even the tiny Lyle school district near the Iowa border, with just 221 students, saved $350,000 this spring by refinancing.

"We were kind of watching the rates," said Jerry Sampson, chairman of the Lyle school board. "We wanted to hit the best that we could. We're an agricultural district, and anything we can do to save the farmers money, that's what we do."

School districts are not the only ones benefitting from the lower interest rates. The state of Minnesota, municipalities and other government agencies also have saved tens of millions this year by refinancing debt.

Low interest rates have helped in another way: Delayed payments from the state have forced school districts to borrow money to cover their operating expenses. Districts have saved millions on those loans, reports the Association of Metropolitan School Districts in St. Paul.

Short-term rates also plummet

The 37 AMSD members, for the 2012-13 school year, have borrowed almost $360 million, the group says. The cost of that short-term borrowing has been about $2 million, with rates well below 1 percent and closer to half a percent.

Historically, rates on such loans have been 3 or 4 percentage points higher, which would have cost districts $10 million or more in borrowing costs on the $360 million.

The savings do not mean that districts have extra money, just that they are not spending as much to borrow, the AMSD said.

The refunding rates, now below 2 percent, have been low for more than a year, but districts can only refinance bonds as they hit their "call" date, set when the bonds are issued.

The original Lakeville bonds were sold in 2005 and used to build Lakeville South High School and pay for other projects.

"Districts are definitely looking at their financing options," said Scott Croonquist, executive director of AMSD. "They see they can save money. This is not saving the districts money, really. They are helping out the taxpayer."

Sutter said that what makes Lakeville stand out is the total savings, $11 million over nine years, and the savings as a percentage of the existing payments, expected to be more than 16 percent.

"This is a rather large example," Sutter said. "I've never seen that savings of $11 million or that high of a percentage."

Although no one can predict what interest rates will do, Sutter says there is a strong demand for municipal and school district bonds around the country. The Lakeville refunding, for example, got 14 bids.

Interest from financial institutions was so strong, for example, that the Lakeville sale saved the extra $1 million. Ehlers had estimated last month that the sale would likely generate a true interest rate of about 1.75. The actual number came in at 1.49.

"I wasn't terribly surprised," Sutter said last week, "because interest rates had been coming down the previous two weeks. I was very pleased."

Heron Marquez • 952-746-3281

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