Record-low interest rates and investors looking for safe ways to earn money have given cities a golden chance to reduce debt.
Plymouth, Chanhassen, Bloomington, St. Paul, Golden Valley, Stillwater, Woodbury, Roseville and Brooklyn Park, among others, will save hundreds of thousands of dollars -- and Minneapolis millions -- by paying off old debt using new bonds.
Officials say three factors have combined to make the timing right for refunding municipal bonds: Interest rates on current tax-exempt bonds are at their lowest point since 1967; taxable investments such as CDs are paying very little and investors burned by the stock market are drawn to the security of high-grade municipal bonds.
"There is a big demand for municipal debt due to its perceived safety," said Michael Abeln, director of capital and debt management for the city of Minneapolis. "Because there is a lot of demand, the rates that we have to pay are dropped."
Cities that have callable bonds are rushing to cash in on the demand for municipal bonds before interest rates go up.
"Cities that might have issued bonds for 4 or 4.5 percent are getting interest rates between 2 and 2.3 percent," said Terri Heaton, a senior vice president with Springsted, a financial advisory firm in St. Paul. "They can utilize this to save money for taxpayers."
Refinancing will save Plymouth about $306,000, Chanhassen about $170,000, Bloomington $200,000 to $600,000, Brooklyn Park $500,000 and Minneapolis about $8 million, city officials said.
Use of the savings will vary by community. In Chanhassen, households will pay several dollars less over the life of the bonds for the city library. In Plymouth, the savings will help hold the line on a future tax levy, said Cal Porter, administrative services director. Minneapolis will use its gains to reduce fees or to fund more infrastructure improvements, Abeln said.
Some cities left out
"Debt is a cost to the taxpayer, either directly or indirectly. If this cost goes down it helps the taxpayer long-term," Abeln said.
"Does it mean we can lower the 2010 tax levy? No, it doesn't mean that. The ultimate outcome is the city is doing what it can to control the cost of providing services."
Not all cities can take advantage of the record low interest rates. Although homeowners can pay off mortgages at any time, there are government and bond market restrictions on when cities may refinance debt, said Mark Ruff of Ehlers and Associates, which advises cities, counties and school districts concerning financial issues.
Usually, if cities sell a 25-year bond, the bonds can't be repaid for nine or 10 years, Ruff said. "That's why you don't see more refinancing -- not everybody is at the point in time where they can refinance the bonds."
Also, state law requires that cities realize a 3 percent savings if they refinance bonds.
Chanhassen is so eager to save money on the $6 million it borrowed to build its library that it is issuing new bonds two years before the library bonds can be called in 2012. The money will accrue interest in an escrow account until the bonds can be refinanced, said Greg Sticha, Chanhassen finance director. Even though that means the city will have to make two bond payments for two years, the switch to the lower interest rate on the new bonds will net Chanhassan a 4 percent savings, he said.
Because the bonds were approved by referendum and have a separate spot on tax statements, taxpayers will see a slight reduction in what they pay for the library, Sticha said. "It's not going to be a whole lot per individual, but over the life of the bonds [13 years], it might amount to a couple of dollars per household."
Last week, Bloomington refinanced bonds that were sold in 1999 to finance parking ramps at the Mall of America. The new debt of almost $9.4 million carries a 2.2 percent interest rate.
Because some of the old debt was at variable interest rates, savings could be anywhere from $200,000 to $600,000, said Lori Economy-Scholler, the city's finance director. She said Bloomington expects to save an additional $40,000 on a fall bond issue for the city's permanent improvements fund.
Timing is everything
The rush to refinance is an about-face from last winter, when the implosion of financial markets prevented all but government units that had the highest financial ratings from selling bonds. But all the refinancing could end as suddenly as it began, said Dave MacGillivray, Springsted's chairman.
Last week, interest rates on bonds bounced up two-tenths to three-tenths of a percentage point -- possibly enough to cool bond refinancing because of that state requirement that refinancing save at least 3 percent.
"Little bumps make a big difference," MacGillivray said. "Everything is very market-sensitive. We have these cycles every so often."