BROOKVILLE, Pa. (EYT) – The Jefferson County Commissioners took the second of three steps necessary to refinance nearly $11.7 million of outstanding debt yesterday, a move that is expected to save county taxpayers nearly $850,000 over the life of the borrowing period.
(Above photo: Jefferson County Commissioners (from left) Jeffery Pisarcik, Paul Corbin, and James McIntyre hold up the Jefferson County flag. Photo by Scott Seeley.)
Jefferson County Commissioners Paul Corbin, James McIntyre, and Jeffrey Pisarcik approved a debt ordinance under the Local Government Unit Debt Act which will refinance the county’s 2010 outstanding bond issue through a loan package from S&T Bank.
The loan features lower interest rates than the outstanding bond, allowing the county to secure taxpayer savings of nearly $850,000 over the life of the loan.
“We have looked at this issue very seriously, and it appears to make sense to the taxpayers of the county with the savings. Moving forward, I think it’s only good financial sense to make these decisions,” Corbin said.
Refinancing The County’s Debt
R. Mark Lundquist of Financing Ideas Incorporated (FII) said the process began last fall, when the commissioners authorized a line of credit with S&T Bank.
“At that point in time we looked at your 2010 outstanding bond issue and wanted to refinance that to take advantage of the interest rates that were available in the marketplace,” Lundquist said.
S&T Bank will offer portions of the loan to other area banks, allowing the financing to be kept local.
“Ultimately they will become partners with other local banks here,” Lundquist said.
The county can’t refinance its debt until December due to federal tax laws, which are also the reason the move must be done in three separate steps.
“We’ll be back at the August meeting for the second piece of the puzzle,” Lundquist said.
For now, the commissioners authorized two different series of bank notes, a tax-exempt borrowing in the amount of $9,945,000 and a taxable note for $1,750,000.
“Together, those two obligations will be used on December 1 to retire your outstanding obligation 2010 bonds, which are currently outstanding in the amount of $11,290,000,” Lundquist said.
The county will repay both loans with fixed monthly payments, paying $38,055.55 per month for the larger loan and $11,303.74 per month for the smaller loan. The county must also pay several one-time fees as part of the refinancing at a total cost of about $105,000.
One More Step
Next month’s action will pave the way for the county to convert the taxable borrowing into tax-exempt notes.
“Those notes will be issued in January 2016,” Lundquist said.
This is yet another move spurred by federal tax laws, which Lundquist said will only allow the county to issue $10 million per year on a “tax-exempt bank qualified basis.”
“So we have to jump through these procedural hoops to secure for the county the lowest and best interest rate available,” Lundquist said.
The county must advertise its intent and present information to the state Department of Community and Economic Development, a process Lundquist said takes about a month.
“So as of the end of August we will be in a position to close on the loan sometime before December 1,” he said.
Saving Taxpayer Money
The county will see total savings of over $850,000 from the refinancing according to Lundquist.
It will recognize savings of nearly $120,000 in the 2015 budget alone due to this move, Lundquist said.
“In every single fiscal year moving forward, your debt service will be reduced by $19,000 plus, or over $500,000 total over the life of the term,” he said. “The value of replacing the taxable debt next month with tax-exempt debt will take that $19,000 per year up to $33,000 to $37,000 in savings, and will take total debt savings up by more than $350,000.”
The savings comes from lower interest rates. The 2010 bonds require the county to pay interest through 2035 at a rate which rises over time up to 4.375 percent. However, the refinancing lowers those rates, resulting in lower costs.
Between the loan settlement date and the end of 2018, the county will pay a fixed interest rate of 2.2 percent. After 2018 it will re-adjust based on a formula with a number of factors, but Lundquist said the county has negotiated a cap of 3.1 percent for the next five years of the loan.
“So effectively for the first eight years, you’re at about a 2.4 percent average interest rate,” Lundquist said.
The rate will re-adjust again following that period of time, but will not exceed pre-assigned caps of 4 percent, 4.75 percent, and 5.5 percent.
“Your worst case scenario works out to about 3.195 percent interest rate, which is very very attractive,” Lundquist said.”That’s if the note stays outstanding, and you can refinance at any point in time.”
The county’s fixed payments are based upon hitting the interest rate cap, but if that doesn’t happen, the payment will remain the same and the loan will be paid off more quickly, resulting in additional savings.
Refinancing through local banks also saves the costs associated with bond financing and keeps the money coming from local sources, Lundquist said.
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