Garner refines plan for bond sale

kjahner@newsobserver.comOctober 28, 2013 

— The Town Council will attempt to maximize savings through low interest rates by borrowing as much money as possible early from $35.7 million in voter-approved bonds.

Council refined instructions to Davenport & Co. after the financial advisers presented options during the Oct. 22 council meeting regarding the first phase of the town’s borrowing.

The town will close on the first round of bonds Dec. 19, but the town must submit a preliminary statement to the Local Government Commission – which oversees local government bonds – by Nov. 4. The council didn’t make a final decision on the exact borrowing structure and further parameters remain to be set.

Council did rule out Davenport scenarios that would have eventually raised taxes slightly higher than council had told voters, instead sticking with the 2.75-cent property tax increase (per $100 of valuation) that council promised.

Davenport and the town have slated $10.4 million in projects to coincide with the first borrowing period. That money will pay for a new police facility, Montague Street improvements, land acquisition for downtown plans, a series of sidewalks and other projects through September 2014.

The town has already borrowed $800,000, and qualified bonds – less than $10 million in a calendar year allows the lender tax breaks – carry a lower interest rate. That makes the immediate question facing the council whether to borrow the entire $9.2 million now, or dip into the town’s $6.9 million in excess reserves.

Plans call for using those reserves to help mitigate interest over the coming decade regardless, but the question is whether to save that leverage for when interest rates are higher.

“If the rates are lower now, they’re able to do more of the debt sooner and still end up with that same (tax) impact,” Davenport’s Ted Cole said. “Whereas if rates are higher, the debt being more backloaded ... gets you to the same place but at a higher interest.”

Borrowing more now would take advantage of interest rates that are currently at historic lows. Borrowing up to $3 million later would prevent interest accruing on that money for at least a year.

Cole told the council a town in a similar position to Garner recently had 20-year bonds priced at 3.13 percent.

He also noted that interest rates have swung as much as a percentage point over a 30-day period in the last year, so things could change by the time the bond is priced on Dec. 10.

“If rates hang in there I can comfortably recommend issuing more of it in the first (phase),” Cole said.

Currently, Davenport’s projected schedule for repayment assumes a 4 percent rate on this first set of bonds, and 4.5 percent rates on the next three periods of bond sales: about $13.4 million between October 2014 and April 2016, $4.9 million before November 2017, and $7 million before June 2019.

Cole told council his company had always provided conservative projections. Calculations also included a projection of 2.5 percent growth in town revenue, which would help pay for the debt through the council’s savings plan.

“Right now, (let’s) try to sell the maximum bonds at the lowest interest rate. In the long run it will save money,” councilman Gra Singleton said, and others on the council agreed.

Davenport also offered four scenarios for increasing taxes, which will also help finance the debt. Cole said a 2.75-cent increase in 2015 would grant more flexibility, but also offered a scenario of raising it 1.3 cents in 2015 and another 1.45 cents in 2016.

Two other options were tossed out by council for increasing the 2.75-cent level, which council promised in its bond pitch to voters.

“I don’t think that’s even an option,” Singleton said.

Mayor Ronnie Williams also chimed in: “It contradicts what the voter was told.”

The scope and timing of tax increases can be decided later, as interest rates for various bonds, changes in town revenue, costs of various projects and other variables become known.

Jahner: 919-829-4822; Twitter: @garnercleveland

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