GARNER — Garner found someone to give it about $10 million, and at a low price.
At the Dec. 10 auction, FTN Financial, a division of First Tennessee Bank National Association, beat out seven other bids by offering the town a 3.379 percent interest rate on the 20-year loan.
Though rates are not as low as those from 2012 and early 2013, the town did catch rates at relatively historic lows. In addition, the town’s high credit rating helped it secure a competitive rate, and reduces the cost of borrowing the money for the town. That means long-term projections for the $35.7 million bond measure – already designed conservatively and deemed in a safe range by experts – appear to be on even more solid ground.
“It went well,” town Finance Director Emily Lucas said. “We were very pleased.”
The lender also offered a premium: They will give Garner $10,056,000 in January for a $9,805,000 bond (the principal Garner will pay back plus the interest). Lucas said premiums were common in the market leading up to the sale. She said that money will take care of issuance costs including the town’s financial advisor and bond attorney fees rather than having it come out of principal.
“They lock in at that 3.379 percent. Right now that’s a good interest rate for investors,” Lucas said, explaining why the lender offered the premium.
The money, which Garner will officially receive on Jan. 2, will fund various capital projects over the next year-plus, including the new police station currently in the design phase. It represents the first borrowing in a $35.7 million bond measure that voters passed in March. FTN Financial will sell the bonds (and the towns payments) to investors seeking safe returns.
Davenport & Associates, the town’s financial advisors, had drawn up long-term projections. In payback schedules, the firm projected a conservartive 4 percent interest rate on the first round of borrowing, and 4.5 on future rounds to be sure the town would have money to pay down debt without having to slash its budget or raise property taxs more than the 2.75 percent promised to voters. The rate of that first round of borrowing will cost 15.5 percent less than projected.
The town plans to dip into reserves during the early years of the bond to avoid raising taxes before 2015 or excceed 2.75 cents on any tax hikes and still get projects moving. That puts some pressure on early borrowing rates and revenue growth, pressure the lower rate alleviates.
Other than the police station, projects include a $7.8 million recreation center, a new Town Hall facility to be built when the police have moved into their new station, sidewalks, greenways, downtown improvements and road upgrades.
Fund balance hefty, but delicate
Town policy requires its fund balance to be equal to at least 30 percent of its $25.7 million annual budget. Currently uncommitted reserves roughly double that, but to Lucas, there’s less room for error. About $7 million of that overage has been dedicated to helping bond projects, with later bond loans helping rebuild the fund balance beyond its current state eventually.
During the bond spending process, cash flow will temporarily drop the balance to near-zero according to projections – though those projections plug interest rates and expected growth conservatively.
With the town taking on two-thirds of the cost of burying the power lines as part of the White Oak expansion and U.S. 70 road project (a cost about $265,000 greater than initially budgeted to simply move the lines), she had cautioned council members that the unbudgeted amount could push the fund balance below 30 percent during that cash flow crunch in a few years.
That could force either changes to planned spending or a violation of town fiscal policy absent other adjustments. (The town now expects to pay about $631,500 to the developers, including $281,500 to bury the wires.)
If the town violates its fiscal policy, future credit ratings (the next would likely come before the next round of bond borrowing in roughly two years) could be affected, which could cause lenders to offer less competitive interest rates.
But that risk is years off with a lot of moving parts to settle in the meantime. While Lucas counts the money as spent for planning purposes, the policy technically wouldn’t be violated until the cash balance actually slipped below 30 percent of the budget. Lucas said the town is working to find another source for the funds. The U.S. 70 project came in below budget, though contingencies could reduce any surplus, which the federal government would share. The low bond interest rate could also build in some wiggle room.
Lucas said a more precise fiscal picture would emerge at the end of the fiscal year in the summer.
Jahner: 919-829-4822; Twitter: @garnercleveland