Sunday, January 20, 2008


The Town currently has potential refunding savings from four different bond issues which were sold in the years 1996, 1997, 1999 and 2000. .

Based on interest rates of January 16, 2008, a refunding of the four bond issues noted above results in budgetary savings to the Town of $211,663. The present value of these savings are $174,633 or 3.36%; the bonds to be refinanced and 3.37% of the proposed refunding bonds. As a benchmark, many issuers of tax-exempt bonds use a minimum of 3% savings to gauge the cost effectiveness of a refunding transaction. These savings are net of the costs of issuance (underwriter, bond counsel, financial advisor, ratings, etc.) and will be realized over the next nine years ending in 2016. Annual savings will average about $19,000 a year but close to $25,000+ for the first seven years. The true interest rate for the refunding bond is 3.19% which compares to average coupon on the refunded bonds of 4.55%.

Certain data for the proposed refunding is as follows:

Debt Debt %
Service Service Savings
Bond Amount Refunded Refunding Refunded
Issue Outstanding Bonds Bonds Savings Bonds

1996 $1,555,000 $1,901,076 $1,809,474 $ 91,602 4.87%
1997 775,000 869,550 854,006 15,544 1.58
1999 1,615,000 1,900,375 1,839,919 60,456 2.89
2000 1,250,000 1,497,926 1,453,865 44,061 3.20

Totals $5,195,000

In my opinion, the assumptions used for the refunding plans and the estimated savings are reasonable. The assumed interest rates are in-line with current conditions and the costs of issuance are comparable or better than competitive borrowings the Town has done in the past. For example, the underwriters’ proposed or discount $4.50 per $1,000 of refunding bonds. The underwriters’ discount for the Library bonds sold in 2007 was approximately $11.40 per $1,000. The markets have been extremely volatile over the past few months due to the ongoing subprime mortgage loan problems. There is certainly no guarantee that a refunding would produce the results noted above. However, we will have the flexibility to postpone the sale of these bonds if the results do not match the current estimates. I would recommend that the Town adopt the necessary refunding bond resolution as soon as possible. Once the authorization is in place, the Town will be able to move quickly to take advantage of favorable market conditions. Prior to the actual sale of the bonds, the underwriter will provide continuous updates monitoring the markets and keeping the Town informed on the status of the refunding.


Anonymous said...

For a town supervisor who said he's not an accountant and should not be held responsible for the town's accounting failures, including, among other things, the town's failure to account properly for the WestHELP money, and the keeping of hundreds of thousands of dollars in such money off the town's books, how can taxpayers be expected to take seriously any of what's being reported in this blog entry?

In other words, if the town supervisor by his own admission is not responsible for this kind of financial decisionmaking, who on the town board is capable of assessing whether these recommendations make any financial sense?

Anonymous said...


hal samis said...

I'm not saying I completely understand what has been written nor am I saying that the concept is completely alien to me either.

But there are obvious questions that this information does not address.

Before I question the cost of redeeming the outstanding debt, I have to ask how, per the illustration that shows the interest rates for 1996 as 4.87%, 1997 as 1.58%, 1999 as 2.89% and the statement that the average coupon, I assume on the debt amount shown, is 4.55%.

Whereas the cost of issuing NEW bonds is represented; whereas new issues may or may not be sold at a lower interest rate, what is missing is the cost, if any, of redeeming the outstanding debt.

Does the Town have the right to retire the exisiting debt at par or does it have to pay a premium?
I would assume that if prevailing interest offered is lower than older existing bonds were priced to yield, that the market value of these bonds is above par to produce a desired YTM. Why would anyone holding the Town's debt at a higher yield exchange them at par for new debt at a lower yield? If my supposition is true and the Town is obligated to pay the face value of the existing bond PLUS a premium, then I doubt that this makes any sense.

For this to work, the Town would have to be able to redeem bonds sold at par by paying par ($1000 redeemed for $1000). Second, what if the Town had sold bonds initially at a discount to par, say (not including transaction costs) each $1000 bond were sold at, say, $975 so that the yield to the buyer was not the stated interest rate but more enticing due to the discount. Early redemption of these bonds would mean that the Town is paying out, even at par, $1000 for an instrument sold for, say, $975. Again, this is not going to produce a savings to the Town.

What percentage of these existing issues under consideration are serial bonds and required to be redeemed in 2008?

Frankly, without further information, I am dubious that reducing the interest rate alone on the outstanding issues, is going to produce a meaningful savings after ALL transaction costs. However if the intent is really to extend the maturities and dodge the mandatory redemptions starting in 2008, then this is something that should be explained as well.

Finally, this is something that should be handled by the Town Comptroller and not rushed in the absence of one.

Anonymous said...

Where does the Supervisor's information come from? The numbers don't mesh.

Does the town have the right to redeem the bonds? Oftentimes bonds can only be redeemed according to a schedule agreed to when the bonds are issued.

Are there any costs involved in the redemption? And in the reissuance? What are they?

There are penty of other questions to be asked, and I don't think that the Supervisor knows the answers. Somebody prepared this announcement for him. Who? That person should be available for questions.

If what the Supervisor said is actually true, then we don't have to rush. Interest rates will be going down further (unless the entire credit market collapses, as may well be the case).

A little thought and a little care, please.

Anonymous said...

The Federal Reserve has announced another rate cut this morning. Time is NOT of the essence. Good to consider and evaluate, but there are other factors as well, like a financial plan for the year, including the capital budget. What does this latest rate cut mean for the 2008 budget? Obviously lower interest income, but how much. Combined with increased use of fund balances to give the appearance of "holding" down taxes, the Town will have lower investible funds.

With all due respect to the Town Board, there isn't one of them who can independently review and understand this issue. Let's get the analysis out.

hal samis said...

Is there enough money remaining in A and B Fund Balances to retire high interest debt and not replace it. Does the Town earn more on excess Fund Balance than it pays out in debt?

hal samis said...

If bonds are bought in at prices above par (face value), do the presumed savings reflect the future value of the money being paid out. For example, if the Town has to pay, say, $1100 for a $1000 bond (priced at $1100 because the higher interest yield can't be replaced), if the future value of this extra $100 (were it invested) being considered in the calculations?