City issues bond despite global market turmoil
August 18, 2011 · 6:39 PM
The city cashed in on the nation’s unpredictable market last week when it issued its bond despite the economic turmoil.
The shaky market actually worked in the city’s favor to help secure a low interest rate, said Annette Sommer, vice president of Seattle- Northwest Securities.
In addition to providing funds for the Waste Water Treatment Plant project, the bond issue also refunded the existing Limited Tax General Obligation (LTGO) bonds to take advantage of current low interest rates and to complete the separation of the three city utilities – water, sewer and surface and stormwater management – which was passed by ordinance earlier this summer.
The bond, which was issued on Aug. 10 totaled over $5.7 million with the true interest cost over the 20-year life of the bonds at 3.44 percent. The city will have the bond money at its disposal on Aug. 24.
The city had originally authorized the WWTP bonds to be issued in early 2009, but due to a lawsuit filed by a citizens group the bond issuance was delayed.
In the interim, the city paid for the project by using a $3 million interfund loan from the water utility, temporarily using sewer fund operating cash and issuing the city’s sewer revenue bond anticipation note (a line of credit).
The proceeds of the 2011 bond will repay the note, the interfund loans and reimburse the sewer operating fund to complete a transaction that has been planned for more than two years at the city.
The city’s tax-supported 1998 bonds were issued for various purposes, including the redemption of 1994 LGTO Bonds, which were issued to pay a part of the cost of improvements to the city’s sewage treatment plant.
Sommer said the volatility in the bond market ultimately proved to be perfect timing for the city.
“You have probably read the tumultuous market headlines related to the stock market going up and down, Standard & Poor’s credit downgrade of the federal credit rating, increased economic woes in Europe and the federal government saying it feels we will have a sluggish economy for quite some time,” said Sommer. “Which is actually great for a municipality selling bonds and locking in low interest rates.”
Sommer said the bonds were mostly sold to bank trust departments, banks, money managers, and interestingly enough, she said, both Skagit and Lewis counties placed orders for city bonds.
Sommer said the removal of the negative credit watch from Moody’s and assignment of the A1 credit rating were helpful, as was the timing of the bond issue. Sommer estimated that had the bonds been issued a week earlier the interest rate could have been closer to 4.5 percent.
Councilor Barry Peters said he was pleased with the low interest rates.
“Back in 2009 the UAC made assumptions about the cost of issuing bonds for the sewer utility and they assumed it would cost 4.5 percent [interest],” said Councilor Barry Peters. “This lower interest rate is really a blessing.”
City watchdog Daniel Smith said that only time will tell whether the lower long-term interest rate will equate to any change in sewer ratepayers pocketbooks, but he doubts that the city would transfer the savings to ratepayers.
Deputy City Manager Morgan Smith said that although the more favorable bond interest rate will result in lower debt service over the 20-year lifetime of the bond, the differential on an annual basis is relatively marginal.
She said the city doesn’t expect that marginal change alone would prompt a change in sewer rates.