Most of us have loans of some kind. The type of loan may be for a car or the
mortgage on your house. Cities are no
different. Cities take out loans called
bonds to finance things like roads and sewer improvements. Some of these are repaid by assessments from property
owners. Some are paid by taxes and
sometimes a portion is paid by an enterprise fund like the sewer fund. In Breezy Point we have bonds that are paid with
various approaches using one or all three of these revenue sources.
In managing debt instruments the city has a specific fund
that addresses only debt. All revenues
received go into this fund. All bond
payments come from this fund. Each bond
carries its own payment schedule.
Revenues are budgeted annually from anticipated assessment income and tax
levy. If the bonds had a sewer payment
component, a percentage of the amount of debt service required, is paid annually
to the debt service fund.
Bonds are structured so they are paid off over the course of
many years. Typically bonds will mature
in 15 or 20 years with annual payments made to retire the debt. They also have a “call” feature. Typically about half way through the term of
the bond there is an opportunity to pay it off.
This is called an early redemption.
This call feature provides for some flexibility in debt service
management. If the bonds can be
refinanced to take advantage of a lower interest rate they can be called and
new bonds issued. The bonds could also
be restructured at call to extend the term with a new bond. The call also allows the payoff of a bond if
funds are available.
The city has two outstanding bonds that have met their call
date. The debt service fund had adequate
resources to pay off at least one on these bonds. There is a good deal of interest savings available
if they are paid off early. Paying off
both bonds has been a goal.
Some of the outstanding bonds the city holds require an
annual sewer contribution. This
contribution extends through the life of the bonds, essentially owing the debt
service fund revenues for bond payments.
It was felt that if these funds were prepaid to the debt service fund,
both bonds could be paid off.
After accomplishing a cash flow analysis on all outstanding
debt, several approaches were developed to address the early payoff off the two
bonds. The differences in these
approaches were the dates of redemption and how sewer payments would be
received. Each approach saved a
considerable amount of interest with an early payoff of them. Each approach also freed up additional
resources as revenues previously used for debt service can be used
elsewhere. From a very simple
perspective the sooner the bonds are paid the more the interest savings. With that in mind the use of owed sewer funds
became an important component in providing for a payoff.
To make a long story short the owed sewer funds will be prepaid
to the debt service fund. This makes adequate
resources available to pay off the bonds.
The City Council approved the early redemption of the 2005 and 2008
bonds. They will be paid off in February,
thus reducing the number of outstanding bonds to one.
