Joel Sutter from Ehlers, Inc. recently went in front of the St. Michael-Albertville school board for the third time in three years to talk about refunding bond debt, which is essentially the same as a homeowner refinancing a mortgage.
This opportunity to refund some of the high school’s bond debt, he said, was the last of the bigger opportunities for the district to refund existing bonds.
Sutter said he wanted to discuss the pros and cons of refunding the $41 million bond now (an advanced refunding) versus waiting until next fall and doing it as a current refunding. This bond’s “call provisions,” he said, can be pre-paid just by paying their face value on or after February 2018. These bonds have interest rates that average 4.3 percent. Once past the call date, the school district would continue to pay interest at a higher rate than they’d have to, he explained, so he said the bonds should be refunded no later than next fall.
Sutter said doing an advanced refunding now brings a measure of certainty, since there is no waiting to see how interest rates could change over the next year. With historically low rates right now, the school district would see a decreased savings from the refunding if rates raise more than just under 3/10 of a percent in the next year. However, they could save more if rates remain lower than that.
However, the advanced refunding is more complicated and expensive to do compared with if they waited a year to refund, when it would be considered a current refunding.
“If we knew rates were going to stay the same, we’d never tell you to do an advanced refunding,” Sutter said.
Despite the downsides, the STMA school board opted not to wait to refund the bond, saying they didn’t want to take the risk with current interest rates much lower than the historical average. With the current favorable rates, Sutter said refunding now would be akin to a homeowner getting a two percent interest rate reduction by refinancing their mortgage.
The bond sale will take place in early October, with the closing in February. Due to the refunding, local residents and businesses will see a small reduction in the school portion of their property taxes for 2018.
Superintendent Dr. Ann-Marie Foucault said taxpayers would save $470,000-$475,000 per year starting in 2018 with this refunding, with a total savings of over $5.6 million through 2029, though about 60 percent of those savings would be at the state level and 40 percent at the local level due to equalization aid.
A local taxpayer with a $200,000 home would save $17 per year, she added.
Foucault said she supported refunding the bond new versus waiting due to the current low interest rates.
The $35 million bond the school board is expected to approve next month would go into effect for tax year 2018 if voters approve it in February. This means the refunding would reduce the net increase in local taxes if the new bond passes. On a $200,000 home, a $35 million bond would cost $43 per year. With the refunding in place, a taxpayer with a $200,000 home would see a net increase of $26 per year in additional school district taxes starting in 2018 if the February bond passes.