Utah's local governments saving big on interest rates
Never been better.
Those three words may seem awfully out of place as the nation's economy sputters, but that's how governments are describing plunging interest rates that could save themselves and taxpayers money on bond-related debts for everything from parks to convention centers.
"Interest rates are as low as they have ever been," said Alan Westenskow, vice president of public finance at Zions Bank.
Consequently, bankers have been busy the past few months, crunching numbers for cities, counties and school districts to see if they qualify to refinance their debt and if doing so will save them any money.
The savings can be huge. Salt Lake County just refinanced $43 million in bonds, issued in 2001 to help pay for construction of the Salt Palace Convention Center. The county is expected to save $655,000 a year on those bonds, Chief Financial Officer Darrin Casper said, by swapping 4 percent to 6 percent interest rates with something more affordable. The new rates, in many cases less than 1 percent, will cut a total of $5.1 million, in today's dollars, off the construction tab over the life of the loan.
"These are unheard-of interest rates," Casper said. "Everybody should be refinancing their debt and making sure they get the best value. It's good business for our taxpayers."
Those savings then can help governments close budget gaps, prop up expenses or return money to taxpayers in the form of a tax decrease.
Using them to pay down the principal investment is a good use of that money, said Royce Van Tassell of the Utah Taxpayers Association, as is decreasing taxes.
"That shows they want to protect the taxpayers' interests," Van Tassell said.
Using the extra cash to fund new projects or pay for general operating expenses could be cause for concern, he added, as it could mean less money in taxpayers' pockets.
For some government services, the savings may be the only thing shielding them from potentially severe cuts. Take the Clark Planetarium, for instance. It recently refinanced a $9 million construction bond, allowing it to keep an extra $75,000 in a year when its budget was cut by 6 percent, Director Seth Jarvis said. That equates to at least one full-time employee, a star show or an education program that may have otherwise been cut.
"Especially since we've been in cutting mode for the last couple of years already, we long ago moved past the point where we had anything called fat," Jarvis said.
While the financial climate may seem attractive for refinancing, it's not an option for everyone, Westenskow said. Although many Utah municipalities have good-to-great credit ratings, some bonds simply aren't ready to be revisited.
Most municipal bonds have rules about when they can be refinanced. In many cases, the earliest option is 10 years. Otherwise, governments face hefty fees and penalties.
But those costs don't necessarily stop officials from refinancing. Financial experts simply must weigh the savings against the losses. If the total savings is at least 3 percent of the refund, and can be paid off by the original deadline, those bonds may make sense.
Generally, bonds issued between 2000 and 2004 are the best fit, Westenskow said.
In addition to saving money, the climate is also ripe to issue additional bonds, Westenskow said. Holladay is working on a bond refinance of $6.5 million right now of approximately $10.3 million in bonds, which could save the city around $100,000 a year. With interest rates so low, city leaders hope to add $3.5 million to the bond for a new fire station while making only a slightly higher yearly payment.
Other entities like water and school districts are also saving. Davis School District just completed a refinance in June, for example, saving $1.5 million that will go toward paying off the loan early.
Interest rates could continue to fall, but are likely to rise again in the next two to three years, Casper said. He considers it good public policy to take advantage of historically low interest rates. "You wouldn't want to wait," he said.
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