Bond Refinancing Saves Town More Than $1 Million

By John Voket

Just as the tides of Newtown’s municipal finances seemed to ebb, they came flowing back in again Tuesday as officials celebrated a double dose of good news related to local bond initiatives.

Last week’s report that the town was unsuccessful in securing a better bond rating from Moody’s Investment Service did not seem to matter to competing investors who jockeyed with interest rates to arrive at a statewide low of 3.98 percent on $12.4 million in municipal bond interest over the next 20 years.

Barry Bernabe, a Webster Bank bond specialist who works with Newtown and dozens of other Connecticut communities, trumpeted the good news: “Wall Street went crazy for the Newtown bonds.”

“This series of bonds were issued at a true interest cost [TIC] of 3.98 percent, which is one of the lowest interest rates in the State of Connecticut this year,” Mr Bernabe said via email from his Waterbury office. “In fact, it is below the rate triple-A-rated Darien received for its bond issue last week. Double-A2-rated Newtown received a better rate than AAA-rated Darien!! This shows how strong the investment community feels about the fiscal discipline in Newtown.”

In addition, a refinancing of bond initiatives from 1996 and 2000 resulted in $1,058,000 in interest savings to the town. The news greatly diminished the impact of Moody’s decision on the bond rating, which Finance Board Chairman John Kortze said may have saved the town an additional several hundred thousand dollars in interest over the life of all the town’s existing bond debt.

If this all sounds confusing, even Newtown Finance Director Benjamin Spragg admits that it is.

“Here you have Newtown with a lower bond rating than Darien and we get a 3.98 rate on our borrowed $12 million. And last week, Darien went out for $17 million and they got a rate of 4.02 percent,” Mr Spragg said. “It doesn’t really make sense, but I’m pleased that we were as successful as we were.”

An already complicated formula of financial calculations can become even more confusing when taking into account the equally important, but completely separate, issue of the refinancing, or refunding, of the 1996 and 2000 bond initiatives.

“It’s not like refinancing a mortgage where you just shop for a better rate,” Mr Spragg said.

Notwithstanding the financial gyrations, the bottom line for taxpayers will primarily be reflected in the 2005 municipal budget where the interest savings will translate into a two-tenths of a mill savings, and in 2006 where interest savings will equal about one-tenth of a mill, according to Mr Spragg.

“On paper, the debt service portion of the budget will decrease,” he said. “In 2005 and 2006 we will pay less in interest and as a result, we will enjoy unanticipated savings in those two years’ budgets.”

First Selectman Herb Rosenthal said he was very pleased with the results, although he was also surprised to hear of the substantial differences between Newtown’s and Darien’s bond initiatives.

“What a difference a few days make,” he said. “I understand that these things may be affected by market fluctuations, but I think this also proves that Newtown has a good financial reputation among lending institutions.”

The first selectman said it was reassuring to see several financial institutions competing for both the new bond sale and the refunding initiative.

“It certainly shows there is a lot more to it than just achieving a bond rating upgrade,” he said.

After hearing the news about the financial windfalls, Mr Kortze said his only regret was that the town was prevented from seeking better interest rates on outstanding bonds sooner.

“It’s always good when a town can enjoy the fruits of good planning and fiscal management,” he said. “It’s unfortunate that our charter currently prohibited us from acting even more quickly to secure even better interest rates.”

Mr Kortze said because of charter stipulations that mandate an arduous process to move a bond initiative to its point of sale, the town may have missed opportunities to secure a slightly lower interest rate. Currently, the charter prevents town leaders from entering into negotiated sales of bonds, instead limiting the town to a competitive low bid process.

“In a negotiated bid situation, we have the chance to go one-on-one with financial institutions,” Mr Kortze explained. “Having the ability to choose between a competitive and negotiated sale is best. I wish we had the ability to choose between the two, but that may be resolved with the next charter change.”

Mr Spragg provided a financial breakdown of the new $12.41 million bond package.

Besides two heating and air conditioning projects at Head O’ Meadow and Hawley School, which are projected to cost $4.15 million and $290,000, respectively, the bonds are covering $5.03 million toward the purchase of Fairfield Hills, a two-way townwide communications network budgeted $1,975,000, a Class-A fire pumper truck budgeted at $320,000, $400,000 in renovations to create space at the high school, and the design for the Head O’ Meadow School heating and ventilation project, which cost $245,000.