PINETOP-LAKESIDE – Coming before the town council on June 3 with an update regarding the recent sale of Series 2021B (Taxable) bonds and Series 2021A (Tax Exempt) bonds, Managing Partner Nick Dodd of Piper/Sandler offered a favorable report.
Two weeks ago the taxable bonds were sold so the town can pay off the unfunded Public Safety Personnel Retirement System (PSPRS) liability and to fund the construction and remodel of the Police Department building.
In their Oct. 27, 2020 work session the town heard a presentation from Dodd and began discussion of possible options for PSPRS and the police facility.
Dodd gave two extensive council presentations, the first on Dec. 3, 2020 and the second on Feb. 4, primarily for the benefit of newly seated Councilor Paul Watson, but also to add a time-table. On March 4 the council voted unanimously to move forward with a resolution authorizing the execution and delivery of all documents necessary for the issuance of revenue bonds not to exceed $10 million.
Dodd said the economy continues to recover. They are hearing concerns regarding inflation, but interest rates remain low and forecasts report they will remain so at least through the end of the year.
The most recent spike in interest rates happened when COVID hit. Dodd said investors thought local government would default and tax exempt markets froze for about six weeks.
“But, what happened, and I think Pinetop has been a great example of this, is that people still figured out how to do take out, and they stayed home and spent local,” said Dodd. “Governments continued to perform and provide services. And, local government is probably the most crucial during this last year because you have continued to provide those services that people have come to expect, and you’ve actually seen growth in your revenue, and federal government has helped out with the stimulus it has provided. And, investors quickly wrapped their brains around it and said, well we’re going to be OK.”
Dodd said that in February only six or seven towns or cities had pre-funded their PSPRS liability but now nine or ten other jurisdictions have done so, totaling around $1.5 billion. Not included in that figure, Kingman sold about $35 million. In most cases the interest rates were under 3%, as it is for Pinetop whose rate had been accruing at 7.3%.
Dodd said the town now has a clear path forward with budget stability and does not have to worry about a rapidly increasing Unfunded Accrued Liability (UAL).
The actual bond sale results on the 2021 Series B (Taxable) bonds is that the debt will be repaid over 27 years with a final maturity date of July 1, 2047. The town will pay approximately $2.934 million in interest over that time period, which is a reduction of around 20%. The actual annual payment will be $370,000, down from $407,000. The cost to the town for borrowing on the bonds is 2.97%.
It is estimated that with the prepayment to PSPRS the town will save approximately $9.25 million over the 27 years due to the bond sale versus the $8.5 million over 27 years if the town did nothing.
“The savings is based on what PSPRS forecasted your UAL payments to be during that 27-year time period,” said Dodd. “What you know for sure is that you have $370,000 to pay off. You are actually over funded about $350,000. You have a reserve with them so that if reserve does not meet what was expected, you have a cushion with PSPRS of around $350,000, and that was done because the interest rates were so favorable.
“Hopefully, knock on wood, you will never have an unfunded liability with PSPRS again. And we’ve spoken with PSPRS about July 1 when you pay it off, and they will stop and all you will have to pay is the normal cost.”
The actual bond sale results for the 2021 Series A (Tax Exempt) bonds for public safety is that the debt will also be repaid over 27 years with a maturity date of July 1, 2047. The town will pay approximately $1.178 million in interest over that time period, in addition to the $3 million borrowed for the facility. That interest is a reduction of around 30% from the original projected numbers. The annual payment will be $155,000 instead of $170,000 and the cost to the town for borrowing on the bonds is 2.27% in lieu of the 2.89% forecasted.
Dodd said that when the bond sales started two weeks ago, they had one sale right away but then it went slower than they wanted. By the end of the sale they had attracted six or seven investors. It was one of the busiest weeks for bonds and they felt like there was a bit of investor fatigue.
Without any other investors willing to buy bonds, as a risk transfer, Piper/Sandler underwrote a little over $1 million in bonds themselves — around 15%.
“Your interest rates were locked and we took that risk. We have since sold most of the bonds,” said Dodd. “We are an underwriter and that’s what we do.”
Dodd said he was happy with the results and credited town staff for going to the mayor early on, and for council making the decision for the bonds after going through a very deliberate process.
Mayor Stephanie Irwin said, “I think this is going to be good for the town.”