The city of Clinton could save approximately $200,000 by refinancing loans for the city’s downtown revitalization projects over the past decade and taking advantage of “all-time low” interest rates, the city’s finance director said this week.
A couple different options were presented to Council by assistant city manager/finance director Shawn Purvis. In both cases, potential savings are around $200,000 over the next 15 years due to the interest rates being nearly 2 percent less than the city’s current rates.
Refinancing the loans would have to receive approval from the Local Government Commission (LGC) and staff requested Council’s blessing to delve further into the matter.
“At this point it is a simple request for your consent to move forward, mainly because it is a large amount of money and will require us to go through LGC,” said Purvis. “For the long-term health of the city, we recommend at least moving forward and researching this.”
The Council unanimously obliged.
The city has three financing agreements with USDA, all of which represent financing for downtown revitalization projects undertaken over the past decade. Purvis presented refinancing options that could reduce the city’s long-term debt obligation and improve its financial sustainability. He crunched the numbers in a memorandum to the board and spoke to the matter at this week’s Council meeting.
“These loans all came about before the recession so, even though the interest rates at that time on these loans were great — around 4 percent, a little bit higher — and not too bad even now,” said Purvis, “the fact is we can get them for about 2.5 percent from the private market at this point. The recent recession and current economy has suppressed interest rates to an all-time low.”
The city has invested more than $3 million in revitalization efforts downtown over the past decade, the cost of which is included in several 20-year USDA financing agreements.
“When the city secured the agreements, favorable interest rates were between 4 and 5 percent. Since the 2008 recession, interest rates have reduced considerably to less than 3 percent,” Purvis pointed out.
The city of Clinton’s initial loan was for $425,000 at 4.25 percent. It has 11 years and $276,314 in principal remaining until complete amortization, the period for which a payment is fully accounted. For the city’s second downtown revitalization, the city has two separate loans totaling $750,000 at 4.375 percent. These loans have 17 years and $646,666 in principal remaining until complete amortization.
The city has a fourth loan, for $1 million at 3.75 percent over 20 years, but has yet to close on that loan — it will do so in the first quarter of 2013 — so it was not included in the refinancing discussion.
“Refinancing the previous three loans through private market placement could involve interest rates less than 2.5 percent, which may represent a significant long-term savings for the city,” Purvis said. “It potentially could reduce the city’s long-term debt obligation within the General Fund, which has the greatest need of large capital projects that will likely require additional funding.”
Placing the loans in the private market requires approval from the LGC because of the amount, he said. Prospective rates for 10 and 12-year options were obtained, and showed sizable savings.
For the Phase I loan, a proposed 10-year refinancing schedule (the only one available due to the 11 years remaining) would bring an interest rates nearly 2 percent less than the current 4.25 percent rate, at 2.29 percent. That new rate would yield an annual savings of $739 over the 10 years. The net savings would be $39,345, with the 11th year payment of $32,000 eliminated from the debt schedule completely.
Two loans for Phase II have 16 years of debt service payments remaining, and each can be refinanced at 10 or 12 years. For either option, the proposed rate would be 2.49 percent, down from the current 4.375 percent.
“We’ll absorb the debt that we have,” Purvis said. “Past that 10 year mark, over that next seven years that we would be paying debt, we won’t have this debt anymore. We’ll save almost $200,000.”
The 10-year financing projects savings of $182,000 for the two loans over the amortization period, however the decrease in time would require an increased annual payment of $16,000, “potentially causing budget concerns,” Purvis stated. The 12-year financing projects savings of $157,000, with just a $6,000 bump in the annual payment amount.
According to Purvis’ analysis, the total net savings for Option A (10-year financing on Phase I and Phase II loans) would be $221,000. Option B (10-years on Phase I and 12 years on Phase II) would yield a proposed savings of $196,000.
Based on the cost analysis, he said, refinancing the original loans from the Phase I and Phase II revitalization projects was recommended.
“Either option presents a significant savings for the city over the next decade,” said Purvis. “While Option A presents a greater net savings by $25,000, it may cause a greater short-term strain on the budget than Option B. Option B is only two years longer and may be the best refinancing option to consider that will help the city long-term while not creating short-term cash flow conerns.”
Chris Berendt can be reached at 910-592-8137 ext. 121 or via email at email@example.com.