Hundreds of small cities in Georgia are faced with the same dilemma: a capital project that they want to complete to make their community a better place to live. The project may be a new fire station, renovations to city hall, extending a water main to a new subdivision or upgrading the equipment in a wastewater plant. The main challenge is how to get the project financed. Federal and state loan programs exist but they may not be a good fit for any number of reasons. City leaders often do not consider a municipal bond issue as a viable alternative but bonds might be just the right fit to get the project financed.
Last year the city of Chatsworth was facing two issues. The city had three loans on the books with interest rates that exceeded four percent. Also, the city’s wastewater treatment plant needed $500,000 in equipment upgrades. A $7,180,000 issue of municipal bonds allowed the city to restructure its outstanding loans and fund $500,000 for the wastewater plant improvements. More than $700,000 in interest savings was achieved and annual debt payments were significantly reduced for the next 12 years without extending the payoff period. The city went through the credit rating process for the first time and received a high investment grade credit rating of AA- from Standard & Poor’s Corporation.
With interest rates near historic lows many communities have the ability to refinance existing debt to reduce annual debt service or shorten the term of outstanding debt. As Chatsworth discovered, the ability to restructure existing debt obligations with municipal bonds provides an opportunity to fund badly needed projects with minimal or no impact on tax or utility rates. One major benefit of municipal bonds is the flexibility in structuring principal and interest payments. Bond issues can be structured to literally wrap around existing obligations to create aggregate debt service that is level. This structuring technique helps to avoid major changes in debt service from year to year that can create real budgeting headaches.
Many misconceptions exist about municipal bonds. Most of these misconceptions relate to bond issue size, issuance expenses, the credit rating process and the complexity of the bond issuance process. Municipal bonds can be efficiently issued in amounts as low as $2 million. Issuance expenses including legal and underwriting fees generally range from 2-3 percent for issues under $5 million and are paid from proceeds from the sale of the bonds. The credit rating process provides you an opportunity to educate the rating agency on the many great things that are going on in your community and to discuss how you are addressing challenges. Many smaller communities receive medium and high investment grade ratings that provide access to the lowest interest rates available in the market. The legal requirements, tax regulations and documents may be confusing and seem complicated at first. Having a good transaction team in place is essential. Reading the documents that are circulated for review and asking questions about anything that you do not understand will get you quickly up to speed and make you a more informed decision-maker.
After considering other funding alternatives, the city of Midway is in the process of issuing approximately $3.5 million in revenue bonds for debt refinancing and capital project funding. Your community may have a similar opportunity that you haven’t fully considered. A municipal bond issue may be just what your city needs to operate more efficiently and turn concepts and ideas into projects and facilities that benefit your citizens.
Tony King is a Certified Independent Public Finance Advisor and manages the Georgia office of Kidwell & Company, a full service municipal advisory and investment banking firm. He can be contacted at firstname.lastname@example.org.