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HILLSVILLE — Taking advantage of low interest rates through refinancing water and sewer project debt could lead to a savings of between $686,000 and $1.1 million for the Carroll Public Service Authority, a financial advisor said Monday.
R.T. Taylor, associate vice president of Davenport Public Finance, said his company — at the request of the authority members — undertook a financial analysis of capital improvement debt.
Davenport distributed information to 17 financial institutions about possibilities to refinance $4.3 million in Rural Development loans to the PSA.
The interest rates on these loans are 4.5 percent, authority members discussed.
Three bids came in, including one from National Bank, which would provide the PSA with a locked-in, five-year rate of 3.72 percent, Taylor explained. After five years, the new rate would depend on where interest rates go in the meantime.
Accepting National Bank's offer would guarantee the PSA savings, because the bank will provide a ceiling interest rate of 4.35 percent, meaning it can't go any higher, Taylor said. The ceiling, or maximum rate, will remain less than the 4.5 percent rate that the authority is already paying.
There's also a floor of 3.30 percent that the rate could reset at after five years.
The least amount of savings under this offer would be $686,805, if the interest hits the ceiling rate, Taylor said. The best-case scenario is the interest rate drops to the floor and saves the authority $1,092,952.
The refinancing package would cut out the last seven years of payments in each scenario, Taylor said. This would shorten the repayment period from 32 to 25 years.
"The refunding allows the authority to 'cut-out' $973,325 in debt service in those later years; thereby increasing the authority's debt capacity," according to Taylor's presentation.
The refinancing would also cut the authority's debt service payments from 60 a year to just two, Taylor said.
"What does that mean? You're able to keep your money in your pocket, earn more interest, earning throughout the year," he said.
National Bank also offered other terms, such as allowing revenue from the water and sewer systems being refinanced as the only security needed; allowing prepayment any time without penalty; no closing costs; and no annual fees.
The refinancing can be closed by Aug. 15, if the authority members agree to it, Taylor said.
County Attorney Jim Cornwell noted there were two outstanding Rural Development loans that it didn't make sense for the county to refinance, because they already had lower interest rates.
PSA Chairman David Hutchins asked about the potential costs of this idea.
Taylor pointed to cash flow savings charts he developed, which showed that, in all scenarios, the cost for the refinancing would be $2,338 per year from 2010 to 2013.
Under the worst-case scenario, the cost would go up to $16,235 per year until 2028, he said. But under the best case scenario, the authority would actually come out about $5,000 on the plus side until 2028.
Even in the worst-case scenario of the interest rate in five years resetting at the ceiling, said Authority Member Wes Hurst, "you're still saving a pretty good chunk of change and we're cutting the term back seven years..."
Hurst then made a motion to go forward with the idea.
In discussion, Hutchins wanted to make sure that the authority knows how they can pay the extra cost that would occur under the worst-case scenario.
All six authority members voted for the motion.