North Ridgeville Review The Community That Cares
In March of this year, Mr. Michael Pissini, Chief Financial Officer and Treasurer of the North Ridgeville City Schools, contacted his finance team to initiate proceedings to begin analyzing a refinancing opportunity for the district’s outstanding Series 2014 A and B bonds. On Wednesday, August 11, 2021, the district finalized plans to refinance $9.510 million in outstanding bonds, saving taxpayers by lowering the overall interest expense on their outstanding debt. Much like a home mortgage, most municipal bond transactions have prepayment options, whereby issuers can take advantage of lower interest rates, thereby saving money.
The opportunity initially presented itself for the district in the height of the pandemic in 2020, when interest rates and financial markets were shocked after international lockdowns slowed manufacturing and economic growth across the globe. Initially introduced with an opportunity to refinance the bonds in advance of their prepayment date, which could only be done on a taxable basis, Mr. Pissini instructed his finance team to wait for the current call of the transaction; on December 1, 2021, and optimize its savings by issuing a currently callable tax-exempt issue. This strategy resulted in over a million dollars of additional gross cash flow savings, as tax-exempt interest rates are much more cost-effective. Bond prices and interest rates work inversely, meaning when bond prices go up, interest rates come down. With the equity markets in turmoil, investors decided to put their money in safer instruments, such as U.S Treasuries and municipal bonds, driving prices up on the much sought-after investments. Bond markets continued their rally, i.e. rates continued to fall; through the summer, after an initial backup in rates in late spring, when it was thought the COVID-19 pandemic was coming to a conclusion. As such, Mr. Pissini conducted analysis on all potential candidates from the original series 2014A and 2014B Refunding Bonds, which were the remaining portion of the district’s original $50.1 million bond issue. The other portions of the original Series 2014 A&B were refinanced in 2017.
Mr. Pissini instructed his municipal advisors, Sudsina and Associates, to structure an issue in a manner which could potentially shorten the overall issue by eliminating as many long-term maturities as possible, without increasing debt service or requiring any additional millage assessment for district taxpayers. As such, his finance team was able to construct a principal redemption schedule which eliminated seven years worth of interest payments, which also resulted in additional cash flow savings for the taxpayers.
As part of the overall process, the district needed to produce a prospectus (called a preliminary official statement, or “POS”) for potential investors, and as such, needed to update their credit rating with Moody’s Investor Services on their outstanding bonds. The district was reaffirmed at their current credit rating of Aa2. The highest rating the district could have achieved is Aaa, which is only two notches above their current rating. Mr. Pissini emphasized to the rating agency his requirement to keep transactional costs to an absolute minimum, while still providing exceptional results for the refinancing.
Moody’s recognized the prudent and conservative fiscal approach the CFO takes toward revenues, while maintaining reserve balances and continued growth in real estate valuations because of continued economic development and new home construction. Even with restrictions on revenue, Moody’s applauded the Treasurer’s approach to district general fund reserves and the ability to control expenses while maximizing revenues. Mr. Pissini guided them through their questionnaire, all the while explaining and providing all the salient data and analysis required for the rating affirmation. Moody’s Investor Services specifically highlighted the Treasurer’s ability to eliminate long-term maturities while still retaining exceptional cash flow savings – a definitive “+” for the rating.
TRANSACTION SUMMARY:
– The final maturity date of the outstanding bonds was shortened by seven years, now maturing on 12/1/2034 (vs. 12/1/2041).
– The par size of the transaction was $8 million.
-By refinancing the debt at a lower interest rate, the district was able to save taxpayers $2.346 million through 2034. In today’s dollars, that’s $2.094 million.
-The issue refinanced the following maturities:
Refunding of 2014A UTGO Term Bonds:
12/01/2034 @ 4.000% — $1,755,000
$1,755,000
Refunding of 2014B UTGO Term Bonds:
12/01/2028 @ 4.000% — $1,160,000
12/01/2041 @ 4.000% — $40,000
$1,200,000
Refunding of 2014B UTGO Serial Bonds:
12/01/2029 @ 4.000% — $1,110,000
12/01/2030 @ 4.000% — $1,190,000
12/01/2031 @ 4.000% — $1,330,000
12/01/2032 @ 4.000% — $1,420,000
12/01/2033 @ 4.000% — $1,505,000
$6,555,000
TOTAL PAR of Bonds Refunded $9,510,000
-The new bonds will also have an additional prepayment option to take advantage of potential future
lower interest rates.
-Net Present Value Ratio of 22.108% (3% and higher is considered beneficial)
-True Interest Cost of the new bonds – 1.504%
-Average Interest of the Series 2014 bonds refunded – 4%
