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City bonds sold: Interest rate higher than expected

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news Bemidji, 56619

Bemidji Minnesota P.O. Box 455 56619

The pot of leftover contingency funds for the construction of The Sanford Center just got significantly smaller.

The Bemidji City Council sold $44 million worth of sales-tax bonds Tuesday on a 30-year long-term basis at a true interest rate of 5.4126 percent.

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The interest rate is higher than what city staff and bond counsel expected, and it will result in an initial shortfall of $696,038. Those dollars will come from The Sanford Center's construction contingency fund, which had been sitting at $821,000 and expected to end up around $1 million.

Councilor Kevin Waldhausen noted that the council had hoped the contingency fund would cover the cost of a new Nymore Beach on the south shore of Lake Bemidji.

Now what, he wondered.

"Nobody's more disappointed than Ron and I," said City Manager John Chattin, referencing Ron Eischens, the city's finance director.

The council was informed in a November work session of all of its options regarding the sales-tax bonds, Chattin said.

The bonds were sold in February 2010 for two-year short-term bonds at a rate of 3.96 percent.

Long-term interest rates were at historic lows last fall, so staff and bond counsel recommended refinancing.

Doing so in November would have created a shortfall of $568,000, due to a combination of issues such as the timing of when sales-tax dollars are available for serving the debt, the cost of the bond issue and capitalized interest. Refinancing in January was expected to generate a shortfall of $83,000.

Bemidji's bond counsel believed waiting that waiting until January would be best due to the shortfalls expected.

"If interest rates change substantially, that's the risk that you face," Eischens told the council on Nov. 8.

And, in fact, they did increase.

"We lost," Chattin said Monday. "The last three weeks, the bond interest rates have escalated."

Fortunately, he said, the city has the funds available in contingency funds to cover the shortfall.

"But we are quite disappointed," Chattin said.

Had the council chosen to not put the bonds in short-term rates in 2010 and put them straight into long-term bonds, the true interest rate would have been between 6.5 and 7 percent.

So, staff noted, 5.4 percent is still lower than what it could have been.

Chattin told the council it could opt to play the market and keep the bonds as short-term bonds, but interest rates could rise to 6, 7 or even 8 percent.

"Staff believes this is still the best option," he said.

The bonds will be paid by sales-tax collections. The payments are based off of 3.5 percent annual growth of sales tax. Eischens reported that the city continues to experience about 5 percent growth in sales tax.

There may be deficits accumulated in the first years, staff said, but they will be covered in later years.

In the event that sales-tax collections to not meet or exceed 3.5 percent, property taxes would be needed to meet bond payments.

"There's going to be a balancing act there, and we really do need to see positive sales-tax growth in the early years," Chattin said.

Seven bids were received on the bonds, reported Myron Knutson from The PFM Group.

"That indicates a lot of interest," he said.

The low bid came in at 5.4095 percent from Wells Fargo Bank, BB&T Capital Markets and Bosc. Inc. The bid price was then slightly modified, which resulted in a true interest rate of 5.4126 percent.

Knutson said the city again was given an Aa3 bond rating.

"Which is an excellent rating," he said.

The difference between the low bid and the high bid (about 5.7 percent) was about three-tenths of a percent.

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