West York discovers millions in savings with one-time bond refunding
In 2013, the West York Area School District issued an approximately $52.2 million tax-exempt bond, at an average of 4.5% interest.
Since then, interest rates have dropped, but federal law doesn't allow districts to refinance tax-exempt bonds for at least 10 years.
But if the district takes out a lower-interest taxable loan, it can repay its bond at a lower interest rate for a savings of $3 million.
The federal Tax Cuts and Jobs Act of 2017, which establishes the 10-year refinancing rule, only applies to tax-exempt loans, said Ken Phillips, of financial advising group RBC Capital Markets, at a board meeting last week.
With federal interest rates at historic lows, Phillips said, the district could refinance with a taxable loan to pad its budget with the savings before refinancing again in three years.
West York has $42 million left to pay on its 2013 bond.
With a unanimous vote Tuesday, board members approved a partial refunding of $37 million or $38 million of the bond debt for a 9.2% savings — which is three times the industry standard of 2% for advanced refunding, Phillips said.
A refunding on that amount would return about $3.49 million. The state would receive 12%, since that’s what it now pays the district in PlanCon funding — a reimbursement plan that the state discontinued for new projects. So it would be a net savings of about $3 million, Phillips said.
Phillips said 10-year U.S. Treasury rates reached 1.51% in January and 1.60% at closing on Tuesday, and based on current economic projections, rates are not expected to rise significantly anytime soon, he said.
That means banks are willing to offer an interest rate of about 2.35%, as of Feb. 11, compared with the average of 4.88%, Phillips said.
By acting now, district officials were able to lock in the lower rate until its loan is paid off in full by 2033. If interest rates were to drop even further by 2023, the district could refinance again with a tax-exempt loan.
Refinancing with a taxable rate will not affect the district's debt service payments. The district would still pay $4.6 million each year for the remainder of the bond repayment, said district business manager Sheri Schlemmer.
While in favor of the savings, board members last week discussed how they would use the money.
“I don’t think it’s a matter of whether we do it, but what do we use it for," said board Vice President Jeanne Herman.
Phillips said the district could use the money for capital reserve or other one-time expenses. It would not affect the district’s interest rates for future refinancing as long as it goes into a pot of money that could be used to pay off debt service, he said.
West York has a -AA rating, which is great for a school district, Phillips said.
The district can still refund its bond with a tax-exempt loan in three years, but to remain in good standing with the banks, officials need to keep fund balance total in the teens.
They don't want to see the district drawing down that balance significantly, he said.