December 29, 2017 – 05:00 a.m.
In the past few years, local taxpayers have saved a lot of money.
For those getting water from the Sweetwater Authority, it was $2.7 million.
In the Carlsbad Unified School District, folks saved $10.2 million.
And in San Diego, it was a whopping $323 million.
A lot of this was done through a certain type of bond refinancing obscure to most of us. Sounds scintillating, I know. But the money is real, even if the savings are stretched out years into the future. Now, thanks to the recently signed federal tax bill, this option is not likely to be used much any more after Jan. 1.
Under current law, governments had one shot to refinance certain existing bonds at a lower rate and still get the federal tax exemption on new bonds. The tax bill does away with that exemption on what the financial world calls “advance refunding.”
“Terminating advance refundings will eliminate the flexibility that (public agencies) have had to take advantage of lower interest rates and free up funds for other projects,” according to The Bond Buyer.
The Government Finance Officers Association said such refunding of municipal bonds has been “a critical method by which issuers achieve cost savings on public infrastructure.”
With so much focus on reduced income tax rates and limits on deductions, this provision of the tax bill hasn’t received much attention. But it will.
“Generally, there will be a loss of savings,” said Lakshmi Kommi, debt management director for the city of San Diego.
Governments will still have other ways to refinance, but they won’t be as attractive.
Advanced refunding transactions have represented approximately 15 percent of municipal bond issues over the last few years, according to Tim Benzel at Oppenheimer Funds.
There was a tremendous surge in this kind of refinancing a couple years ago when interest rates dropped.
“The goal is to get the most value out of every tax dollar,” San Diego Mayor Kevin Faulconer said in May 2016 when the city announced a sweeping refinancing effort, which had begun a year or so earlier.
“By taking advantage of historic lows in interest rates, we’re paying millions less in debt and will have millions more available in future budgets for priorities such as roads, water and sewer projects and parks.”
Four large debts, including bonds used to build Petco Park, had been refinanced by the city.
The city said its annual savings would be $13 million — about 25 percent more than it spends each year to operate SDCCU Stadium in Mission Valley.
“In the past few years, we have been very aggressive in taking advantage… of the low interest-rate environment,” said Kommi, who was kind enough this week to walk me through some of the changes in municipal bond financing and what they mean.
She said financing for projects in Balboa and Mission Bay parks were also redone.
San Diego was not alone in the refinancing binge, aimed at locking in low rates and reaping big savings . California State University launched an effort to refinance nearly $1 billion in 2016 that was projected to save the system $300 million over a decade.
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