Hopkins County Commissioners Court authorized issuance of general obligation refunding bonds to take advantage of lower interest rates to advance refund the two bonds taken out to build the new jail facility, provided rates continue to be favorable for doing so.
“It’s an opportunity to save a whole lot of money for Hopkins County,” Hopkins County Judge Robert Newsom said.
Robert Henderson, managing director with RBC Capital Markets who serves as the county’s financial advisor, said the voters approved bonds to finance the jail. They were sold in two series in order to sell them at lower interest rates given provisions of the Tax Reform Act which allowed it to be designated as a base qualified debt. by breaking it into two transactions, the amount was below $10 million. Bonds were sold in 2013 and 2014 at a lower interest rate, which allowed the court to set the tax rate 1 cent less than they had anticipated.
Interest rates have dropped dramatically in the last 18 months, and are astoundingly low right now, Henderson told Hopkins County Commissioners Court during their regular meeting Monday morning, Feb. 8. Refinancing the 2013 and 2014 bonds at even lower interest rates will improve the tax rate even further, the financial advisor reported. The average bond sold in 2013 and 2014 was about 4.07 percent.
“The average interest rate on those bond was 4.07 percent. We believe based on current market rates that we can refinance that debt at 2.05 percent and, in so doing, save the county’s taxpayers about $879,000, a little bit more than $875,000 over the life of the issuance of these bonds,” Henderson said.
A tax rate can only be levied for debt sufficient to meet those debt service payments. So by refinancing the debt, the tax payers will see a reduction in the I&S (interest and sinking or debt service) tax rate, Henderson said.
“There’s going to be a slight little twist on this refinancing. The Tax Reform Act of 2017 eliminated the ability to issue tax exempt bond on an advance refunding basis,” Henderson. “When those bond were sold, there was a par call date, the date you can take and pay your bonds off early without having a penalty associated with that. Advanced refunding is refinancing that debt before we get to that call date. Which means that what we’re doing, instead of taking that debt like you would a home mortgage, refinancing it and paying off the old debt immediately, because we cannot pay off the old debt immediately, we’re going to take the proceeds of this debt and put it into an irrevocable trust, an escrow account, and it will stay in that escrow account until we reach those call dates. And, then, when we get to those call dates, the escrow account will collapse and pay off the old bonds.”
The call date for the two bonds, according to information Henderson provided during the Commissioners Court meeting is Oct. 15, 2023.
Fees such as escrow, legal feels, fiscal fees and Attorney General’s Office rating fees which are associated with refinancing a bond are built into the amount cited, so the $879,000 is net of all the cost. The present value savings, Henderson said, is 7.92 percent; saving 4 percent present value savings is considered economically feasible. The projected savings amount is nearly twice that amount, Henderson pointed out.
There would be a 9-year “hard call” by which the county would have to wait if they chose to pay the remaining debt off early, that would be 2030 if the advance refunding occurs. If desired before then, the county could potentially establish another escrow account for advance refunding, but Henderson said that would likely be unadvisable due to the very low interest current interest rates of 2.05 percent, which would allow the county to have a lower tax rate.
“When we fund that escrow fund, that legally comes off the books of the county. So once we do that, even though those bonds are outstanding, because they are paid from that trust account he described, they come off the books. Its no longer a debt of the county,” Jeff Gulbas, the county’s bond legal advisor noted.
The Commissioners Court agreed to a parameter sale, authorizing the advisors to notify the county judge when when the market appears to be at the best place to take advantage of the lower rates. The bonds would not have to be sold on or immediately following the date of the court meeting. Newsom will be required to sign all documents when the advisors indicate a favorable market for the advance refunding, before the issuance of the bond.