By Sheryl Hamlin
Suppose you own a home financed by a 30-year mortgage. Subsequent to the origination of the mortgage, interest rates drop significantly. Assuming you are still a creditworthy buyer, there are several options to take advantage of this drop in interest rates: 1) refinance the balance of the principal, reducing payments and saving money to pay down other debt, 2) maintain the same monthly payment borrowing more than the remaining principal thus giving yourself an infusion of cash, and 3) reduce the monthly payments slightly giving yourself a smaller cash payout from the savings on the interest. Which would you do?
The City Council of Santa Paula discussed such a scenario on Wednesday, November 20, 2019 with respect to the refinancing of the 2010 Santa Paula Water Bonds. The solution chosen approximates the middle path, where payments are reduced in order to meet the bond ratio requirements, but a small amount of cash is extracted.
In the chart above the $43,550,000 represents the par value of the outstanding 2010 bonds plus accrued interest, while the $35,900,000 represents the new issue. After net-present-value is computed for both, there is a projected savings of about $9 million. The bar chart to the right shows the proposed payments (bars) compared to existing (blue).
The extra cash is called “new money” and is shown in the chart below by a blue extension of each orange bar. The potential projects are a result of a previous energy efficiency audit. Read that audit here: Energy Efficiency Audit
There were two parts to this refunding: the sale of the bonds and a city debt policy. The discussion about the bond sale centered around timelines which change cash flows. Council Member Crosswhite brought up the point, which was confirmed by Mr. Curls from Hilltop, that if interest rates change during the sales process, the $3 million free cash could be returned to the water fund rather than spent.
Council Member Sobel asked about the wastewater bonds. Mr. Curls said that these would need to be evaluated because they are relatively new.
Both motions were approved by Council and by the Utility Authority unanimously.
There was no discussion about potential savings with the “new money” spending.
To watch the video, click here.
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