Duluth among Minn. cities jumping on low interest rates to save millionsIn an era when state funding is tight and local government investments aren’t earning much, the city of Duluth is taking advantage of one factor in its favor: low interest rates.
By: Peter Passi, Duluth News Tribune
In an era when state funding is tight and local government investments aren’t earning much, the city of Duluth is taking advantage of one factor in its favor: low interest rates.
The city is one of many local governments around the state doing the same thing that a lot of homeowners are doing. It’s refinancing some of its loans and saving millions of dollars in the process. In 2010 and 2011, for instance, Duluth refinanced the outstanding balance on five different bonds with a cumulative value of $14.4 million. As a result, the city stands to save more than $1.5 million in interest over the remaining life of the bonds, according to David Montgomery, Duluth’s chief administrative officer.
“Low interest rates have helped us a lot,” said Montgomery, adding that the city likely will continue to refinance other bonds as they reach their call dates, as long as similar savings can be achieved.
The city issues short-term bonds — usually 5 years or less in duration — to pay for equipment such as dump trucks, plows and computer technology. It issues longer-term bonds — anywhere from 10 to 20 years in duration — to pay for capital improvements, such as road projects, a new law enforcement center and renovations at City Hall.
While there’s no overall tally of statewide savings, units of governments statewide have saved tens of millions by jumping on lower interest rates for bond debt on past construction projects. St. Paul reduced its total debt by
36 percent over the life of $8.8 million in bonds related to a U.S. Bank building it helped finance. The city saved another $5 million by refinancing bonds for the Lawson Building and the new police headquarters.
“We live in exciting times when we can save this kind of money,” Todd Hurley, the city of St. Paul’s finance director, told the St. Paul Pioneer Press.
The state has gone on a refinancing campaign, too. In August, Minnesota refinanced $21 million in bonds for a state retirement systems building — dropping a 5.9 percent interest rate down to 1.6 percent. That meant $9.5 million in savings.
Refinancing opportunities began to pick up about a year ago, according to Mark Ruff, a financial advisor with Ehlers and Associates, which offers advice on bonds and borrowing. Demand swelled in May and June, he said, spurred by falling interest rates.
A typical 20-year bond now carries an interest rate of about 3.75 percent — below the 5.4 percent charged in January 2011. Savings are particularly big if the borrowers have a history of well-managed finances and the coveted AAA bond rating.
Most bonds can only be refinanced on specified dates, known as “call-able” dates. When low interest rates, high credit ratings and good timing coincide, “it is an opportunity,” said Jeff Solomon, director of finance and operations at Rosemount-Apple Valley-Eagan schools.
“Saving 5 or 6 percent is considered good,” Solomon said. “And in excess of 10 percent? That is superb.”
Ruff, the financial advisor, cautioned that despite the refinancing opportunities, all is not perfect for the budgets of local governments. The economic slowdown has resulted in drops or delays in state support for cities and schools, and investment income has fallen significantly too.
Savings from refinancing get spread over the life of the bonds, meaning there’s rarely a dramatic difference in any single year’s budget.
The Associated Press contributed to this report.