Even while the nation's economy is reeling from the impact of COVID-19, the municipal bond market is good news for cities looking to restructure their debt because of historically low interest rates.
Monday night, the Rapid City, S.D., Council voted to refinance $15.175 million in sales tax revenue bonds from 2013 to take advantage of the low interest rates.
The city's Chief Financial Officer Pauline Sumption said the refinancing is expected to save the city $808,291.12 in interest payments through 2033.
"By refinancing this, the bonds will still pay off in 20 years, so in 2033 they will be paid in full. This will bring the annual payments down by about $75,000 a year, saving the city approximately $800,000 over the life of the bond," Sumption said.
The historically low interest municipal bond market and the fallout of the coronavirus has investors skiddish, although that is a temporary benefit to cities.
According to a March study by the Brookings Institution, those low interest rates cities are paying for financing debt is likely to increase as investors are pulling out of the municipal bond market.
"A more likely explanation is that, given frictions in financial markets, investors simply wanted to hold onto cash instead of buying municipal bonds," the Brookings study found. "Therefore, they started selling the bonds or mutual funds they had and stopped buying any new issues. Indeed, once it became clear that the Federal Reserve was going to support municipal bond markets, yields fell back somewhat."
Rapid City Council member Becky Drury, who represents Ward 1, told Sumption that she is grateful the city is taking a look at saving money during the economic crisis.
"I'm just glad to see that we are doing savings measures during these times. This is just one of the things you're working on, I'm sure, and we appreciate that," Drury said.
The $15.175 million in 2013 sales tax bonds is part of the city's capital improvement (CIP) fund, Sumption said.
"We took these out as part of what was then the utilities support fund to do improvements for sewer, water and some street projects. That has since been combined into the CIP fund when we did the different allocations of the sales tax," Sumption said.
