The market for municipal bonds has softened, and at least one local community is revising its plans.
The town of St. John recently attempted to refinance the $7.3 million in building corporation bonds sold in 2005 and 2006 to construct the St. John Municipal Center, police and fire stations and public works building.
At the June 13 Town Council meeting, Town Manager Steve Kil announced the lower interest rate paid to investors would mean a savings of more than $1 million in interest.
“Tax money that was being used to pay on the corporation bonds will be reduced. The property tax rate per household will decrease,” he told the Town Council. “Residents will see that on their property tax bills.”
However, two weeks later the scenario was very different.
Between the time plans were finalized to refinance those bonds using Mesirow Financial of Chicago as underwriter and the possible sale date, the bond market “softened," Kil told council members at the June 17 meeting.
“Interest rates (paid to investors for purchasing the bonds) have risen. If we would refinance we could realize $350,000 in savings rather than $900,000,” he said.
Part of the problem was the bond market’s reaction to Federal Reserve Chairman Ben Bernanke’s announcement low interest bond-buying by the U.S. government would be scaled back later this year if economic reports continued to show improvement.
Kil and St. John Town Attorney David Austgen also blamed a lack of communication on the part of Mesirow Financial.
“They didn’t tell us anything about the soft market,” Kil said.
The Town Council opted to hold off refinancing the bonds.
Municipalities borrow money to build new facilities, redevelop or revitalize areas and attract businesses to their borders.
The sale of bonds to investors and backed by various forms of revenue constitutes the financial instruments most frequently used by various forms of government, said Clay Johnson, Munster assistant town manager.
Money generated by the sale of bonds is “a separate source of funding” for projects than is available in a town or city’s budget, Johnson said. This funding provided by bond sales is usually in the millions of dollars.
As with all forms of borrowing, the sale of bonds requires the repayment of principal and interest to the investors, he said. There are also costs associated with the sale of bonds, including payments to the underwriter responsible for conducting the sale.
The type of bond sold by a municipality depends on what revenue source will be used to pay back the interest and principal.
Economic development bonds are generally backed by revenue from a tax increment financing, or TIF, district. This revenue comes from a portion of property taxes paid by businesses within the TIF district that is returned by the state government for redevelopment inside the district borders.
That redevelopment can include infrastructure such as streets and sewers, and the building of facilities.
Munster and Chesterton are among the communities that have successfully used TIF-backed economic development revenue bonds for these purposes.
Development of the Munster Shops along north Calumet Avenue and the Lake Business Center at Fran Lin Parkway and Calumet Avenue were financed, in part, by economic development bonds.
Chesterton issued $25.9 million in economic development revenue bonds to bring Urschel Laboratories to town. The money is being used for the company’s new manufacturing facility as well as a corporate headquarters at Coffee Creek Center.
Another type is building corporation bonds, which are used to construct public facilities and are paid back through residential property taxes.
Valparaiso, for example, recently issued this type of bond to build new public works department facilities on a 30-acre site the city owns at the sewer treatment plant on Joliet Road.
In some cases, municipalities find they can save money on the interest payments by refinancing the bonds they’ve sold in the past, much as a homeowner would refinance a mortgage. That occurs when interest rates on the refunded bonds is lower than the original rates.