After some difference in opinion, the Lower Merion Board of School Directors ultimately voted unanimously on Tuesday night to move forward with plans to advance refund the district’s 2003 bonds, which could bring $6 million in savings to the district.
The refinancing option comes at a time when interest rates are at an all-time low, according to John Frey, senior managing consultant for Public Financial Management, a district financial advisor. Most municipal bond issuers look for about a 3 percent savings when refinancing. Currently, refinancing the district’s 2003 bonds would result in a 12 percent savings, Frey said.
Back in the fall, the school board had considered refunding the 2003 general obligation bonds, which at that time would have garnered $4 million in savings for the school district. The board voted to wait, and now, only a few months later, refinancing would earn the school district about $2 million more, for a total of about $6 million in savings.
That kind of jump had some school board members at Tuesday’s meeting wondering whether the district should take a gamble and wait to refund the bonds later, in hopes of even greater returns.
Refunding the bonds now would lock in approximately $6 million in savings. If the district waited to refund the bonds in 2013 when they come due, the savings could be as high as $7,788,984, according to a document provided by Frey—but that’s assuming that a year from now, interest rates are as low as they are today. As little as a .5 percent interest rate increase would drop the savings down to $5,917,000, with a 1 percent rate increase resulting in only $4,044,000 in savings.
A third option considered by the school board was refunding half of the 2003 bonds now, locking in today’s interest rate on one portion, and waiting to refund the other half of the bonds in 2013. That option could bring the school district $6,805,000 in savings, assuming that interest rates stay as low as they are today. If interest rates saw a .5 percent increase, however, the school district would only take home $5,869,000 in savings, or with a 1 percent increase, $4,933,373.
Some school board members, including Subha Robinson, thought the potential of extra savings might be worth the risk. Robinson promoted a fourth option, in which the school district would lock in half the savings now, and then refinance the second half of the 2003 bonds once scales began to tip the wrong way.
In this fourth scenario, however, the process of locking in a rate would take at least a week and as long as two or three weeks, Frey said—meaning that savings for the school district could continue to plummet after deciding to refinance.
Some school board members were not willing to take that risk.
“I see a significant amount of money on the table at this time, and the world is so uncertain—who knows what could happen a year from now,” school board member Gary Friedlander said. “The realization of a $6 million savings today in an economy where school boards are looking for funds … I don’t want to take a chance that it might now be there a year down the road.”
Jerry Novick agreed. “$6 million is hard to pass up … I don’t think you look a gift horse in the mouth and without question, I would act as quickly as possible.”
After 40 minutes of discussion, the school board ultimately voted unanimously to move forward with plans to refinance all of the 2003 bonds immediately.
The school district’s financial advisers plan to return March 19 with a firm proposal for the purchase of the bonds, on which the school board will vote.
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