PORT TOWNSEND — A plan to refinance millions of dollars in bonds to take advantage of historically low interest rates would allow the city of Port Townsend to move forward with bike and pedestrian improvements along Discovery Road, officials said.
With state and federal grants in hand, the city already has begun designing a sidewalk and bikeway to be installed between McClellan and Rainier streets along one of two primary routes into and out of the city.
The city’s share of that project — $250,000 — was to be covered by a $900,000 line of credit taken out last year and due to be repaid by next June.
Instead, with the help of more than $500,000 in interest savings over the next 10 years, the city aims to convert that line of credit to long-term debt, allowing it to slowly pay back the money over the next 20 years.
“It really is a unique opportunity that we’re in with the interest rates and COVID,” said Ariel Speser, Port Townsend City Council member, during the council’s first look at the plan on Monday.
“They [city finance staff] are basically applying some financial savvy-ness to put us in a position to complete this project and minimize our interest payments.”
During that meeting, the City Council gave its initial blessing to a plan to issue nearly $3.66 million in limited tax general obligation refunding bonds so as to call back and refinance some $2.74 million in bonds outstanding from the $3.8 million in bonds issued in 2010 to pay for a variety of capital projects.
Those 2010 bonds still would be paid off within their original 20-year term, by 2030, only at an average interest rate of 1.54 percent instead of 5 percent, resulting in $555,947 in total savings, staff said.
Most of those savings — all but about $2,000 — would be absorbed by the borrowing of $900,000 to pay off the line of credit over 20 years at an interest rate of 2.02 percent, said Finance Manager Tony Hillman.
“We would be able to just make principal and interest payments over the next 20 years and would no longer have to worry about finding funding to pay off the line of credit next year,” Hillman said.
Council member Monica MickHager, who serves on the council’s Finance and Budget Committee, said she supports the ultimate goal of ensuring the city can come up with its share of the project cost but is concerned refinancing will cut the city’s debt payments at a time when lagging revenues are forcing cuts to city departments.
“While it’s great that low interest rates allow us to absorb our line-of-credit debt into long-term debt without an increase in debt service, departmental directors are currently being asked to reduce our budget by over $1 million for next year,” she said. “Departmental budgets will shrink while our service debt payments stay constant.”
MickHager said the council could avoid this kind of financial maneuvering by discussing how it will fund capital projects when those projects are first presented by staff.
Deputy Mayor David Faber, however, said the council is already well involved in those discussions and that “suggesting that we’re not paying attention just belies reality.
“I’ve never once voted yes on one of those projects without realizing that it was going to end up in our general obligation debt because we don’t simply have $250,000 of extra cash lying around at any given time,” he said. “That’s something that I think should be patently obvious to anyone serving on council.”
City Manager said John Mauro said staff could work on being more upfront about capital project costs early in the process.
“Talking about the full city out-of-pocket costs for projects well in advance and making that abundantly clear is something we can be committed to, particularly in the next year,” he said.
Hillman said he expects the share of city revenue used to pay off debt is likely to increase next year because revenues are down.
The city’s internal policy is to stay below 15 percent, although the state Auditor’s Office recommends staying below 12 percent. In 2019, the rate was 10.9 percent.
“With coronavirus, we’ve had a reduction in revenues, so there is a chance we’ll probably see an uptick,” Hillman said. “We’ll probably be closer to 15 percent. Hopefully this is a one-time situation with coronavirus, and as revenues build back up, we’ll start to see that percentage come back down.”
Faber said the city’s plan to refinance bonds and convert a line of credit to long-term debt won’t be a contributing factor in that rise.
“If we didn’t vote on this tonight, we would pop over that 12 percent guideline one way or the other because that $900,000 is being refinanced as existing debt,” he said. “We still would have had this pile of debt we would have had to pay.”
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Jefferson County senior reporter Nicholas Johnson can be reached by phone at 360-417-3509 or by email at njohnson@peninsuladailynews.com.
