North Little Rock's proposal to pay off one set of bonds and refinance another will reduce annual payments and take advantage of much lower interest rates, according to two proposals the City Council is to consider today.
The bonds to be redeemed were issued for $10.2 million as part of a multi-issue, $60 million bond package for the North Little Rock Electric Department in 2012 that also restructured bonds for the Murray Hydroelectric Plant to extend the plant's payoff date by 10 years.
The payment of almost $7.9 million for the outstanding balance on the 2012 C bonds will reduce the annual debt payment of that total bond issue by $1.48 million, according to information provided to the City Council. The payoff will come from the city's excess reserves, with the yearly savings to be used to replenish the reserve fund. The interest rate on those bonds at the time of issue was 3.56 percent.
The other bonds, also for the Electric Department, were a 2011 issue for $16 million at an interest rate of 4.68 percent. Refinancing that bond issue's outstanding balance of $14.6 million at today's much more favorable interest rates is projected to save the city $175,000 annually in interest costs without extending the term of the bonds, according to the proposal.
The recommendations to the City Council are from a council-appointed Investment Advisory Board that was established in August 2014. The board, composed of City Finance Director Karen Scott, Chief of Staff Danny Bradley, Electric Department General Manager James Bray and nonvoting member City Attorney Jason Carter, tracks the city's investments and the city's debt obligations.
"It's all about the flow of cash," Carter said of the advisory board. "We need to have people with visibility of both [investments and debts]."
Reissuing the 2011 bond debt "is trading one set of bonds for another set of bonds," Carter said. "We can do that when we think we can get a better interest rate or change the way our cash flow works.
"Refinancing the 2011 bonds allows us to take advantage of current low interest rates and reduce our annual expenditures," he said.
Scott said that the advisory board has been "debating for a while" on making the recommendation on the separate bond issues after studying interest rates being paid on the bonds versus interest received on the city's investments.
For example, she said, the average interest on bond coupons being paid was 3.65 percent, while the city was receiving "maybe 1.25 percent" on its investments.
"We decided to take the cash we had and pay it off," Scott said. "It didn't make sense to have 3.75 percent in interest expense and not be earning anything on the money that was sitting there in investments.
"The market has been so favorable really for quite a while," she said. "We can do it without extending the term. It's just that the interest rate is better."
The 2011 bonds were used to build an electric substation in the city's Galloway area, establish the Electric Department's new headquarters at 1400 W. Maryland Ave. and the addition of "smart meters" for all city electric customers, Carter said.
The 2012 bond issue's A and B series restructured three outstanding bond issues that included $44 million left on hydroelectric plant bonds. The 2012 C portion of that bond package and a 2012 E issue were for acquiring about $10 million in new debt to improve the utility's cash flow, Carter said.
The bond restructuring in 2012 delayed until 2025 the payoff for the hydroelectric plant, which had been scheduled in another three years. The city didn't start making any payments on the 2012 bond issue until 2015. Yearly payments on the combined bond issue were to be about $20 million less because of extending the term and acquiring a lower interest rate than had been available when the old bonds were issued in the 1990s.
Before the restructuring in 2012, the Electric Department was paying $13.2 million in annual debt obligations on the hydroelectric plant's bonds, plus a $13.3 million balloon payment coming due by 2015, according to information provided to city aldermen in May 2012.
The plant, adjacent to Murray Lock and Dam and the Big Dam Bridge on the Arkansas River off Cook's Landing in North Little Rock, uses water from the river flow to generate electricity. It was placed into service in 1988.
Metro on 06/13/2016