City lowers overall debt by $3.5 million
Taking advantage of several converging circumstances, the City of Prineville was able to save millions in future debt service payments and substantially lower its overall debt.
The city recently utilized advanced refunding to lower its debt load by $3.5 million and save $3.2 million in annual debt service payments going forward. This reduces the debt load from $22.1 million to $18.6 million and lowers the debt per capita from $2,247 to $1,890 per thousand dollars of assessed property value.
Advanced refunding was taken away as an option for municipalities effective Dec. 31, which is what prompted the city to act when they did.
"When you go out and purchase bonds on the market, they have a call date. Our bonds weren't callable until 2021, so that means you can't pay them off until that date. Advanced refunding made it possible to refund prior to the call date," explained City Finance Director Liz Schuette. "Advanced refunding is where you are able to borrow dollars and place them in an escrow account. The escrow company holds the dollars and makes the payments, the city is out of the picture."
While the change in tax law prompted action that Schuette said might have otherwise waited until this calendar year, it wasn't the only circumstance that made the timing for the advanced refunding optimal. Schuette points out that data center expansions resulted in large SDC (system development charge) payments that the city used to either pay down or pay off certain debts.
The city will pay off a $1.17 million reimbursement agreement with St. Charles Prineville 17 years early as well as a water revenue bond series from 2003 that totaled $335,000. By paying it off five years early, the city saved about $54,000.
The city was also able to act when interest rates are very low, so the advanced refunding enabled them to refinance several debts that averaged a rate of 4.34 percent at a 2.67 percent rate. These included Meadow Lakes Golf Course debt, which matures in 2026, a debt for water and wastewater capital that matures in 2031, and a debt for the construction of city hall, which will now mature in 2031 instead of 2036.
Schuette went on to point out that all of these changes coincide with the city increasing its net position by $6.8 million and its capital assets from the prior year by $7.6 million.
"The city is in good shape financially, and we have been able to do good things to increase the stability," she said.
While the city was able to reduce its overall debt, it is unlikely the municipality would ever reach a point where it is completely debt free — and Schuette said that is not a bad thing.
"It's good to have debt, reason being it helps you pay for things over a period of time so growth helps pay for its piece of it," she explained. "We try to backload the debt so that it's smaller principle/interest payments up front for the current users and as the debt increases and the population increases, the overall population is paying for the debt."
Schuette went on to say that any debt the city takes on is intended to either add to city assets, such as the purchase of the IronHorse property, or to pay for capital projects. The municipality does not borrow money to pay for operational expenses.
Consequently, it makes good financial sense, she said, to borrow money when the interest rates are low to pay for projects before inflation increases the price of labor and supplies.
"If we would have waited to build a lot of things until we had the money, it would cost a lot more to build it," she said. "When the interest rates are this low, it's a good investment on the dollar."
City Manager Steve Forrester points out that lowering debt while increasing the city's asset base and utilities capacities is a rare feat for the private sector as well as any public entity, and he credits Schuette with making such an accomplishment possible.
"Prineville is positioned to serve both population growth and business expansion without having to take on debt, which is an enviable position," he said. "The city is very fortunate to have Liz Schuette as our finance director. Liz and her team have kept a watchful eye on interest rates and refunding opportunities that save taxpayer dollars. Taking full advantage of this refunding opportunity has resulted in lower debt, shorter terms and an improved financial position."