As the COVID-19 pandemic guts state and local government revenue sources, Cuyahoga County is taking advantage of a historically low U.S. treasury market to fill budget gaps.
“Right now, interest rates are near historic lows, and very similar to a home mortgage when interest rates decrease, you refinance for savings,” said Bob Franz, director of public finance at the Cleveland office of Stifel, an investment bank. “A lot of municipalities are doing the same thing. They are refinancing existing debt with lower-cost debt to generating savings.”
Franz works with governments, including Cuyahoga County, to take advantage of lower interest rates available during a bond’s call — a period of time before the bond matures when it can be restructured — to reduce debt payments, in some cases by tens of millions of dollars.
This month, Cuyahoga County will finalize the final of three rounds of substantial bond refunding. The three rounds will save a nearly $50 million in interest payments beginning in 2021.
“Municipalities issue new bonds that replace old bonds and pay less in debt service,” Franz said. “The rates are very low, and that is where the savings are.”
After the pandemic-induced economic shutdown, Cuyahoga County Council in April approved the restructuring of a handful of economic development bonds worth about $28 million, saving a total of $9.3 million in debt service.
County Council voted again in July to restructure the debt connected to one of the bonds behind the Global Center for Health Innovation and the Huntington Convention Center, triggering more than $27 million in savings through 2027 on that deal.
This latest refunding issue went before County Council in late September. The county is working on a deal to refund bond measures of nearly $68 million in general obligation bonds and $137 million in sales tax revenue bonds.
The deal, slated to be completed this week, will move the funds from a 5% interest rate to a 1.5% rate, saving $12.9 million in debt service during the next decade.
“Industry standard is 3%-5% in savings, and we are looking to get 10% savings, so it is well in excess of the standard,” said council member Dale Miller, chair of the Cuyahoga County Finance and Budgeting Committee, during a Sept. 22 vote on the bond ordinance.
The municipal bond market, which Franz said represents about $400 billion in assets, was experiencing historical low interest rates before the coronavirus hit the U.S. economy.
Volatility in the stock market triggered a wave of stock sell-offs in March, and when the Federal Reserve Bank launched a program (Money Market Mutual Fund) supporting short-term municipal bonds, many investors were drawn to the safe, tax-exempt bonds investment provide.
Franz points out that a 1% for a 10-year treasury bond was considered an advantageous rate, so when the market plunged to 0.5% earlier this year, it was something investors had not seen before.
Governments are constantly on the lookout for savings opportunities when bonds hit a call date, but this year has been busier than most.
“This is pretty epic doing three (refundings) in one year. It made sense to take advantage of the opportunity,” said Cuyahoga County’s fiscal officer, Michael Chambers.
The savings resulting from the three rounds of bond restructuring will help to offset some of the revenue shortfall Cuyahoga County is grappling with during the pandemic.
Cuyahoga County Executive Armond Budish said in May that he estimates a $76 million loss in revenue this year, primarily due to reduced sales and use tax collections.
The county ordered a hiring freeze, two-week furloughs and is working on 15% budget cuts. But even with those changes and the $215 million in federal aid from Coronavirus Aid, Relief, and Economic Security (CARES) Act, resources will be strained.
The refunding also provides extra revenue while municipalities wait out a possible new federal stimulus bill, aimed in part at providing general operating fund relief to local and state governments.
The city of Cleveland — where spending from April to July outpaced revenues by $35 million and a pre-COIVD revenue surplus of $43 million is three-fourths depleted — also has made steps to refinance some of the city’s municipal bonds.
Cleveland City Council’s finance committee in early October voted to authorize the potential restricting of bonds associated with airport properties and FirstEnergy Stadium.
It is unclear what type of market is available for bonds related to two industries that have been devastated by COVID safety and health precautions. Municipal bonds connected to assets that have extended revenue shortfalls, like travel and sport facilities, could be harder to refund, Franz said.
When the question of refinancing was posed to city finance director Sharon Dumas, the city communication staff sent a statement indicating there are no deals on the table.
“However, the city is authorized to act if a favorable market presents itself,” the statement said.
As of August, Cuyahoga County has $253.4 million of outstanding nontax-revenue debt and maintains “a high quality with a low credit risk” bond rating from Moody’s Investors Service, making it a good candidate for additional municipal bond restructuring going forward. Moody’s in July also maintained “a stable outlook” for the city of Cleveland.
“Right now, investors are demanding bonds, but it can dry up in a second,” Franz said, referring to the market as a bit of a roller coaster at times.