By KEVIN McCALLUM
THE PRESS DEMOCRAT
Santa Rosa plans to refinance about $35 million in pension bonds in an effort to control costs and prevent the city credit rating from slipping further.
By locking in historically low interest rates and spending about $4 million to pay down debt, the city expects to save about $870,000 in today’s dollars over the next 12 years, according to Chief Financial Officer Lawrence Chiu.
“This will help preserve the city’s credit rating,” Chiu told the City Council on Tuesday.
Credit ratings agency Moody’s has twice reduced the Santa Rosa’s credit rating on the bonds out of concern over the pension debt of cities throughout the state.
The proceeds from the bonds were paid to the California Public Employees’ Retirement System. The idea was that the city could save money by financing the cost of the increased benefits with bonds that paid a lower interest rate than what CalPERS would have charged the city.
Today, $38.3 million in principal is outstanding on the bonds with a maturity date of 2025. Some of the bonds have a fixed rate and some have a variable rate. Because current rates are low and are expected to rise in coming years as the economy improves, the city’s financial advisers recommend that city refinance the bonds now.
The city isn’t extending the term of the bonds, but rather is committed to paying them off by 2025.
“We want to pay this off on schedule,” City Manager Kathy Millison said.
Another reason to move away from the variable-rate bonds is that it is becoming harder and more expensive for the city to find banks willing to guarantee the bonds through something called irrevocable letters of credit. The city’s current letter of credit with Wells Fargo Bank expires in 2014. Fixed-rate bonds require no such letters.
Much of the savings will come from lower rates. The city currently is paying about 1.1 percent on its variable-rate bonds, but that is expected to rise to an average of 3.6 percent for the remaining 12 years of the debt. Its fixed-rate bonds are rising to 4.9 percent in 2014 and 5.4 percent in 2019.
The city expects to get a new fixed rate of about 4.3 percent when it sells the new bonds later this summer.
Additional savings will come from paying down the principal by $4 million. The city had been planning to set up something it called a “pension stabilization fund” with a recent $1.6 million settlement with Sonoma County over property tax administrative fees.
But it changed gears after it recently received higher pension cost estimates from CalPERS for the 2015-16 year. It decided instead to put that settlement money, plus an additional $2.4 million, toward the extra principal payment.
Some council members wondered whether some of that cash might be better spent fixing streets, given how much repair costs increase once the pavement deteriorates past a certain point. But Millison said she was convinced that paying down and refinancing the debt is the wisest option.
“We think this is the better investment in terms of helping the city better manage its cash flow for the general fund,” Millison said.
The measure passed 7-0.
You can reach Staff Writer Kevin McCallum at 521-5207 or firstname.lastname@example.org. On Twitter@citybeater.