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LANSDALE — Borough council could soon see significant savings by refinancing a bond borrowing from half a decade ago.

Council could hear details next month on a proposed refinancing that could produce savings in the six-figure range, according to Finance Director John Ramey.

"What happens when we issue bonds is, there's always a variable interest rate. Usually the first five years are lower, then they're callable, but then they start getting higher," Ramey said. 

"Usually you refinance very five years, so we'll be looking at refinancing the outstanding (bond), just under $10 million, without extending the life of the debt or borrowing anything new," he said.

Over the past decade, borough council voted to authorize bond borrowings for capital projects of roughly $10 million each in 2010, 2012 and 2014, along with a smaller bank loan borrowing of $2.5 million in 2017, at the same time as the two earliest bonds were refinanced.

Ramey told council's administration and finance committee on June 5 that staff have started talks with the borough's bond counsel about refinancing the 2014 issue now that five years have passed.

"As the interest rates are about to go up in year six of the 2014 bond issue, we're going to reissue them at a lower interest rate. So instead of paying at six percent interest, we'll knock it down to three percent," he said.

Processing and legal fees will be covered by savings from the transaction, according to Ramey and Borough Manager John Ernst, so the net result will be a drop in future payments of roughly $250,000 by reducing that rate.

"It saves us $250,000, and it's not costing us anything," Ernst said.

As of the end of 2018, Ramey said, total borough debt was $32.6 million, of which the bonds comprised $29.4 million, and that number is well below the amount the town is legally allowed to have.

"For general debt, we actually are allowed to have just under $60 million worth of debt outstanding. Currently, we only have $32.6 million, so we're at about half of what we're allowed," he said.

That figure takes into account all forms of borrowing, including the bonds and loan, Ramey told the committee, and the similar calculation for bond debt only sets a ceiling at just under $43 million, with Lansdale's current $29.4 million still below that total.

"It's actually based off of what our total revenues are, a percentage of that. On bonds, you're allowed to take out 250 percent of your revenues — that's what they say you can borrow, bond-wise," Ramey said.

Committee chairman and councilman Leon Angelichio asked how close the borough can get to those limits before the current borough bond rating could be impacted, and Ramey said rating agencies usually take note when a town reaches roughly 75 percent of its borrowing capacity.

Further details from the borough's bond council will likely be presented at the July administration and finance committee, then to full council, according to Ramey. If council votes to proceed then, the call date for the new issue would likely take place around early September. After the refinancing is processed, Ramey told the committee, the borough's future debt payment schedule will likely be reconfigured slightly, with payments on principal likely to continue for three more years on the 2010 issue until it's completely paid off, then payments shifted to the 2012 issue.

"It's not like we'll have all this extra money. It just kind of shifts over," Ramey said.

Resident Jean Fritz questioned whether council should seek to pay down all of the debt before taking out any new issues. Ramey and Angelichio replied that past practice by council has been to borrow to pay for long-term assets like road repairs, upgrades to the town's wastewater treatment plant, and the new borough municipal building, so costs are spread over time and paid down each year by the taxpayers who use those assets.

"It takes the up-front cost down, so residents in 10 or 15 years are going to pay their fair share too," Angelichio said.

Total debt service payments are roughly $2.5 million per year, Ramey told the committee, and a breakdown of how those payments are allocated between interest and principal on the various borrowings is included in each year's borough budget and each financial audit.

"Having some debt is beneficial to us," Ernst said, and Angelichio added — "but we don't want to be swimming in it."

Lansdale Borough Council next meets at 7 p.m. on June 19 and the administration and finance committee next meets at 7 p.m. on July 3, both at the borough municipal building, 1 Vine St. For more information or meeting agendas and materials visit www.Lansdale.org.

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