Promises Made - Promises Kept
Build America Bonds
The City, with its engineers, had been planning to upgrade and rehabilitate its East and West Sewage Treatment Plants. In order to better serve the residents of the City and to continue to meet Illinois Environmental Protection Agency regulations, it was determined after a six month study, which concluded in February of 2010, that it would be cost effective to essentially build a new East Sewage Treatment Plant while utilizing any properly functioning equipment from the existing structures. Concurrently, in November 2009, the City began to work with its financial advisors PMA Securities, Inc. and TMF Solutions to study the feasibility of financing these vital and necessary improvements through the operations of the water and sewer system. A final report presenting the capabilities and procedures for financing capital improvements was presented to the Mayor and City Council in April 2010.
After much review and contemplation by the City’s elected officials at work sessions that took place on April 26, 2010, August 23, 2010, October 25, 2010, November 8, 2010 and January 24, 2011 with the financial advisors, consultant engineers and City staff, the City decided to finance the improvements at the East Sewage Treatment plant by issuing municipal bonds. Municipal bonds are purchased by individuals, trust accounts, casualty insurance companies and other institutional investors and are repaid over time similar to a home mortgage. Since the 1980s, the City has issued municipal bonds to finance water and sewer system improvements and to refinance outstanding bonds on several occasions. The then current water and sewer system bond issues consisted of bonds issued in 2002 and 2004 to refinance prior bond issues as well as four Illinois Environmental Protection Agency loans. In 2010, as a result of the aforementioned feasibility study, the City paid off the 1995 and 1996 Illinois Environmental Protection Agency loans for an estimated savings of $31,656.
After review of various financing scenarios, in November 2010, the City sold approximately $24 million of water and sewer alternate revenue bonds to finance improvements to the East Sewage Treatment Plant. The City designated the water and sewer alternate revenue bonds as Build America Bonds which were created as part of the 2009 American Recovery and Reinvestment Act. The Build America Bonds were sold as taxable municipal bonds in the lieu of tax-exempt municipal bonds. Municipal bond issuers, such as the City, typically sell municipal bonds as tax-exempt and a tax-exempt municipal bond investor may not have to pay taxes on the interest received; so the municipal bond issuer can borrow at lower relative interest rates. Therefore, taxable municipal bonds will have higher interest rates; however, since the City designated its taxable water and sewer alternate revenue bonds as Build America Bonds or BABs, the federal government will send the City a payment equal to 35% of the interest payments on the water and sewer alternate revenue bonds every six months. These Build America Bond payments, totaling $7.3 million over the life of the bond issue, will save City residents $2.1 million over the life of the 25 year bond when compared to interest rates available on traditional tax-exempt municipal bonds in November 2010. The average interest rate, when reduced by the Build America Bond payment, was approximately 3.85%.
Subsequent to the City selling its Build America Bonds, the Build America Bond program expired and is no longer an option for financing infrastructure projects in 2011. If the City were to sell the water and sewer alternate revenue bonds today, the average rate would be approximately 4.75% to 5.00% and the interest cost would be almost $4 million higher. As a result of the time and effort by the City’s elected and administrative officials who agreed to sell the bonds utilizing the Build America Bond program, the residents were able to reap the significant interest savings provided by the program.
Lastly, when the City sold the Build America Bonds, it received a municipal bond rating of “Aa3” by Moody’s Investors Service which is their fourth highest credit rating. Obtaining a municipal bond credit rating in Moody’s Investors Service “Aa” rating category significantly lowered the interest cost for the water and sewer alternate revenue bonds and eliminated the need to purchase municipal bond insurance. This high credit rating is a testament to the strong financial condition of the City and its water and sewer system.