Banking & Finance and Government

Grand Rapids outsmarts federal sequester reduction

City will refund BAB-program securities through private-sector financing firm.

September 27, 2013
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In a somewhat ironic turn of events, the federal sequester has negatively impacted an economic development bond the city of Grand Rapids got through the federal government four years ago.

Now, city officials are refunding the bond through the “what’s in your wallet?” public financing arm.

In 2009, the city used the Build America Bond program to issue a capital improvement bond series to raise funds to buy the former NAPA Auto Parts property at 233 Market Ave. SW and to make upgrades at other locations.

The program was part of the federal government’s stimulus aimed at helping the public sector, following the financial market crisis. The BABs were taxable bonds that offered a higher return than the standard tax-exempt municipal bond; the federal government agreed to reimburse the city 35 percent of its interest charge for using the securities program.

That reimbursement feature made the transaction worthwhile for the city. But city CFO Scott Buhrer reported last week the federal government cut its reimbursement amount in March by 8.7 percent, which now makes the transaction somewhat worthless.

What reduced the government’s interest rebate was the sequester, which went into effect this year and created across-the-board budget cuts through the Budget Control Act of 2011 passed by Congress late that year during a debt-ceiling tussle.

Buhrer estimated that if the sequester cut continues for the life of the bonds, the city would lose $37,000 in total federal reimbursements. If the rebate is completely eliminated, he said the cost to the city could be almost $429,000. The bond’s principal sum was $7.4 million in 2009.

“If you want to refund the bonds, you have to make the bondholders whole,” he told the city’s Fiscal Committee last week.

However, Buhrer also said the city’s bond package could be redeemed at par value if the city didn’t receive a full rebate and the city could refinance the securities with the traditional tax-exempt bonds. And this is where the “what’s in your wallet?” group enters the picture.

Capital One Public Financing has offered to buy the bonds for $4.35 million at an interest rate of 2.98 percent, or about a half point lower than the current going rate for municipal bonds.

“This offer came to us on an unsolicited basis,” said Buhrer.

The remaining term is 16 years, and the city will make annual declining-scale payments to Capital One every Aug. 1 from 2014 through 2029. The principal payments to refund the bond and cover the issuance cost will range from a high of $850,000 to a low of $100,000 over those years.

The Michigan Department of Treasury has to approve the transaction.

Buhrer said the sale cuts the city’s losses from the federal government’s reimbursement reduction and, in fact, he expects the city will earn about $4,300 by going through with the transaction. Commissioners agreed to do that.

“We’re just replacing the debt with new debt that is already out there,” he said. “Our sole reason for refunding this is to get away from the federal cuts.”

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