Financial Restructuring Saves Taxpayers Another $142K

By John Voket

Newtown financial overseers have not been able to figure out how to get blood out of a stone…yet.

But town financial watchdogs using a computerized system monitoring US Treasury rates were able to squeeze more than $142,000 in additional savings from a December bond refunding procedure. When added to the initial savings achieved through last month’s bond activities, the total savings now tops $1.2 million, according to Newtown Finance Director Benjamin Spragg.

“On Tuesday, January 4, the Town of Newtown restructured the escrow for the advanced refunding bond of December 2004,” Mr Spragg explained in a memo to The Bee. “This resulted in an additional $142,025.25 in savings. When added to the original $1,058,732.50 of refunding savings the savings now total $1,200,758 for the December 2004 refunding bond issue.”

Mr Spragg said the additional savings was achieved because in December the town issued advanced refunding bonds for two of the town’s existing bond issues.

“In an advance refunding transaction, the existing debt is not redeemable until a future date,” he said. “So in order to achieve savings, an escrow or savings account is setup and is funded with US Treasury securities, which actually pay the debt service on the refunded bonds until their respective call dates.”

By monitoring the rates for US Treasury securities, Webster Financial bond advisor Barry Bernabe was able to help initiate the sale of existing lower rate securities when the rate adjusted January 4, and immediately negotiated the purchase of new higher rate securities which resulted in the additional savings.

In an email, Mr Bernabe further explained that it is his standard practice to explore every means of extracting savings on municipal transactions.

“Subsequent to the December advance refunding, Webster Bank assisted the financial director in analyzing additional savings opportunities regarding the existing escrow account, which is utilized for this complex type of debt transaction,” Mr Bernabe wrote.

He said when market conditions are appropriate, it is possible to sell the current escrow securities and purchase new escrow securities simultaneously.

“The Government Finance unit at Webster Bank has computer models in place to quickly determine if pricing discrepancies among various types of treasury securities are large enough to justify an escrow substitution or restructuring,” Mr Bernabe wrote.

He said Newtown municipal officials, along with legal counsel and its financial advisors, were diligent in monitoring the interest rate environment and eventually were successful in restructuring the advance refunding escrow account to generate approximately $142,025 of additional savings.

“The bottom line is that the town’s principal amount of debt outstanding stays the same, but the interest cost on that debt is reduced,” said Mr Bernabe. “Though numerous municipalities have refinanced debt in this historically low interest rate environment, very few have taken the additional steps the Town of Newtown has — to create such an efficient refunding transaction and maximize net debt service savings at over $1.2 million.”