Smooth bond sale benefits high school renovation, sewer project
The city’s $32.2 million bond sale went through as expected Tuesday, budget director David Kale said, providing $25 million for high school renovations and about $7.2 million — the remainder — for sewer improvements.
The buyer, beating out 10 other bidders, was Bank of America Merrill Lynch.
The buyer will be repaid 3.08 percent interest. It’s a slight improvement over last year’s sale of bonds, which are being paid back at 3.4 percent interest, Kale said Wednesday.
“We got a very, very favorable rate,” he said. “At the end of the day, this is one of the benefits of having AAA bond rating. Basically you get a lot of [buyer] interest in your bonds, and typically once you get a lot of interest you generate good interest rates … lower than they would be.”
Financial stability is rated by three credit rating agencies hired by the city, and all three gave Cambridge — for the 11th year in a row — the highest possible score, AAA. To investors, the score means the city can be counted on to pay back its debt on time, and buyers of municipal bonds respond well to reliability even though they get a lower interest rate on the money paid back over the course of the loan. (The high school portion is in 20-year bonds, while the sewer portion must be paid back within 10 years, as has long been city practice.) A city or town that is considered less reliable must pay higher interest to draw investors’ attention to a bond sale, which raises the cost of large projects.
In this case, Cambridge benefits by paying lower interest on the latest portion of the $112 million cost of a two-year renovation at Cambridge Rindge & Latin School — about 30 percent of the city’s total share of $84 million. A primitive calculation: At the current rate of 3.08 percent, the city will pay $770,000 in interest; borrowing the same amount of money at last year’s interest rates would have cost the city $850,000, or an additional $80,000.
With an A or AA rating, the interest that would have to be paid by the city could have been anywhere from a third of a point to a full point higher, Kale said.
The city made its presentations to the rating agencies this month and announced the scores Feb. 8 to the City Council. The city posted its statement of rating agency score and intent to sell bonds on a trading site called Bidcomp/Parity and, on Tuesday, the sale went live. Kale’s budget office spent the day analyzing bids to find the best.
Agencies looked at whole picture
One of the more troubling spots on the presentations must have been the city’s looming pension strains. Cambridge must set up a fund (the “Other Post Employment Liability Trust Fund”) of about $599 million to pay costs of its retiree employees not already covered by city pensions, and has only started in the next budget with a $2 million transfer.
But the credit rating agencies made their scores cognizant of that, Kale said.
“We’re not the only people in the country with these issues … This isn’t a Cambridge issue. This is a cross-country issue,” he said. “The sense is, we’re no different than other cities and towns, and in some cases might be further ahead” because Cambridge is addressing the issue with a second study and putting putting funding mechanisms in place “down the road.”
The city does well selling at this time of year, Kale said, and benefits somewhat from a rocky national economy as well as from a high credit score. In times such as these, “Municipal bonds are in favor in terms of a place where people might want to put their money. It’s better than a CD,” he said, referring to an investment vehicle called a certificate of deposit. “Granted, it’s a longer-term investment [and] even though it’s lower than last year in terms of what we’re paying, it’s still — in comparison to other investment vehicles such as U.S. Treasuries — a better rate of return than what you can get right now.”
The current interest rate is also an improvement over what Cambridge got before the recession struck, but identifying what effect the economic slump has had on the annual sale “is a tough analysis to make,” Kale said.
Whatever the trends in the general economy, “We generate a good amount of bidders. Last year we had 12,” he said. “Basically because of our rating, we’re desirable. We’ll always generate some interest — a lot of interest.”
This post was updated from the original with information about pensions and the life of the bonds.