✕
☰

Hoover council votes to borrow $15.2 million to refinance 2010 debt

by

Photo by Jon Anderson

The Hoover City Council on Monday night voted unanimously to refinance $18.1 million worth of debt issued in 2010 in an effort to give the city more financial options over the next several years and save some money.

But before the vote was taken, there was significant discussion and debate about whether it would be better to go ahead and pay off the debt entirely now with money on hand.

Currently, the 2010 debt was set to expire after slightly more than $9 million payments each of the next two fiscal years.

Council President Gene Smith had questioned whether it would be better to go ahead and pay off that debt now since the city is earning much lower interest rates on money it has in investment accounts.

Paying off the 2010 debt entirely now would go ahead and reduce the city’s annual total debt payments from $13.3 million a year to $8 million a year and save the city about $800,000 in interest, said Matt Adams of Raymond James & Associates, in response to questions from Smith.

But Mayor Frank Brocato and numerous council members had argued in favor of refinancing by borrowing $15.2 million worth of new debt issued at a lower interest rate than the 2010 debt.

The plan on the books would be for the city to stretch those new debt payments out until 2026, with the city’s total debt payment dropping to $4.8 million in 2021 and $4.9 million in 2022 before jumping up to $13.3 million for 2023, 2024 and 2025 and dropping back down to $8.8 million in 2026 and $8 million in 2027.

Such a restructuring of the debt would save $187,000 and free up cash for the city as it deals with the uncertain economic conditions associated with the COVID-19 outbreak and a national election.

However, Brocato said his plan is to budget to pay off the new debt over the next two years anyway, as if the city never refinanced. Adams said that would save the city another $1.2 million.

“We think this is a good business decision on our part to take this opportunity to take advantage of low interest rates in particular, and there is a significant savings that we will realize quickly,” Brocato said.

Also, it gives the city more options, the mayor said. While he does plan to pay off the new debt over two years, this refinancing gives the city flexibility if the economic situation worsens more than it has already.

Councilman John Lyda, chairman of the city’s Finance Committee and Investment Committee, thanked Brocato for his engagement in financial discussions and echoed support for the refinancing plan.

“It doesn’t kick any can down the road,” Lyda said. “It allows us the opportunity, if cash flow goes further south than we may anticipate, it gives us an option and flexibility on how to pay that back, and the cherry on top is that … it saves us $180,000 no matter how you cut it.”

Every Hoover family and business is looking for ways to save money and to get the greatest flexibility in how they service their debt, and this is how the city is doing it, Lyda said.

Councilman Mike Shaw said it was worthwhile to investigate paying off the 2010 debt early.

“Obviously, if you can get out of debt, that’s a good thing,” Shaw said. “The problem is we’re in a time of extreme uncertainty, and in a time of extreme uncertainty, we need options, and this is a very intelligent solution that gives us plenty of options. If things go really bad in the next couple of years with the economy, cash is king. This gives up options to pay off debt. If we need to, we can, but it also gives us a lot of reserve cash.”

Councilman Derrick Murphy wanted to know where the city would get the money to pay off the 2010 debt entirely, as Smith at one time proposed.

City Treasurer Ben Powell said the city has about $31 million in unrestricted money in its reserve fund. Also, by cutting expenses after the COVID-19 outbreak began, the city had a $4.4 million surplus for fiscal 2020 as of June 30 and had identified up to $6.5 million in capital projects for which no money had been spent or purchase orders issued, Powell said.

The latter two factors would mean the city could, in a best case scenario, only have to pull about $7 million from reserves to pay off the 2010 debt entirely, Powell said.

Adams said pulling a significant amount out of reserves potentially could negatively affect the city’s bond rating.

Powell said the Government Finance Officers Association recommends that, in a stable economic environment, cities keep a reserve fund equal to at least two months of operating expenses or operating revenues, whichever is most stable. In a volatile environment, cities should possibly keep more than that, according to those best practices, Powell said.

Adams noted that city officials in the past had informally told bond rating agencies that the city would keep three months of operating expenses in reserves. That would be about $30 million based on Hoover’s current operating budget.

When it came time for a vote Monday night, all seven council members voted in favor of the refinancing plan as presented.

In other business Monday night, the council:

Back to topbutton