The city saved $19 million today. Thank you Michael van Dyck.

Michael van Dyck is the City of Seattle’s Director of Debt Financing. He saved the city $19 million today. Here’s how he did it.

This morning, the city put $385 million of municipal bonds up for sale in a competitive auction. That means investment banks (or syndicates of them — $385 million is a lot for one organization to fund alone) bid an interest rate at which they are willing to buy the bonds, and whichever bidder provides the lowest interest rate wins.

$240 million of the bond revenues will fund capital projects at Seattle City Light for power supply, distribution and transmission. The other $145 million will be used to refinance a set of bonds that the city issued in 2011, when bond interest rates were higher.

Six syndicates bid on the city’s bonds this morning. The winner, led by Morgan Stanley, bid 3.166124%. It was a very competitive auction; the next lowest bid was nearly identical.

The 2011 bonds being refinanced range in rates from 5.0% to 5.5%. Refinancing them at the much lower rate will reduce the city’s debt payments by just over $1 million per year, or $19 million over the remaining life of the old bonds.

According to the adopted 2017-2018 budget, the city expects to spend about $38 million on debt payments this year, and about $35 million next year. Lopping $1 million per year off that is a good day’s work.

There are two reasons the city can do this. One is that van Dyck watches the bond markets carefully and times the offerings for when rates are low. According to van Dyck, they are currently near their lowest point since last November’s election.

The second reason is that the city has an impeccable credit rating. Investment banks want to buy Seattle’s municipal bonds because of the credit rating, and that keeps the bidding highly competitive and the interest rate low. The executive and legislative branches have been very careful to preserve that rating for several years. They do it through a combination of keeping adequate cash reserves, making payments in full and on time, avoiding over-leveraging the city by issuing an overabundance of debt, and choosing only to issue debt when there is a reliable source of revenues earmarked for repaying the debt over the entire lifetime of the bonds. Those are all factors that the credit rating agencies consider.

Access to cheap debt financing is an incredibly important asset for the city. Given the substantial ongoing capital investments that SDOT, the Parks Department, the Office of Housing, Seattle City Light, and Seattle Public Utilities require, the city’s debt payments would take up a much larger fraction of the overall budget and prevent the city from doing many of the things it needs to do if it had to borrow money at a higher interest rate. This is a problem that many smaller cities and towns face: they don’t have the financial tools available to pay for roads, sewers, and power, let alone parks, arts programs, and human services.

All this is important context going into the 2018 budget development process, which starts next week. The city’s ability to issue bonds looks like a great way to generate cash for a bunch of important short-term needs, but there are hidden costs — particularly down the road — that must be weighed.

In the meantime, we should all be thankful that Michael van Dyck is out there saving the city money that we can spend on critical needs. This isn’t the first bond refinance transaction he’s done this year, and it probably won’t be the last. You can watch him explain the bond sale this afternoon to the Council here.

 

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