Lansdale Looking into $10 Million Bond to Fund Infrastructure Work

Dan Sokil | The Reporter•

Borough officials could go back to a familiar tactic to tackle long-term infrastructure work around town.

Council heard details recently about options for bond borrowings that could be put in place as soon as the end of 2023.

"We met with staff, a number of people, and went through what you can finance, what you can’t finance, what we can put in a project, how the projects have to line up, how you can’t exceed the average useful life of a project,” said bond advisor Ed Murray.

"Things with longer lives: buildings, sewer, electrical transformers, pumping stations, can be very, very long things,” he said.

Throughout the year, council and its various committees have discussed infrastructure needs around town, including potholes and road repair projects currently underway and still on the to-do list, aging equipment at the town’s wastewater treatment plant that prompted a rare summer sewer rate increase, and an electric rate study that could pave the way for a rate hike.

Staff also announced this summer that they were beginning to discuss another long-term borrowing, similar to the three separate $10 million bond borrowings then-council members took out for capital projects in 2010, in 2012 and in 2014, including streetscape and drainage upgrades on Main and Broad Street in 2011, similar upgrades along a connector route on Vine Street and Derstine Avenue in 2013, and construction of the new borough municipal building and police station in 2013-15.

Council members subsequently took out a bank loan of $2.5 million in 2017 to refinance part of the two earliest bonds, and in 2019 council refinanced nearly all of the 2014 issue, and in February 2020 refinanced the 2014 and ’15 bonds, then voted in March 2020 to refinance the 2012 bond as interest rates plummeted in the early days of the COVID-19 pandemic.

During their Oct. 18 meeting, council heard an update from Murray on the approaches the town took during the previous borrowings, keeping the amount at $10 million to achieve "bank qualified” status that could secure lower interest rates, and the call provisions detailing the length of time before the bond could be refinanced at lower rates. The 2019 and 2020 refinances of the earlier bonds were done when rates were at near-historic lows, Murray told council, and well below current rates.

"We weren’t really concerned about that in 2019 and 2020, because interest rates were so low, the idea of refunding that one percent (rate) money was so ridiculous. Now that interest rates have ticked back up, the call period is more important to us,” Murray said, calling those "almost free money.”

"We definitely want to have a five-year call. We definitely want the opportunity to refund these bonds as soon as we can,” he said.

As he spoke, the bond advisor showed council a series of charts depicting the payback period of the earlier bonds, with borough principal and interest payments listed for each year. The 2017 borrowing has roughly $2 million left with payments scheduled through 2033; the 2019 refinancing of the 2014 bond has roughly $11.2 million left with payments running through 2036; the 2020 refinancing of the 2010, ’14 and ’15 bonds has $4.5 million left and will be repaid by 2027; and the 2020 refinancing of the 2012 borrowing has roughly $9.1 million left with payments running through 2034. Annual debt payments are slated at $2.3 million for 2024 through 2026, then drop to $2.1 million through 2033, and down to $1.9 million for the next three years until 2036, Murray told council.

Early talks with borough staff have estimated that a $10 million borrowing would be split up into roughly $6 million for general government uses and $2 million each for electric and sewer uses, and the bond adviser showed a schedule of payments for each, running through 2023 and with total debt service adding up to $16.8 million in that timespan. The current total debt payments of roughly $28 million scheduled out through 2036 would then be "wrapped around” with new payments for seven more years through 2043, but with one difference: an additional $230,000 to $250,000 due in the first two years due to capitalizing the first interest payment.

"That’s the impact over two years, that you’ll have to put into budgeted expenses, for the $10 million. And then you can see the total debt service is pretty level out until 2036,” Murray said. "This is as good a schedule as we can come up with at current interest rates, as they are today.”

The borrowing would also come with a statement used to sell the bond to investors, and Murray showed the statements from the 2010 and 2012 borrowings that listed a new borough administration building, police station, electric and wastewater infrastructure, and other long-term needs.

"We’ve done this before, where you’ve given us a list of projects, and we’ve identified them with bond counsel. It has been done before, it’s not that difficult to do,” he said.

If council approves a borrowing, Murray said, updating the town’s bond rating and finalizing the statements and borrowings could take 60 to 90 days, and the bank-qualified borrowings are available once each calendar year. To do a borrowing in 2023 would require a council action in November, and settlement in December, "and I can do that — I can move really fast,” updating documents from earlier borrowings, Murray said, "otherwise we’re into 2024, and that’s fine, but you’d be using your bank qualified (borrowing) for 2024 once we go past January 1st.”

Councilwoman Carrie Hawkins Charlton, chair of the town’s administration and finance committee, asked about the payment schedule from 2036 to 2037, when the $1.9 million in existing debt payments fall off and the 2023 bond issue payments would jump from $424,000 to $1.6 million per year. Murray said those projections are based on current interest rates, and could drop if interest rates are lower in five years and the 2023 borrowing could be refinanced: "It’ll never go higher.”

Councilman BJ Breish asked if the payments in the first two years could be reduced, or spread over the length of the rest of the borrowing. Murry answered that the town could pay it all in the first year, but he typically structures borrowings to do so over both: "You can capitalize for two years, or for one year after completion of construction, is what federal tax law allows. I can’t take it out farther than that.”

Mayor Garry Herbert then asked if the advisor had any idea if or when interest would decrease or increase, and Murray said the outlook is unclear, but most forecasts he’s seen have predicted rates lowering around early 2025. If those rates fall, he added, the borough could also miss out on revenue by investing the bond proceeds for the short term, until they’re spent, at current high interest rates.

"Your interest earnings will be more than your interest expense, and you’re on the clock, getting to that five-year call. There’s no real reason to wait,” Murray said.

Lansdale’s borough council next meets at 8:30 p.m. on Nov. 1 and the administration and finance committee next meets at 6:30 p.m. that night, both at the borough municipal building, 1 Vine Street. For more information visit www.Lansdale.org.

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