City Council will begin paying principal on bonds early

Wednesday, September 12, 2012 | 5:34 p.m. CDT; updated 9:32 p.m. CDT, Wednesday, September 12, 2012

COLUMBIA — In September 2006, the city of Columbia issued $38.5 million in bonds to pay for improvements to its electric distribution system. But by September 2010, the city still owed $38.5 million on the bonds. For four years, it had paid only the interest, leaving the principal untouched.

Last Monday, the Columbia City Council voted to restructure the bonds so that it could begin paying the principal immediately, rather than waiting until 2024.  Officials estimate the move will save the city $7.5 million over the next 20 years.

"That throws all my debt on my grandchildren," Third Ward councilman Gary Kespohl said of the original bond structure. "We need to pay as you go."

The bond restructuring also will save the city money because interest rates are much lower today than they were in 2006. The interest on the original bond issue was about 5 percent; the interest after restructuring will be less than 3 percent, John Blattel, city finance director, said.

The city will use electric utility reserve funds and utility cash flow to pay off the principal, Blattel said. At an Aug. 18 budget work session, the City Council discussed raising the electric utility rate by a half percent to raise money to begin paying the principal early, but it later decided that was unnecessary.

"The city's already raising the rate, so we didn't want to do that," Kespohl said, referring to the utility rate increases in City Manager Mike Matthes' proposed fiscal 2013 budget.

With the original bond structure, the city delayed paying the principal to keep payments manageable, Blattel said. The smaller payments were intended to allow the city to manage its many bonds without raising utility rates, to keep cash reserves in case of emergency and to pay for capital projects, such as repairing transformers.

"The downside is that you pay more interest over the life of the issue," Blattel said.

Blattel said that he will work with a city financial adviser and bond attorney to restructure the debt by putting it on the market for competitive bidding.

The city recently restructured three other bond issues to pay off their principals early, Blattel said. Those included sewer and solid waste bond issues as well as another for the electric utility. Restructuring those bond issues will save the city more than $5 million, Blattel said.

Kespohl said he noticed soon after he was elected to City Council in 2010 that the city wasn't paying principal on the eight bond issues. Lori Fleming, the previous finance director, told him the bond issues could be restructured only after maturing for five years. Kespohl brought up the possibility of restructuring the electric utility bonds at the Aug. 18 budget work session.

Kespohl hopes to restructure four other bond issues when they become eligible. The 2008 bonds that the city issued to build the parking garage at Fifth and Walnut streets will become eligible for restructuring in fall 2013, Kespohl said.

A local bank determined the city would have saved $45 million to $50 million if it had been paying off the principal on all eight bonds from the start, Kespohl said. He  hopes the city will avoid delaying payment of the principal on future bond issues.

"We won't do that process anymore," he said.

Supervising editor is Scott Swafford.

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