There is an upside to all the financial turmoil and the sluggish economic recovery of the past few months: Maine towns and cities are taking advantage of very low interest rates to refinance debt, with significant savings for taxpayers.

Cape Elizabeth, for instance, refinanced $1.91 million it still owed on a $4 million bond sold 10 years ago to pay for the purchase of a building for its community center and for work on a public works garage. The town had been paying interest at 4.8 percent, but the new bond carries a rate of 2.02 percent.

The town sold a $2.1 million bond and will pay off the rest of the initial bond within the next few weeks. It also took on an additional $200,000 in debt, which will go toward helping the Cape Elizabeth Land Trust buy additional open space and will still save about $30,000 in payments on the new bond, versus the old one, over the next decade, said Town Manager Michael McGovern.

Portland plans to join the refinancing rush later this month, if the City Council approves issuing a $25.3 million bond to pay off several bonds that had been used for annual capital improvement programs and some school financing.

The interest on the old bonds, in aggregate, is 4.3 percent. The new rate is expected to be about 2.5 percent, said Ellen Sanborn, Portland’s finance director.

“We think the market is the best it’s going to be for a while,” Sanborn said, noting that Portland hopes to save $1.3 million over the next decade by issuing a new 10-year bond to pay off the old bond.

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Even though the annual savings of about $130,000 isn’t huge in a city with a $200 million annual budget, “it helps,” Sanborn said.

Eight communities in southern Maine have refinanced old bonds since the beginning of the year, said Joe P. Cuetara, senior vice president of Moors & Cabot, a Boston-based banking and advisory firm.

Cuetara said he periodically reviews the outstanding bonds for the towns and cities he advises and looks for those with relatively high interest rates.

He uses a formula that takes into account the projected savings and the value of the bonds. If the “present value,” or savings, derived from that formula is more than 2 percent, he said, issuing new bonds usually makes financial sense.

In the case of some Maine communities that issued bonds this year, that figure was as high as nearly 19 percent.

That’s the case with Cumberland, which in April issued a new bond for $890,000 to pay off an old one. The interest on the old bond was nearly 6.9 percent, but the new one comes in at just 2.9 percent and the town will save $219,000 over the next 10 years — a significant amount, given the size of the bond.

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Some towns use the opportunity to not just pay off old debt but also borrow more at an advantageous time.

In addition to Cape Elizabeth, that includes Bar Harbor, which is scheduled to sell a new bond for $5,055,000 later this month. The proceeds will pay off an older bond of $2.5 million on which interest is 4.9 percent and pay for some improvements to the sewer system, Cuetara said.

The interest on the new debt will be determined when the bond is sold, but as most Maine communities are seeing, it’s expected to be less than half the current rate.

The terms of municipal bonds usually bar towns and cities from calling the bonds — paying them back early — for the first 10 years, so investors can count on a certain return on their money. But there are ways around that, as well.

Portland, for instance, will be redeeming bonds that were issued eight years ago. Cuetara said proceeds from the new bonds will be sent to an escrow company that will make the regular payments to the bondholders until the 10-year mark and then pay off the bonds.

Portland will pay the debt service on the new bonds in the meantime, but the savings from low interest rates are so great that it makes financial sense, he said, and Portland won’t miss the current low rates.

Staff Writer Edward D. Murphy can be contacted at 791-6465 or at:

emurphy@pressherald.com

 


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