Is refinancing debt again a prudent move?

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Indiana’s Department of Local Government Finance cut Carmel’s 2014 budget by about $17 million. That means according to their analysis Carmel did not have enough revenue to support the spending levels submitted by the mayor and approved by the city council. I understand the mayor has appealed that determination. The DLGF cut still allows Carmel to make additional appropriations to cover that $17 million amount if it can find the money.

A recent announcement by the city indicating it had $36 million in the bank as of end of 2013 seems to make the budget issue mute; however what does the detail tell us? Only $12.4 million of that $36 million is in the general fund and $9 million of it is in the rainy day fund. Thus, without digging into the rainy day there is only $3.4 million available to spend. The rest of the $36 million is already earmarked for things such as health insurance, parks, Illinois Street construction and Carmel Redevelopment Commission bond payments, etc.

Two ordinances were introduced at the March 17 city council meeting to refinance about $170 million in lease rentals bonds that are eight, nine and ten years old. Unlike the $180 million refinancing in late 2012 to bailout the Carmel Redevelopment Commission, interest on these lease rental bonds is not excessively high. However, you have to consider more than reducing your interest rate in making a prudent refinancing decision.

By looking at the ordinances people can see they are proposing to borrow $14 million more than is required to pay the remaining balances on these bonds. In other words, these actions would create $14 million more in debt. Additionally, there is the cost to sell the bonds, attorney fees, and then what about the length of the term and amount of the payments which can be front-loaded or back-loaded? Unlike tax increment financing bonds, these bonds which are already eight, nine and ten years old can be refinanced for another 25 years.

Refinancing these bonds at this time is questionable since rates were much lower over the past several years than they are today. So why do they want to do it now? I believe it is because the city needs more money. At least that is what the DLGF $17 million budget cut and the small amount of usable money in the bank at year’s end seems to indicate. If this debt is refinanced there will be no payments due on the new bonds this year freeing up millions. Additionally, it will generate $14 million in cash from new debt being added to the balances being refinanced. I am confident that lower debt payments will be lauded as the biggest benefit of the refinancing, however does that save taxpayers anything when we extend payment on this debt for another 25 years?

Think about it because you, your children and grandchildren will be impacted as we continue to see Carmel government kick the can down the road.

John Accetturo is a Carmel resident and former member of the City of Carmel Common Council. To reach John, write him at accetturo4carmel@gmail.com.



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