On May 7, Umbaugh and Associates representatives Mike Givler and Jesse Nelson presented the Oxford School Board with an offer they couldn’t refuse.
Umbaugh suggested the district borrow money to switch their old bond debt to a much lower interest rate of three percent for about four years.
By doing so, the school board had the opportunity to save $45 million over the life of the bond. The board looked favorably on the proposal, and authorized Umbaugh to proceed. But in the short time since the May 7 presentation, a new wrinkle has developed, one that stands to save Oxford taxpayers even more.
Although attempts to reach Tim Loock, the Assistant Superintendent in charge of the district finances, for comment were unsuccessful , Nelson informed the Leader that Bank of America has come forward with an offer to privately finance the old bond debt.
The difference felt by Oxford is relatively small, but far from insignificant. The four-year note with Bank of America will be pegged at the low interest rate of 2.25 percent, and the final principal payment is expected in May of 2016. This option will save approximately $300,000 beyond the savings projected under the previous refinancing plan.
The main reason for these added savings is Oxford is ‘able to close sooner, and by closing sooner, (won’t) have as much accrued interest with the State of Michigan,? Nelson indicated. The closing date is accelerated by about a month, which means interest saved to the tune of a projected $167,153.
Umbaugh and the school board are proceeding with the assumption ‘the interest rates that the State of Michigan charges to school districts right now of 3 percent and 4.625 percent . . . (won’t) change between now and then. We won’t actually know the true dollar amount until well into the future, ? Nelson clarified.
Nelson indicated these request proposals of bank purchases are really fairly new to the market. Historically, banks would occasionally invest in municipal bonds, but ‘in the past two years they’ve really been hungry for it,? he said.
So. what accounts for the banks increased desire? Nelson speculated on a combination of other factors.
First, right now the ‘cost of funds are really low, with a lot of the actions the federal reserve is taking; (secondly,) because they’re not loaning as much out to the private sector because of the economy, the banks are looking for safe havens to get some good returns on the money they have.?
So who wins and loses with this scheme? Oxford looks to possibly save an additional $300,000, so it seems a clear victory for the school board. Losers are a little more difficult to see; in fact, ‘I’m not sure there is a loser,? Nelson said.
‘If these bonds had gone to the open market and if there had been an official statement, then it (would have) been open to anyone . . . (But) whatever investor who may have been able to purchase the bonds under that avenue won’t get to now,? he added.
So the only losers are those potential private investors who were denied access to the safe investment Oxford school debt represents.
But if we exclude the private citizens who bailed out and enable Bank of America to participate in this investment opportunity, how about other interested market players?
Nelson said that Umbaugh and the Oxford school board ‘did look around a little bit, but the problem is that once you start to get up to $40 million, there’s just a very limited number of banks that are going to be able to do that.?
Ultimately, no other lending firms were allowed to bid. Nelson said ‘once we saw (Bank of America’s) rate of 2.25% and the cost savings, and because we wanted to get it done quickly to save the accrued interest,? the Board felt this was the right way to go.
Nelson, an affable junior associate at Umbaugh, said the offer from Bank of America is a very good deal for Oxford. Though the national economy remains in the doldrums, Nelson said we’re ‘lucky to have these low-interest rate environments right now to be able to do these things.?