With interest rates as low as they are, the city of Hays will likely go to market March 25 to sell $6.795 million in general obligation bonds to pay toward the $13.2 million reconstruction of N. Vine Street.
If approved, the 25-year term bonds will carry an estimated debt service of about $338,553 annually, according to Kim Rupp, city finance director.
With interest rates at record lows, the city’s bond adviser is estimating an interest rate of 1.77% for the city, said David Arteberry with Stifel, Nicolaus & Co. of Wichita, “which is historically just an incredibly low interest rate. We can’t guarantee that it’s going to be at that level, but that’s currently where interest rates are.”
The city would pay off the debt with proceeds from its additional 2% transient guest tax on travelers spending the night in a Hays hotel or motel. The commission passed the hike to its 5% transient guest tax in June 2018 with the idea of funding the corridor project. The rate took effect in October 2018.
Debt payments would begin in 2022, and it’s possible the city could pay off some of it early, according to Rupp.
“In about 10 years there will be notes that are available for retirement, we could do that to shorten the term and also save on interest costs,” Rupp told the Hays City Commission on Thursday evening during its regular work session at City Hall, 1507 Main.
City commissioners will vote at their Feb. 25 meeting on whether to go forward with the sale of the general obligation bonds, which would repay the Kansas Department of Transportation for a portion of the N. Vine Street Corridor project now underway.
The reconstruction calls for four roundabouts to replace stoplights at intersections with side streets entering onto the busy N. Vine Street commercial corridor, as well as rerouting some streets, and a roundabout where off and on ramps enter US-183 highway from Interstate 70.
Interest rates are at all-time lows due to a lack of supply in the bond market, said Arteberry, who joined the commission meeting by phone.
“When you have a lack of supply it could mean that there’s more bidders, and that tends to mean that bidders are willing to accept lower interest rates on their bonds,” he said. “That’s really led to a real strong situation in the bond market now.”
As a result, more municipalities are coming into the market to refinance old issues, he said, but supply is still constrained.
“That causes a little bit of a trend upward, but nothing real significant,” Arteberry said. “So it’s been a very stable and strong market now, really, since probably about June or July of last year.”
Ellis County in August 2020 in robust bidding from 14 bidders raised $5.4 million selling 10-year bonds to fund road and bridge work. The county got interest rates effectively below 1% on 10 maturities.
To market the city of Hays bonds to financial institutions around the country, Arteberry said Stifel Nicolaus will prepare a prospectus similar to that of a public stock offering to give investors a full understanding of the city’s credit worthiness. Once the bond issue gets a rating from S&P Global in early March, official documents will be finalized, and the prospectus will be distributed to financial institutions around the country, he said.
“Do we have to go to market with a rated bond?” asked city commissioner Michael Berges.
Prior to 2008 or 2009, Arteberry said, ratings weren’t always necessary. And a smaller bond, under $1 million, might not need a rating, he said. The city in 2019, for example, sold a small issue to some local banks without a rating.
“With the Great Recession there was a real shift in the municipal bond industry and a much more intense focus on credit quality, and that’s measured most easily by a bond rating,” Arteberry said.
He estimated anywhere from 150 to 200 banks, investors and brokerage firms will get a prospectus. The offering will also be advertised through Bloomberg financial news wire and the bond industry’s trade newspaper, The Bond Buyer.
Prospective buyers on March 25 will submit their bids through an online portal with the interest rates they are offering.
“At that time all the bids are due, we’ll look at the web site,” Arteberry said. “The final results will pop up and the interest rate that each firm has bid, and determine who is the best bidder, who’s offered to buy the bonds from the city at the lowest interest rate.”
The bond issue goes through legal proceedings for state approval, and then the money is delivered to the city on April 15, he said.
By structuring it as a 25-year bond, it lowers the annual payment but also leaves room for the city to pay the notes off faster with surplus money from guest tax proceeds.
“I think the important thing would be is making a commitment to do that,” Arteberry said. “And not just the commitment right now but for future commissions to continue to have that dedication to allocating the surplus over to paying off bonds early.”