Wentworth plan won’t impact taxes

By refinancing debt, Scarborough will absorb bond payments on the new school without raising the mill rate

SCARBOROUGH — For Scarborough voters who had to hold their noses while checking “yes” last November to a $39.1 million bond to rebuild Wentworth Intermediate School, town officials have good news – they’ve found a way to pay that debt with no impact to the tax rate.

With interest rates for municipal bonds at an historically low 2.48 percent, the town will borrow enough money to pay off about one-third of its existing bonds, most of which were issued at 4.33 percent. It will then restructure the new debt in a way that will allow it to absorb annual payments on the Wentworth bond, as well as $3.09 million in capital improvement borrowing approved by the Town Council at its March 7 meeting, without moving the needle on the property tax rate.

“Going forward, all bets are off,” Town Manager Tom Hall said on Friday. “These numbers assume we take on no additional debt in the future, and that’s obviously not going to be the case. Still, I can say with confidence that while other things might, the Wentworth school itself will not affect anyone’s taxes.”

That should come as a relief to Scarborough taxpayers. They gave the OK to replace the outdated, overcrowded Wentworth school – built as a junior high in 1962 – by a 2-to-1 margin, even though, at the time, Hall predicted payments on the bond would bump tax bills 46 cents per $1,000 of property valuation. At an assumed tax rate of $13.49 per $1,000 of property valuation, that would have cost the average homeowner an extra $138, given the $300,000 median property value in Scarborough.

The selling point at the time was that the expected tax hike broke down to a cost of $2.65 per week. But now it looks like taxpayers won’t even have to fork over that much.

Scarborough has $67 million in long-term debt and, at the higher rate, would’ve shelled out $98.4 million by the time of the last payment in 2035. However, Joseph Cuetara, a senior vice president at Boston-based Moors & Cabot Investments who works as Scarborough’s financial adviser, said that by paying off $21.14 million in bonds at or near their 10-year “call date,” Scarborough can save “at least $500,000.”

Restructuring payments through 2043, Cuetara said, allows the town to take on the new debt – to total $163.3 million with interest – without ever eclipsing the $8.4 million needed for annual debt service in the budget.

School Board Chairman Robert Mitchell, who works as an actuary at his day job, said the town will have to pay a 1 percent premium for early payment of the bonds, but the cost is worth it.

“If you do the math, if you look at the yield curve, it’s very advantageous to lock in new rates,” he said.

In fact, Mitchell notes that some of the money Scarborough will bond at the lower rate will be held in escrow to pay off bonds that are still a year or two away from their call dates, at which time the town can make early payment.

“Any time that you can minimize your debt interest costs, that’s a positive,” he said.

“Basically, we’re re-funding with cheaper money,” said Hall. “It’s like refinancing your home. If you can do it at a lower rate, it reduces your costs.”

Despite a $61.9 million payback, even at the lower interest rate, the debt restructuring frees $1.46 million in next year’s budget just as the first Wentworth payment, for $1.35 million, hits the books.

But more importantly to Hall, restructuring evens out annual debt payments through 2018.

“That’s the real key to our ability to affect what it means to us on an annual basis,” said Hall. “Debt service can go up and down and have pretty dramatic effects on budgets, but we’re going to be on a nice, level path with this restructuring. This smoothes out the lumps and that’s a pretty good thing for predictability.”

After the deal is blessed by attorneys, Scarborough’s annual bill for debt service will be a little more than $8 million through 2019. That’s when payments begin to fall, Hall said, making that the “likely horizon” on borrowing for any new, major projects in town.

“For our capital improvement needs, if we could keep our debt service on an even keel, at about the $8.4 million we had this year, we’d be in good shape,” said Hall.

But there was one other wrinkle Hall, Mitchell, Cuetara and the town finance director, Ruth Porter, had to iron out to make the restructuring work.

Bonding for Wentworth has to be done in two phases, starting with a $30 million offer later this month. The remaining $9 million will not be bonded until next year.

“Believe me when I say, figuring out how to split this was a very complicated matter, because of all the IRS rules,” said Hall.

For example, Hall would have preferred to bond out the full amount approved by voters now, as a hedge against interest rates heading back north. However, the feds no longer let tax-exempt entities collect arbitrage earnings, such as when money is borrowed and then parked to collect interest higher than the bond yield. The rule is “borrow now-spend now,” but contractors cannot complete work to the new school fast enough that the money can be bonded in one lump sum.

“Back in the late ‘80s and early ‘90s, there were communities that were borrowing money and making double what it cost them to borrow it on interest,” Hall said. “It was a good idea, but the IRS said, ‘Uh-uh, you’re not going to do that any more.’ Still, we pushed to make the amount we can borrow now, given cash-flow needs, as big as we can within the IRS constraints.”

Trees will begin coming down on the Wentworth site this summer, while the foundation for the new school should go in by December. The school will open to students in September 2014, with the old school torn down and the new parking lot built shortly thereafter.

“The $30 million initial bond is probably more than we really need for cash-flow purposes on the school by next spring,” said Hall, referring to detailed tables compiled by Mitchell. “But I would rather lock in rates I know today than take a chance on what might happen a year from now.”

Among other borrowing on the table for the next fiscal year, which Hall intimated could cause a spike in property taxes even if Wentworth doesn’t, is $1.6 million in equipment requests, including $1 million for the fire department (primarily for new ladders), $400,000 for five new public works vehicles and $100,000 for new police cruisers.

With $68 million in outstanding town and school bonds even before the Wentworth vote, Scarborough has a debt load six times higher than the next most-in-debt communities in the region – Yarmouth and South Portland, though the latter has recently approved a $41.5 million high school project.

That debt, however, is just 1.87 percent of Scarborough’s total assessed value – $3.57 billion, according to Town Assessor Paul Lesperance. State law says municipalities must keep their borrowing below 15 percent of assessed value.

Credit rating agency Moody’s Corp. gives Scarborough an Aa2 grade, while Standard & Poor rates the town at AA. In both cases, while the rating is two steps below the very best grade, it still describes bonds that are “high quality, with very low credit risk.”

“I’m really pleased we are able to pull this all together,” said Hall. “Obviously it’s good for the taxpayer and I think it creates a better climate when we go to bid, because it’s a more comprehensive, holistic approach, rather than simply taking on new debt, which is something that the people who buy these bonds like to see, and they credit rating is all tied to the investors confidence in our ability to pay that money back.”