Project rates were discussed and the ordinance regarding general obligation and pension bonds passed during a special meeting of the Bradford City Council Tuesday.
Council voted on the second reading of General File no. 3282, the refinancing of General Obligation bonds 2012 and 2013 and approval of the pension bond, with a final approval of 4-0. Councilman Dan Palmer was excused from the meeting.
Michael McCaig, municipal finance director for RBC Capital Markets LLC out of Pittsburgh, provided a status update and projected interest rates once the bonds have sold.
McCaig opened by explaining that Moody’s Investors Services Inc. provided a rating for the city, similar to what has been done previously. The rating came back as a BA-1, although the report for the rating is not yet public.
McCaig explained that the BA-1 rating is below investment grade, judged to be speculative or subject to substantial credit risk.
“I think we can all agree that that’s not where the city would like to be,” McCaig noted. He shared comparisons with the city’s peers, noting that Bradford City Water Authority is in the A category, which is subject to low credit risk. The Bradford Area School District has an A+ rating. Meanwhile, McKean County is also in the A category. The borough of Grove City, which has a similar population to Bradford, has an A-1 rating. St. Marys has an A+ rating, which is similar to an A-1. Meanwhile, the city of Oil City is a BA-2.
McCaig noted that most areas across the state are in the A or BA range of ratings issued by Moody’s, which means the City of Bradford is on the lower end of the ratings range for municipalities and others in the state.
“Since we have what we have, we have come up with a good plan of finance, I think, given that rating. In addition to that, interest rates have been very much cooperating,” McCaig said. He cited the fact that interest rates have dropped immensely and set records during the first part of 2020.
“The Fed lowered the discount rate (Tuesday) at a surprise meeting and the 10-year Treasury dropped below 1% for the first time in its history,” he explained. “That’s going to help with the sale of the bonds, because even though the rates that we are going to need to sell a BA-1 rated general obligation bond issue are going to be a little higher, that is going to be offset by the low interest rates where they are today. They are absolutely at all-time lows.”
McCaig explained that savings should be “north of $300,000.”
Councilman Tim Pecora asked for a best case/worst case scenario in terms of interest rates.
While the predictions are challenging based on a lack of precedent for bonds with this rating and also the fact that Tuesday was an historic day with rate changes, projected interest rates are in the range of 2.8% to 3.2% for the tax exempt side of the bonds, and for the pension bond, rates will be between 4 and 4.5%, according to McCaig.
“It’s a fabulous time to be selling bonds; there’s a lot of money moving to treasury and by extension into municipal bonds,” McCaig said.
Pecora also asked what the city can do to improve the rating from Moody’s.
McCaig explained that some factors are not something that can be changed — such as location, median family income and market values in the area. He noted that, while the report will specify actions that are recommended, one of those, according to his estimation, will be the lack of a structurally balanced budget for a number of years. McCaig went on to explain the budget has been balanced because of one-time items, like property sales. Moody’s likes to see a structurally balanced budget without one-time items.
Another area to focus on for change would be a level of fund balance.
“The higher rated communities will have a higher fund balance,” McCaig explained.
McCaig and council discussed the covenants included in the ordinance, with McCaig noting that the covenants should not be an issue if payments are included in the budget and regularly made on the bond issue.
“The plan is sound and the trade-off seems sound to me,” McCaig said.
“If we follow those covenants (from the bond insurer) and go a step forward, my feeling is that the city will be able to start raising their rating with Moody’s. They gave us a game plan that we better follow,” said Councilman Brad Mangel. “They put our feet to the fire with those covenants, so I think that it is incumbent on all of us sitting up here to try everything we can to follow those covenants.
“Besides, some of the things that are going to come out of the rating agency. I wish we could see some developer come in here and spend $10 million but I don’t have a wand to have that happen so we are going to have to do it on our own,” he added. “I think this is the first start.”
Mayor James McDonald spoke to McCaig, noting, “I thank you for coming. Based on this information, I feel we’ve made a sound move.”
McCaig noted that the bonds have a five-year call, which means they can be revisited in 2025 and possibly refinanced based on a higher rating for the City of Bradford.
In other business, city council approved the purchase of a new vehicle for the Bradford City Police Department. The vehicle, a 2020 Ford Interceptor sport utility vehicle, will be purchased from Tri-Star Motors, a CoStars Vendor. The cost will be $40,750.
The vehicle purchase is an effort to keep the city’s police fleet in optimal working order.
Due to budget restraints in recent years, the department has made due without the purchase of a new vehicle during one budgetary cycle, making this purchase more of a necessity.
Council also voted on payment of $2,070 for repair of a firetruck, $1,144 for police uniforms and $840 to Cummins Construction for partial demolition of 2 Maplewood Ave. to eliminate safety concerns.
