WESLACO — It’s currently a borrowers market. And that confluence of low interest rates combined with the city’s carefully managed finances means officials here were able to net a deal on debt they weren’t originally expecting in January when they first proposed to voters the idea of a $10 million bond election to fund drainage improvements.
But, that’s exactly what happened when the city went looking for a buyer this summer. “I never like to play the market. When you need the money, you have to borrow the money and the interest rate is what it is,” Weslaco City Manager Mike Perez said in an interview last week.
And Weslaco needed the money.
One year after a 500-year storm damaged hundreds of homes and businesses — and just months after the city commission had approved an initial $4 million via certificates of obligation to pay for the most immediate drainage improvements — city leaders knew they would need millions more to bring an outdated, overburdened and poorly maintained drainage system up to par.
Residents who had hounded city leaders for months about the drainage system agreed, approving May’s $10 million bond election by a 2-to-1 margin.
“When we did the planning back in January, we kinda looked at the worst-case scenario and we (ended) up having the best-case scenario. That’s a win-win for everybody,” Perez said.
That best-case scenario resulted in the city maintaining its AA- credit rating and being able to borrow the money at a lesser interest rate than previously anticipated.
Perez said the city’s ability to maintain such a good credit rating was “very good” after withstanding major flooding and dips in the fund balance.
During a presentation to the Weslaco City Commission earlier this month, financial advisor Anne Burger Entrekin lauded the city for maintaining that rating. “The double A minus rating reflects Weslaco’s strong financial position as reflected in the maintenance of healthy reserve levels,” Entrekin said.
The city was evaluated by Standard & Poor’s, which found the city had strong management, budget flexibility and liquidity, Entrekin said, calling the S&P’s report “very positive for the city.”
As for the cost of taking on the additional debt, the city’s good credit rating and favorable market trends helped the city secure a bonny of a deal.
Initially, the city expected interest costs to be somewhere around 4%. Instead, it secured a 2.69% interest cost. It’s one of the lowest interest rates since the 1960s, according to Entrekin.
The low interest rate will have several beneficial impacts for the city. Over the life of the bond, the city’s total interest costs will be lowered by more than $459,000. And the city’s annual debt service — what portion of the principal and interest it pays down each year — will be $141,654 less than previously anticipated, Entrekin explained.
Too, the low interest rates affected how investors wanted to purchase the bonds, she explained. Instead of purchasing the bonds at their par value, investors preferred to pay a premium to ensure a higher yield.
That premium price amounted to an extra $1.3 million more for the city than what would have been a sale of $8.85 million in bonds at face value. And according to state law, Weslaco can use part of the proceeds from the premium to pay for the $107,000 cost of issuing the bonds, Entrekin said.
“The good news is that means that the entire project fund amount of the voted authorization of the $10 million is able to go into the project fund,” she said of using the premium to pay the issuing fees.
The premium bonds will yield 5% interest from their issuance through 2028, and 4% from 2029 through 2039.
Finally, Weslaco was able to negotiate a nine-year call date. Perez explained most municipal bonds have a 10-year call, which is the minimum amount of time before an entity can refinance or pay off a debt early.
“When the market is good, you can get a call that’s sooner. And what you want for a city all the time is the maximum amount of flexibility for the future,” Perez said.
Weslaco has wasted little time in getting projects underway since the issuance of the COs last November.
A project being done in conjunction with the county at Merida and Austin streets is almost done, Perez said. And another — a nearly four-acre regional detention facility being constructed on the south side of town along Farm-to-Market Road 88 is about two weeks away from completion.
The city also used a portion of the $4 million to buy equipment — including an excavator to clear drainage ditches — and most recently, cameras that can be used to locate blockages in the system. “We pretty much have unplugged every culvert and every pipe that we know of,” Perez said.
With funds from the $10 million bond expected in the coming days, Weslaco will begin tackling more projects, including an RDF at the corner of Sugarcane and Westgate. Weslaco ISD is partnering with the city on the $2.4 million project, Perez said.
And a $4,775,000 project will include the installation of drainage pipes on Pleasantview Drive south of Business 83. Other projects include RDFs at city-owned parks, Perez said.
“We’re making pretty good progress,” Perez said, adding that the city hopes to have the projects completed by this time next year.