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Debt refinancing to save San Diego $300M

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Refinancing of several large city debts at lower interest rates will save San Diego taxpayers more than $300 million over the next 24 years, Mayor Kevin Faulconer said this week.

Four large debts, including bonds used to build Petco Park, have been refinanced by the city since June 2015. And two more large debts will be refinanced by the end of next month.

Because interest rates are historically low, the six efforts to refinance will save taxpayers $323 million total over the course of repayments.

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The city’s savings will be $255 million, with another $68 million going to local schools because one of the debts belongs to a former city redevelopment agency.

The average annual savings to the city over the next 24 years will be $13 million, money that can be spent on neighborhood infrastructure, water projects and city services.

“The goal is to get the most value out of every tax dollar,” said Faulconer, whose financial staff planned and coordinated the refinancing efforts. “By taking advantage of historic lows in interest rates, we’re paying millions less in debt and will have millions more available in future budgets for priorities such as roads, water and sewer projects and parks.”

When each of the refinancing efforts is complete, the city will have lowered the interest rates by at least 3 percent on $1.7 billion in debt -- about 55 percent of the city’s total outstanding debt.

It hasn’t made sense to refinance the roughly $1.4 billion in additional city debt because the savings wouldn’t be large enough to justify such efforts, said Mary Lewis, the city’s chief financial officer.

“It’s expensive -- you’ve got to hire a consultant and a financial adviser, and you have to pay the underwriter who issued the debt,” Lewis said. “If it’s not at least 3 percent it’s not worth the staff time. You’re just chasing marginal returns.”

Lewis said refinancing additional debts could become more appealing if interest rates continue their downward trend.

The city isn’t paying off any of the debts faster than previously planned, with each of them scheduled to be paid off somewhere between 2032 and 2040 as they were before.

But because it’s possible to borrow money at lower rates than when the debts were incurred, the city is refinancing each debt at a lower interest rate.

The debts are all municipal bonds sold in exchange for capital to pay for construction projects and infrastructure.

Each of the debts had interest rates ranging from 5.2 percent to 5.9 percent. The rates after refinancing will range from 2.34 percent to 4.04 percent.

Some are higher than others based on the risk to bond buyers of repayment, with Mello-Roos bonds sold to build infrastructure in some of the city’s newest neighborhoods incurring the highest rates.

The debts include $120.5 million bonds sold to build Petco Park, which were refinanced this month at a savings of $32 million between now and 2032.

The city began the process last June by refinancing $10 million in Mello-Roos bonds sold to build infrastructure in Community Facilities District No. 2, which includes Santaluz, Fairbanks Highlands, The Colrich Collection at Santa Monica, The Ranch at Santa Monica and Mirasol.

That effort will save $2 million between last year’s refinancing and 2034.

In January, the city refinanced $237 million in redevelopment agency debt, yielding $83 million in cumulative savings by 2034. The city will get $15 million of that money, with $63 million going to local schools.

In March, the city refinanced $748 million in sewer bond debt, yielding cumulative savings of $98 million by 2039.

This week, the city is refinancing $595 million in water bond debt, yielding an anticipated $105 million in cumulative savings by 2040.

And next month, the city plans to refinance $10 million in Mello-Roos bonds sold to build infrastructure in Community Facilities District No. 4, which includes Black Mountain Ranch.

New interest rates are only estimates for the last two refinancing efforts because they haven’t been completed. But city officials said they’re confident the rates won’t significantly veer from their estimates in such a short time.

Interest rates are historically low partly because the Federal Reserve has been reluctant to raise rates based on worries that such a move could slow or derail the economic recovery.

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