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John Nephew

Maplewood City Council Policy & Politics


More Good News: Bond Upgrade, Low Interest Rates

On top of last week's good news about a reduction in our special insurance deductibles, last night our bond advisors let the City Council know that the City of Maplewood received an upgrade to its bond rating.

Since 1998, Maplewood has held an Aa2 bond rating from Moody's. This year we were rated by Standard & Poor's, who gave us AA+ — the equivalent of a Moody's Aa1, and only one step down from triple-A ("AAA" at S&P, "Aaa" at Moody's), the highest rating possible. (Wikipedia has a handy chart that shows the equivalent terminology for different credit rating agencies.)

Just like for personal loans and mortgages, better credit ratings on the city's bonds mean lower interest rates. The results were apparent in the bond sale yesterday, as we borrowed money for this year's public works projects. Much of the borrowing itself is to allow residents and business to pay special assessments over time rather than all at once, so the savings will be passed along to the property owners whose streets are being rebuilt.

We sold "Build America Bonds," a financing tool created last year by President Obama's stimulus plan. Unlike traditional municipal bonds, interest on BABs is not exempt from income tax. As a result, their owners are paid higher interest rates — but the federal government rebates 35% of that interest cost to the bond issuer. In theory, this might be a wash, on the assumption that munis get sold to individuals and corporations who are in the highest tax brackets. But in practice, there is more demand for the BABs; you are buying the credit quality and stability of a municipal issuer while getting a higher coupon rate, and not paying for a tax exemption that may be of less value (if the bond holder is in a lower tax bracket, if it's held in a tax-free account like an IRA or HSA, or if the bond holder itself is exempt from income taxes). More demand means lower rates.

The winning bid in yesterday's bond sale was a true interest rate of 4.5630%. Taking into account the federal rebate, the net interest rate is just 3.0222% — a healthy improvement over last year's rate of approximately 3.4%.

Following the policy we established last year, these savings will be reflected in the interest rate applied to special assessments, which should be around 5% for this year's assessments versus the 5.4% applied last year.


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