In an ailing economy, the town of North Bergen was able to refinance its debt by selling $22.5 million in general bonds to Merrill Lynch at the township’s first online auction held on Wednesday. The sale is expected to save the taxpayers $3.5 million in interest over the life of the 20-year loan.
North Bergen will pay the $22.5 million back to Merrill Lynch over the next 20 years with a fixed interest rate, rather than paying it back to the various lenders at higher rates.
At a commissioners meeting in April, an ordinance was approved that would consolidate eight short-term loans into one single bond of $22.5 million. The loans, which the town had taken out from different lenders, were used to fund yearly capital improvements from 1999 to 2008 including street paving projects, sewer improvements, and building the township’s pool complex.
Before the online auction, held at Town Hall on April 29, the town received an upgraded bond rating from Standard and Poors, a company that rates entities on their financial stability for investors. The township, which had not been evaluated since their last bond sale eight years ago, previously received an “A” credit rating from Moody Financial Services, another bond rating service, and had anticipated paying $18 million in interest over the 20-year life of the bond. That amount is almost as much as the amount of the loans themselves.
But this year, the town’s higher “AA” Standard and Poors rating attracted a lower interest rate as well as substantial savings in interest payments. The rating was two notches higher than their previous evaluation.
North Bergen is the only municipality in Hudson County to achieve such a high rating, and now no longer has to purchase bond insurance, which saved the township $150,000, according to Township Spokesperson Paul Swibinski.
Merrill Lynch won the 15-minute live online auction. The firm offered the lowest total gross interest that the town would pay at $14.7 million, saving the township $3.5 million from what they originally expected to pay. The interest rate will be 4.19 percent.
“We were able to save over the life of these bonds $3.5 million of taxpayer money and that’s the effect of having a better rating,” said Mayor Nicholas Sacco.
Other bidders included Citigroup, Southwest, and Robert W. Baird.
“It’s really more than I expected to see,” said Pianese. “I went in today thinking maybe we would save $2 million, and the $3.5 million range is phenomenal. A 20-year savings at that kind of level is tremendous.”
Pianese said that North Bergen will save from $200,000 to $500,000 per year in its budget, including interest. Currently the township pays out $6 million worth of debt each year.
First sale of its kind for NB
During the bidding, Citigroup lowered its interest rate four times, although they remained in third place at $15.79 million in gross interest. Robert W. Baird was in second place, while Southwest was last.
In the pre-online era, bond bids would come to Town Hall in sealed envelopes and entities bidding would only have one opportunity to present a rate. Sacco said that online auctions may prove to be very “effective” and allow entities to compete.
“Some of the national firms, if you inquired them to come into [Town Hall] with a sealed envelope, there’s a good chance they wouldn’t,” said Township Financial Advisor Neil Grossman.
Pianese said that the township now has outstanding debt of $45 million, including the $22.5 million.
When Sacco took office, North Bergen was nearly bankrupt, he said.
The current debt is less than one percent of the township’s equalized value, which is about $3 billon. Municipalities are allowed under state law to have outstanding debts of 3.5 percent of their equalized value.
“Most [local] towns are going to their Local Finance Board because they’re exceeding their 3.5 percent,” said Pianese.
Pianese said that the success of the sale was due to Chief Financial Officer Robert Pittfield, to their bond counsel, and to the town’s financial stability. Even in harsh economic conditions, North Bergen’s tax base grew this year.
“It’s for all our capital needs, your playgrounds, for your streets, it’s for your sewage work.” – Nicholas Sacco
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Good news for the taxpayer
The interest rate, at 4.19 percent, will remain stable for the next 20 years. Previously, the interest of the township’s loans fluctuated each year with the market.
Merrill Lynch will likely sell the municipal bonds to the public or their clients, or they will become part of their own mutual funds, said Christopher Langhart, an attorney with McManimon and Scotland, the township’s bond counsel.
Township Spokesperson Paul Swibinski explained that a lot of financial advisors believe that the United States will be “heading into a period of higher interest rates with the increase of national debt that will typically lead to inflation.” He said holding the sale now was perfect timing.
“Any town at some point needs to borrow money,” said Pianese. “It’s for all our capital needs, your playgrounds, for your streets, it’s for your sewage work. The easiest way to explain it is you want to pay that money back at the lowest rate possible.”
Tricia Tirella may be reached at TriciaT@hudsonreporter.com.