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Schroeder uses innovative approach to reduce interest costs on capital borrowing
Short term notes, reduced borrowing will yield savings for city
Last August, Buffalo Comptroller Schroeder was preparing a charter-required report on the city’s capital borrowing when he came to a conclusion that troubled him.
“I found that the city borrowed more money for capital projects than it was prepared to spend,” said Schroeder. “This resulted in unnecessary interest costs and millions of dollars in unspent funds that increase our debt burden without providing any benefit to our citizens.”
So Schroeder reduced the city’s maximum borrowing amount by 15 percent – from $22 million to $19 million – and made it clear if a project is not ready to begin, then the debt for that project should not be sold until it is.
“In past years, a limit was set, and the city borrowed to that limit,” said Schroeder. “Not only did I reduce the limit, but I made the starting point zero dollars, and would only increase that amount if I was comfortable that each project was ready to begin.”
So when it came time to go to the market to borrow for the city’s $21.3 million capital plan, Schroeder had determined that he would borrow only $17.8 million this year.
“The other $3.5 million in projects are not going away,” said Schroeder. “We just aren’t going to borrow for them and incur interest until we are certain that they are ready to go. It could be next year, or the year after. It will be when we are confident that the money is ready to be spent.”
Schroeder, however, wasn’t done changing the city’s approach to capital borrowing.
“We decided that doing short term borrowing – known as Bond Anticipation Notes – could save the city even more money on interest costs,” said Schroeder.
Bond Anticipation Notes, known as BANs, are issued in advance of a normal bond sale and are paid back within a year of being issued.
“The BANs make the $17.8 million in capital funds available immediately, at a lower interest rate than a conventional bond sale,” said Schroeder.
The rate Schroeder ended up getting on the BAN sale, 0.337 percent, was even lower than he was expecting.
“We had eight investors bidding, and the lowest bidder, TD Securities, offered an interest rate at roughly a third of a percent,” said Schroeder, pointing out that Moody’s rated the BAN sale at MIG1, the highest possible rating for short-term borrowing. “Needless to say, the taxpayers of Buffalo got the best deal possible.”
© 2001-2011 City of Buffalo
Photos by Angel Art LTP, compliments of the Greater Buffalo Convention and Visitors Bureau. Additional photos by Adrian Roselli, compliments of Algonquin Studios