School District May Refinance More Debt

It may seem far away, but the financial situation in Europe has prompted Bethlehem Area School District financial advisors, the Public Financial Management Group, to recommend the district consider refinancing some of its debt.

The district currently holds one last Variable Rate Demand Bond, issued in January 2007, which has $54.98 million in principal still outstanding, PFM Managing Director Scott Shearer told school board members Monday evening. That bond is held by Dexia Credit Local, a Belgian bank which was placed on Credit Watch in May with negative implications from Standard & Poor's as a result of its holding a high amount of Greek debt.

Shearer told the board that this, combined with the uncertainty regarding whether the U.S. debt ceiling will be raised, could negatively affect the school district's situation.

“It could have a very big impact, and we're watching it closely,” Shearer said. “There still is a concern with Dexia, as far as their long-term viability.

“Prior to recent events, that transaction was working very well,” he said of the variable rate loan. “There were a lot of good reasons to keep this one outstanding ... but now, with what's going on in the world ...

“This has nothing to do with Bethelehem,” he added. “There's lots of districts across the country dealing with this issue.”

To that effect, Shearer recommended the district refinance all or part of the debt with a domestic bank. He solicited offers from three financial institutions, Wells Fargo, RBC Bank and PNC Bank, he said. The deals offered by Wells Fargo and RBC are nearly identical and are probably the better situation for the district, Shearer added.

“I think the goal is right now ... to take action on these 2007 bonds in August,” he said.

More complete information about the offers is expected in his office this week.

The board will then have to decide which option to take.

It could terminate the swap entirely, but it would cost the district a bit to do that, Shearer said.

Or, it could decide to eliminate say, $30 million of it and “have a good debt ratio, and see some budget relief too,” Shearer said.

“Legally, you can terminate your swap today, but it's going to cost,” he said.

“You can never look at one transaction in a vacuum,” he added. “You have to look at what you've done, and what you're going to do.”

While the switch will help the district's financial picture overall, there won't be any recognizable impact on the coming school year, Shearer said.

“When we do the final structuring, there will be little or no impact for the 2011-2012 school year,” he said.

The matter is expected to be returned to the school board's finance committee meeting next month, on Aug. 8, and then be forwarded to the regular meeting on Aug. 15 for a full vote.