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Reduce rate impact by paying off bonds

Utilities in the Midwest and across the country are facing ever increasing pressure on utility rates. The rate pressure is the result of a variety of factors, including long-term control plan implementation, asset management replacements, operating increases and declining usage because of water conservation. These mandates and other increases in requirements are pushing the affordability limits of water and sewer utility rates. What can be done to help?

When facing necessary utility rate increases, reducing your fixed bond payments by paying off the bonds may be a valid consideration.

Assuming you have been diligently setting aside revenues and saving cash, one option might be to redeem or pay off your bonds early. However, most municipal bonds have standard call provisions which will not allow for the bonds to be paid off until they have been outstanding for a certain period of time. There also may be some redemption premium.

When considering this option, an important consideration is the need to keep adequate cash balances. Most bond documents have cash balance requirements for outstanding bonds and there should be adequate funds set aside for unforeseen capital expenditures and contingencies.

Many things must be considered before you payoff bonds, so you should ask your municipal advisor to provide you with the information needed to make this decision.

For more information on this topic, or to learn how Baker Tilly municipal specialists can help, contact our team.

Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and wholly-owned subsidiary of Baker Tilly Virchow Krause, LLP, an accounting firm.

Doug Baldessari
Partner, CPA
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