MANKATO — For the third straight year, Mankato’s annual bond sale, which generates millions of dollars for street and sewer projects, has been newsier than one might anticipate.
This time, the noteworthy aspect was the lowest interest rate in city history.
“You had a great day in the market with your bond sale,” Terri Heaton told the City Council Monday night. “... You’ve never been below 1% before.”
The interest rate the city will pay on $8 million in bonds will be .9% after numerous investment firms competed to loan Mankato money to fix up its streets and sewers, said Heaton, a principal with the city’s bond counsel Baker Tilly.
The city also refinanced bonds it sold in previous years, reducing interest payments by $168,000 over the life of the bonds.
It used to be pretty uneventful when Mankato borrowed money through a bond sale — something the council authorizes every year in late February or early March.
That changed starting in 2019, when Heaton reported to the City Council Mankato’s bonds were offered just as investors were looking for a safe haven in a plunging market caused by the crash of a Boeing 737, which sent Boeing stock into a tailspin and dragged the entire market down with it. With few bonds being offered on that day, 11 firms jumped on Mankato’s offer with Robert Baird and Co. offering an interest rate of 2.15 percent — much lower than the 2.82 percent the city expected.
Last February, Baker Tilly predicted an interest rate of 1.5% because the stock market was nervous about a new coronavirus that had arrived in the United States and investors were looking for safer options for their money, such as municipal bonds. By the time the bonds were to be sold on March 23, though, the number of COVID-19 cases in the U.S. had soared from 14 to 43,000 in a single month and the stock market was in a freefall.
Spooked investors were dumping stocks but weren’t sure they wanted bonds either. Worried about the volatility, Baker Tilly pulled the sale, found a private investor and eventually sold $5.9 million in bonds to that individual buyer for an interest rate of less than 1.5%.
And Monday, borrowing money was cheaper than ever.
“There’s a low supply (of municipal bonds), so you’ve taken advantage of that,” Heaton said. “And there’s historically low rates (in general.)”
The one constant has been investors’ willingness to accept low interest payments from Mankato because they view the city as a very low risk to default. Once again, a pre-sale report by bond-rating agency Standard and Poor’s gave Mankato a AA/stable rating despite the uncertainty for government budgets brought on by the pandemic and the accompanying economic recession.
“Your credit report and the timing of your sale all worked in your favor with investors,” Heaton said.
Standard and Poor’s cited the city’s budget surplus despite the COVID-related turmoil and pointed to the Mankato’s “very strong budgetary flexibility” because of fund balances equal to 41% of operating expenditures.
“That means you don’t have to go right away and borrow money if you have a hiccup,” Heaton said
Standard and Poor’s noted Mankato has lower average incomes than many similar cities, but that’s attributable to the number of college students in the population. While the high number of students drives down average income, the presence of Minnesota State University is a stabilizing influence on the local economy, according to S&P.
Other positives cited by S&P included the city’s “very strong management” and long-term financial planning, “robust development over the past four years” that’s driven up the tax base, and stable employment provided by health care and manufacturing firms.
Although the city has relatively high debt, that’s something the ratings companies find reassuring across Minnesota because the debt is invested in infrastructure, Heaton said.
One thing that changed this year was the team of city officials that sat for Standard and Poor’s grilling. Former Finance Director Dan Scott and City Manager Pat Hentges have retired, but new City Manager Susan Arntz praised the debut of Director of Administrative Services Parker Skophammer and other managers who fielded S&P’s questions.
“Parker and his team did a masterful job,” Arntz said. “... You would not have suspected they’ve never done that before.”
And in her 27th year of working in municipal government, the bond sale was a first for Arntz when it came to the bottom-line results.
“I’ve never seen an interest rate below 2%,” she said.