ORANGE BEACH – The city is refinancing a bond

issue from the 2006 sewer project at a new interest rate that city

leaders say will in the long run save $500,000 in interest.

Also, this move will free up a $2 million

reserve fund that was required with the previous bond. Potential

investors in that issuance insisted on insurance for the bond,

requiring the $2 million in reserve.

Mayor Tony Kennon and most of the city council

were solidly behind the refinance, even though it meant adding $5

million to the city’s debt.

“Let my try to describe this in simple terms

because that’s the only way I can figure this out,” he said. “If we

do this refinancing, we pay the same amount starting in 2015 to

2030, same terms, except that we save half a million in interest

and we get to remove $2 million that has been placed in a reserve

account.

“So in reality, nothing changes by doing this

second option except we have $2.5 million freed up cash.”

Councilwoman Pattisue Simpson wasn’t so sure.

She was concerned about the city taking on more debt. The current

debt on the sewer bond issue is about $21.6 million, but the

refinance is for $26.1 million.

“I understand the payment is the same, but

it’s still more debt,” Simpson said.

Reed Cavanaugh with Merchant Capital,

underwriter of the both the 2006 original bond and the refinance,

was called to the podium to further explain.

“Interest rates are at a 44-year low and

they’ve literally fallen off the cliff in the last month,”

Cavanaugh said. “(Refinancing) hasn’t made sense until just

recently when rates took a nosedive. It is a good opportunity.”

Simpson remained unconvinced and in specially

called meeting following the regular council session, she was the

only one to vote no on the refinance.

Kennon said the added debt would not be a

burden.

“Technically, we borrow $5 million,” Kennon

said. “But we borrow it at a lower interest rate, so we pay the

same amount back, and we make $2.5 million. I gotta take that deal

all day long every day. I wish I could find more.”

Currently, Kennon said, the city owes about

$40 million, but the city’s financial position allows it to have a

$140 million debt limit.

“You can technically split hairs if you over

how much debt we are in and how much we are not,” he said. “The $5

million doesn’t move the needle one way or another on that

issue.”

“This in a nutshell, we’re going to save the

city about $500,000,” Councilman Jeff Silvers said. “I think we

would be very prudent if we moved forward with this.”

The freeing up of the reserve fund comes as a

result of the city’s better financial standing as compared to 2006.

With investors not as skittish in 2012 and the city’s excellent

rating, the $2 million goes back into city coffers rather than

sitting in a managed fund where it draws no interest.

An insurance requirement at the time called

for the reserve fund.

“We’ll sell these bonds based on your rating

solely so you won’t have bond insurance,” Cavanaugh said. “There

won’t be a need for a reserve fund.”

City Financial Director Clara Myers said the

city can take over that fund now and draw interest on the

money.

“That $2 million reserve is sitting in a bank

account now at zero interest because they have to manage the fund

and the charge us to manage the fund,” Myers said. “So it frees

that up to where we can get it back to our bank account so we can

at least earn $40 or $50 a month on it, too.”

It can also now be used for city projects.

“That would be earmarked only for capital

improvement,” Kennon said. “That’s the only way it could be

spent.”