Susquehanna Group Advisors, Inc. A Pennsylvania Municipal Advisory and Consulting Firm Presentation to Lower Paxton Township August 14, 2018
INTEREST RATE OUTLOOK 2
Interest Rate History Last 25 Years 8.00% 7.00% 6.00% 10 Year Treasury Yield the benchmark rate that guides almost all other interest rates. Indicator of investor confidence in economic growth. One Month LIBOR the benchmark floating interest rate banks charge each other for short term loans. 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 10 Year U.S. Treasury Yield One Month LIBOR 3
Interest Rate Outlook The Fed has three main goals: 1. Maximum sustainable employment 2. Stable prices 3. Moderate long term interest rates In December 2015, with unemployment down to 6% and inflation at 0.7%, the Fed increased its key interest rate, the Federal Funds Rate, for the first time since June 2006. The rate had remained at effectively zero since December 2008 until the 0.25% increase in December 2015. The Fed has subsequently raised the Fed Funds Rate six (6) additional times (once in 2016, three times in 2017, and twice in 2018) to its current level of 2.00%. The unemployment rate is currently 4.1% and core inflation has steadily increased to 2.3%. As a result, many economists believe the Fed will continue raising rates gradually. The Fed is expected to raise the Fed Funds Rate at least once more in 2018. The Fed expects three additional rate hikes in 2019. 4
OUTSTANDING DEBT 5
Summary of Debt Outstanding OUTSTANDING PRINCIPAL ALLOCATIONS Outstanding Lower Paxton Friendship Original Coupon Final Principal Township Community Series Principal Pupose Range Maturity Call Date Outstanding Township Authority Center Series D of 2009 42,465,000 Capital Projects (Sewer) 6.245-6.345% 4/1/2039 10/1/2019 42,465,000-42,465,000 - (Taxable BABs) 2010 PENNVEST Loan 10,901,017 Capital Projects (Sewer) 2.445% 6/1/2032 Anytime 7,656,426-7,656,426 - Series A of 2010 4,355,000 Advance Refunding (2002A) 4.00% 4/1/2021 Non-callable 975,000 170,000-805,000 Current Refunding (2004) Series of 2011 (Note) 750,000 Roadway Paving Program 1.625% 2/6/2022 Anytime 276,412 276,412 - - Series A of 2012 2,855,000 Capital Projects 1.80-2.70% 11/15/2025 11/15/2017 2,830,000 2,610,000-220,000 Scoop Refunding - 2012 D/S Series of 2013 9,720,000 Current Refunding (2006) 2.00% 4/1/2022 4/1/2018 7,275,000 1,675,000 5,600,000 - Series A of 2013 4,060,000 Capital Projects 2.00-2.65% 4/1/2025 4/1/2018 3,085,000 2,085,000-1,000,000 Series of 2014 29,915,000 Capital Projects 2.25-5.00% 4/1/2044 4/1/2024 27,785,000 5,800,000 21,985,000 - Series of 2015 14,005,000 Current Refunding (2009C) 2.00-4.00% 4/1/2029 4/1/2025 13,600,000-13,600,000 - Series of 2016 27,785,000 Capital Projects 2.00-5.00% 4/1/2046 4/1/2024 26,520,000 3,650,000 22,870,000-132,467,838 16,266,412 114,176,426 2,025,000 6
Outstanding Debt General Fund Allocation EXISTING Series A Series Series A Series Series A Series Series Aggregate Year of 2010 of 2011 of 2012 of 2013 of 2013 of 2014 of 2016 Debt Service 2018 377,275 81,562 72,213 53,700 253,523 507,470 265,975 1,611,717 2019 104,800 81,562 72,123 345,350 234,673 510,533 267,925 1,616,965 2020 71,400 81,562 72,023 472,700 141,873 506,995 264,825 1,611,377 2021 81,562 71,910 468,650 214,223 510,695 265,075 1,612,115 2022 40,781 356,790 459,550 42,523 510,583 263,575 1,673,801 2023 809,830 42,523 510,070 266,775 1,629,198 2024 811,080 42,523 507,470 264,675 1,625,748 2025 801,060 42,523 511,213 267,275 1,622,070 2026 837,259 511,180 266,403 1,614,842 2027 840,998 510,503 266,956 1,618,456 2028 510,750 266,891 777,641 2029 506,875 266,050 772,925 2030 507,125 264,675 771,800 2031 506,375 263,150 769,525 2032 509,500 266,256 775,756 2033 506,500 263,844 770,344 2034 507,375 266,044 773,419 2035 267,919 267,919 2036 264,388 264,388 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 TOTAL 553,475 367,031 3,067,028 1,799,950 2,692,636 8,651,210 5,048,675 22,180,004 7
Outstanding Debt Friendship Center Allocation EXISTING Series A Series A Series A Aggregate Year of 2010 of 2012 of 2013 Debt Service 2018 346,850 5,670 42,790 395,310 2019 321,300 5,670 72,090 399,060 2020 226,200 5,670 165,140 397,010 2021 306,000 5,670 87,990 399,660 2022 30,670 220,138 250,808 2023 70,070 180,903 250,973 2024 68,445 181,676 250,121 2025 66,755 187,266 254,021 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 TOTAL 1,200,350 258,620 1,137,993 2,596,963 8
Outstanding Debt Authority Allocation Series D Estimated 2010 EXISTING of 2009 BABs PENNVEST Series Series Series Series Aggregate Year (BABs) Subsidy (1) Loan of 2013 of 2014 of 2015 of 2016 Debt Service 2018 2,675,034 (874,469) 679,495 1,051,300 1,489,335 849,925 1,387,031 7,257,652 2019 2,675,034 (874,469) 679,495 1,394,050 1,487,016 510,375 1,387,131 7,258,633 2020 2,675,034 (874,469) 679,495 1,437,450 1,486,873 454,725 1,387,031 7,246,140 2021 2,675,034 (874,469) 679,495 1,484,400 1,486,873 459,525 1,386,431 7,297,290 2022 2,675,034 (874,469) 679,495 1,515,000 1,489,054 607,775 1,385,031 7,476,921 2023 2,675,034 (874,469) 679,495 1,490,435 2,146,475 1,387,731 7,504,702 2024 2,675,034 (874,469) 679,495 1,488,035 2,184,875 1,384,531 7,537,502 2025 2,675,034 (874,469) 679,495 1,488,080 2,209,075 1,385,431 7,562,647 2026 2,675,034 (874,469) 679,495 1,485,450 2,205,113 1,386,384 7,557,008 2027 2,675,034 (874,469) 679,495 1,486,688 2,204,150 1,386,919 7,557,817 2028 2,675,034 (874,469) 679,495 1,485,750 2,206,375 1,385,472 7,557,658 2029 3,203,017 (868,906) 679,495 1,487,375 1,674,750 1,386,469 7,562,200 2030 5,997,804 (827,974) 679,495 1,487,250 1,385,619 8,722,195 2031 5,921,888 (755,756) 679,495 1,490,250 1,384,169 8,720,045 2032 5,841,759 (680,527) 339,745 1,486,375 1,386,575 8,373,927 2033 5,757,107 (602,185) 1,485,625 1,387,263 8,027,810 2034 5,667,620 (520,627) 1,487,750 1,386,669 8,021,411 2035 5,575,705 (435,008) 1,487,625 1,385,263 8,013,585 2036 5,480,649 (345,092) 1,490,125 1,387,428 8,013,111 2037 5,379,014 (251,391) 1,490,125 1,388,066 8,005,814 2038 5,275,323 (153,749) 1,487,625 1,387,691 7,996,890 2039 5,168,942 (51,958) 1,487,500 1,388,375 7,992,859 2040 1,489,500 1,384,500 2,874,000 2041 1,488,500 1,388,125 2,876,625 2042 1,489,375 1,384,125 2,873,500 2043 1,487,000 1,387,375 2,874,375 2044 1,486,250 1,387,625 2,873,875 2045 1,384,875 1,384,875 2046 1,388,875 1,388,875 TOTAL 88,694,206 (15,112,327) 9,852,678 6,882,200 40,171,838 17,713,138 40,208,210 188,409,941 (1) Assumes the Sequester Reduction of 6.6% effective for 2018. 9
REFUNDING ANALYSIS G.O. Bonds, Series D of 2009 10
General Obligation Bonds, Series D or 2009 (Build America Bonds) Issued on October 27, 2009 in the aggregate principal amount of $42,465,000. Principal due annually from April 1, 2029 through April 1, 2039. Interest payable semiannually on April 1 and October 1. Allocated to the Authority proceeds were used to fund various capital improvements to the wastewater collection and conveyance system throughout the Township. Current principal outstanding = $42,465,000. Callable on or after October 1, 2019 at par. 11
General Obligation Bonds, Series D or 2009 (Build America Bonds) Designated as Build America Bonds (BAB s) under the American Recovery and Reinvestment Act of 2009. Issued on a taxable basis. Higher taxable interest rates offset by direct payments from the U.S. Treasury equal to 35% of each interest payment due on the bonds. Pursuant to the requirements for the Balanced Budget and Emergency Deficit Control Act of 1985, the Treasury s 35% subsidy payments have been subject to yearly sequestration rate reductions since 2013. 12
General Obligation Bonds, Series D or 2009 (Build America Bonds) YEARLY SEQUESTRATION RATE REDUCTIONS NET INTEREST RATES Anticipated Rate Actual Taxable Projected Net Rate Actual Net Rate Year Subsidy Reduction Subsidy Maturity Coupon (35% Subsidy) (32.8% Subsidy) 2010 35.0% 35.0% 2034 6.245% 4.059% 4.197% 2011 35.0% 35.0% 2012 35.0% 35.0% 2039 6.345% 4.124% 4.264% 2013 35.0% 8.7% 32.0% 2014 35.0% 7.2% 32.5% 2015 35.0% 7.3% 32.4% 2016 35.0% 6.8% 32.6% 2017 35.0% 6.9% 32.6% 2018 35.0% 6.6% 32.7% 2019 35.0% 6.2% 32.8% 13
Refunding Opportunity The Tax Cuts and Jobs Act of 2017 eliminated the ability for issuers to a refinance a tax exempt bondissuemorethan90dayspriortothecalldatewithproceedsfromatax exempt refunding bond issue. Since the 2009D Bonds are taxable, the Township is permitted to advance refund the 2009D Bonds on a tax exempt basis. Based on current tax exempt interest rates and the length of time to the call date of the 2009D Bonds (approx. one year), an advance refunding today would produce debt savings to the Township. Net present value savings from an advance refunding today = $939,603 Net present value savings as a percentage of principal refunded = 2.21% If there is no change in interest rates from today to the call date (10/1/19), and today s taxexempt interest rates are available on 10/1/19, then the Township could realize significantly higher debt service savings. Net present value savings from a current refunding on 10/1/19 assuming today s interest rates = +$2,682,928 If current market interest rates increase by +35 basis points (0.35%) between now and the call date, net present value savings on the call date would be approximately +$940,000 (the savings achievable today through an advance refunding). 14
Refunding Opportunity The Township has the ability to hedge against rising interest rates between now and the call date with an interest rate swap agreement. The swap would be executed today and would terminate on the call date such that no payments would be exchanged with the counterparty except for a termination payment. The swap would be structured such that: If rates are higher on the call date, the Township would receive a cash payment. If rates are lower or unchanged on the call date, the Township would owe a cash payment. If rates are higher on the call date, the Township would not refund the 2009D Bonds but still realize savings through the swap termination payment. The Township would still have the ability to refund the 2009D Bonds in the future if rates decline. If rates are lower on the call date, the Township would refund the 2009D Bonds for debt service savings, and would fund the termination payment that it owes with bond proceeds. 15
Refunding Opportunity Advance Refunding Today Rate Assumption: Current PV Savings: $939,603 Savings %: 2.21% Current Refunding on the Call Date (10/1/19) Rate Assumption: -50 bps Current +50 bps +100 bps +200 bps PV Savings: $5,388,355 $2,682,928 $187,838 -$2,136,232 -$6,321,014 Savings %: 12.69% 6.32% 0.44% -5.03% -14.89% Current Refunding on the Call Date (10/1/19) with Swap Rate Assumption: -50 bps Current +50 bps +100 bps +200 bps PV Savings: $5,388,355 $2,682,928 $187,838 -$2,136,232 -$6,321,014 Swap Payment: -$2,661,279 -$516,335 $1,472,146 $3,316,390 $892,660 Net Savings: $2,727,076 $2,166,593 $1,472,146 * $3,316,390 * $6,616,042 * Net Savings %: 6.42% 5.10% 3.47% 7.81% 15.58% * The Township retains the ability to refund the 2009D Bonds for additional savings if interest rates subsequently decline. 16