Houston City Controller Annise Parker today announced the successful refinancing of $653 million of utility system debt, a move that is expected to lower interest payments and save taxpayers millions of dollars. “Before the refinancing we were paying interest rates as high as 6.7 percent” said City Controller Parker. “Now the interest rate averages 1.6 percent. That is a weekly savings for taxpayers of about $640,000.”

This is the first round in the refinancing of a total of $1.3 billion worth of utility system debt financed with auction-rate securities. Since the first of the year interest rates on the highly-rated auction-rate bonds issued by the city have risen significantly. There have also been concerns about the viability of the insurance companies that back this type of debt. “We are watching the ups and downs on Wall Street very closely and are not immune from changes that have occurred as a result of the mortgage crisis,” said Parker. “As a result, we are adjusting our policies to provide for the most favorable outcome for taxpayers.”

In this refinancing the auction-rate securities are being replaced with variable-rate demand notes. Both options provide long-term financing at more attractive short-term, adjustable interest rates. However, under the current market conditions the variable rate demand notes are less expensive for municipalities because their structure is designed to guard against the recent dramatic interest rate increases for auction-rate securities.

Similar to the homeowner who takes out a 30-year mortgage to pay for a house, the city uses long-term debt to finance major public improvement projects for everything from new runways at the airport to new wastewater treatment plants. The city has total outstanding debt of $11.8 billion. Since 2004 about $1.9 billion of this debt has been financed with auction-rate securities. Controller Parker estimates the auction-rate securities saved the city about $95 million over the cost of comparable fixed-rate financing during the same time period. The overall savings have been reduced by about $15 million in recent weeks due to the increased interest rates for auction-rate securities. “The bottom line is that we are still about $80 million ahead of where we would have been using fixed-rate financing.' said Parker.

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