Money is expensive when you don't have it.
That's particularly true for the city of Scranton, penalized for its lopsided balance sheet and recent default on Scranton Parking Authority bonds.
A closer look at a $14.1 million bond issue, details of which were announced at the Scranton City Council meeting Thursday, shows how dearly city taxpayers pay each time the city goes back to the bond market for financing. When all is said and done, at the end of the nine-year term of the $14.1 million bond issue, the city will have paid half that in interest and fees - about $7 million.
Here's how it breaks down:
Even before the city receives the $14.1 million, it has to pay $493,050 in fees and other costs. That works out to a 3.36 percent charge. As with any loan, the city has to pay interest - 7.25 percent per year over the nine-year term. That adds up to $6,493,375 in interest.
Interest and fees after the nine years is just a bit less than $7 million. The city is paying 50 cents for every dollar it gets. As the city uses new bonds to pay off old bonds, the fee and interest impact gets even larger as debt is extended over time and refinanced.
In an era of record low interest rates, 7.25 percent interest is a hard money rate.
The Federal Reserve Bank sets rates at zero. The average national rate for a 30-year mortgage is 3.32 percent and just 2.66 percent for a 15-year mortgage. Municipal bonds are viewed as lower risk by most investors and the rates are usually comparable to, or lower than, mortgage rates. The neighboring borough of Dunmore, for example, recently advertised a bond issue of 3.38 percent. The borough of Moosic recently advertised a bond issue for 2.4 percent.
The city's default and financial trouble has resulted in doubling interest rates. For this most recently borrowing, that's more than $3 million.
"That ain't cheap money. It's an awfully high rate," said Bert Ely, a financial institution adviser. He noted that tax-free municipal bonds issued for 10 years by AAA rate government pay 1.63 percent. "This is junk bond territory. But given Scranton's situation, that may be the best they can do."
The cost of raising money from bonds is much more expensive that a conventional loan most because of the consultants and people who need to be paid for the work, however routine.
Of the half million in fees, the lion's share, $150,000 goes to the financial adviser, FS&L.The primary bond counsel, Stevens & Lee, receive $105,000. Attorneys for the underwriters receive $70,000. City solicitor Paul Kelly will receive $15,000 and council solicitor Boyd Hughes will receive $22,500.
Contact the writer: dfalchek@timesshamrock.com