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Area governments fare better than some in bond market

By KYLE MILLIRON
Era Reporter
kylem@bradfordera.com

As the widening credit crisis begins to infiltrate the once-safe municipality bond market, communities nationwide are feeling the pinch of ballooning payments, resulting from rising interest rates.

However, local municipalities do not have funds tied up in variable-interest bonds, opting to stick with the traditional fixed-rate bond.

Communities use bonds to pay for large improvement needs such as road improvements, jail repair, or other large infrastructure ventures.

To finance such projects, a community sells bonds to investors. In return, investors receive set payments from the issuing municipality periodically over the term of the bond, for instance an annual payment for 10 or 20 years.

Bonds can be more attractive when looking to finance large expenditures because bond interest rates are typically lower than loan rates, according to Bradford City Clerk John  Peterson.

However, communities like Jefferson County, Ala., are now at risk for bankruptcy after latching on to variable interest bonds. The bonds looked attractive while rates were low, but a deepening recession drove up the fluctuating rates, corresponding to millions of additional dollars that municipalities must dole out to bond holders.

Local municipality have steered clear of variable interest bonds, according to officials.

“Our municipal bond issues are locked in with specific rates,” said Peterson.

Bradford currently only has a combination bond issued for the storm water infrastructure improvements and Elm Street infrastructure improvements.

McKean County Controller Tom Ball also said the county has never entered into variable interest bonds.

With the county carrying approximately $6.1 million dollars worth of debt through bonds, a 2- or 3-percent increase in those rates could have meant hundreds of thousands of dollars when making payments on those bonds.

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