City officials expect lower interest rates this year

St. Petersburg administrators are adjusting plans to finance $53 million in capital improvement projects in anticipation of the U.S. Federal Reserve (the Fed) lowering interest rates this year.

City officials and their financial advisors recently selected Truist Bank to facilitate a one-year direct loan rather than a typical 30-year public utility bond offering. Tom Greene, assistant city administrator, told city council members at a Feb. 22 Budget, Finance and Taxation Committee meeting that the funding mechanism could serve as a “bridge” until rates decrease.

“It didn’t make a whole lot of sense to fix out a 30-year bond offering at today’s rates when it could be lower within a year,” Greene said. “This bond anticipation note is to give us a little time …”

According to city documents, administrators plan to finance $44.3 million in water resources and $8.41 million in stormwater capital improvement projects. They selected Truist from six proposals after consulting with Public Financial Management (PFM).

The Fed began raising interest rates during the pandemic to mitigate soaring inflation. Greene noted that consumer costs are “trending in the right direction.”

However, central banking officials kept rates between 5.25% and 5.50% – a 22-year high – at their January meeting. Greene said, hopefully, reductions will come in March or the summer.

The city will pay 4.24% on its $53 million loan. Jay Glover, managing director for PFM, said officials would currently pay the same rate on a 30-year bond.

The city must repay $26.5 million in 2025 and 2026. The goal is to issue long-term bonds with a lower interest rate before the short-term loan matures.

“How much we are going to save will depend on what interest rates are when we actually take this financing out,” Glover explained. “I think inflation data has been a little hotter than they want the last couple of times, so it’s probably going to be summertime before they start lowering rates.”

He added that the city could pay more if the Fed raises interest rates. Glover reiterated his belief that rates would decrease this year and said that is “a risk we thought was worth taking.”

He said the city pays an average of roughly 3% interest on its public utility debt. Glover also noted that 30-year rates were around 4.75% in October 2023.

The city will pay about $400,000 to refinance the debt later this year. However, Greene explained that consolidating two years of capital improvement projects would reduce bond issuance costs.

“I like the creativity of this,” said Councilmember Copley Gerdes. “I think this is a smart thing to do … and I would anticipate interest rates going down as well.”

Councilmember Lisset Hanewicz said she wanted a report on the city’s infrastructure needs over the next 30 years before voting on the Historic Gas Plant District’s redevelopment. Greene said administrators have master plans forecasting costs for several capital projects, like stormwater system upgrades, but not for other upcoming initiatives, like sidewalk improvements.

Greene said he could estimate project costs assuming future inflation rates, but a more accurate forecast would require engineering studies. “It’s just the difference between a really good, researched understanding of the need versus estimates,” he added.

The committee unanimously approved issuing a one-year bond anticipation note. The full city council will vote on the initiative at an upcoming meeting.