Despite the considerable anxiety caused by COVID-19 and related economic forecasts these days, there may be capital project planning and budget analysis you can perform that will actually bring good news!
Now could be the very best – and least expensive – time to launch a major capital project.
Federal and State incentives in the form of economic stimulus money are currently being formulated. Investment packages, and a subsequent flood of available funding is likely coming. Getting your community into the pipeline for projects puts you in the funding queue early.
There are three compelling reasons to run the numbers and consider the financial advantages of moving capital projects forward, ahead of an economic upswing:
- Interest rates are at historic lows. Reduced rates can lower annual debt service by a significant amount. Use the calculator link at the end of this article to see just how much less the annual debt service would be, using today’s rates in comparison to bond rates from earlier in the year.
- Waiting will likely increase project construction costs / bid results. Right now, the construction market is hungry for stimulus, too. Depending on location, and availability of work crews, bids could be lower. The longer you wait, the more likely materials and labor become scarce, driving project costs up – and up.
- Your financial “strength” determines your bond rating – and your interest rate. If there is any risk that your financial situation may affect your bond rating, borrowing while your rating is higher (AA for example) results in a far lower interest rate – and significantly lower payments. The savings add up quickly and can make a big difference to your taxpayers!
As an example, a $7,000,000 project bonded at, say, 3.5% will cost your taxpayers $11,417,980 over thirty years. If the available bond rate increases to 5%, your taxpayers will be on the hook for $13,660,801. That is an increase of $2.2 million! And that’s before we take into consideration that your project’s actual cost will go up over time with inflation.
Based on today’s published interest rates for AA-rated borrowers, taking advantage of a current reduction to 2% would lower the same project’s total cost to $$9,376,484, saving an additional $2 million.
Run the numbers first before you make the “go/no-go” decision for capital projects in response to the current crisis. An analysis of options and their potential budget impacts is somewhat straightforward. One might reveal that, with a proactive approach to capital projects, you can significantly reduce the impacts of COVID-19 on your community’s financial health.
Link to Bond Rate Comparison Calculator: https://mrbgroup.com/debt_yield_calculator/
