Editor, The Smithfield Times:

I’m no expert in municipal bonds (“munis”), but let me estimate a hypothetical case where Smithfield might sell coupon bonds to raise $6 million. 

The current average yield on 10-year munis is about 3%, a figure that is determined by the bond’s rating and the premium or discount applied to the price of the bond, determined by market demand. I figure that the investor’s yield before accounting for his tax benefit is a fair representation of the issuer’s effective interest cost. 

So, assuming a 3% annual coupon rate, a 10-year muni would have the following:

 Price $6 million

Semiannual coupon $90,000

Redemption at par $6 million

What this means is that Smithfield would receive $6 million at the outset, then pay $90,000 every six months for 10 years for a total of $1.8 million. Then at the end of the 10-year period Smithfield would have to redeem the bond for an additional $6 million. 

It’s important to understand that Smithfield’s government could not apply the proceeds of the bond sale to an income-generating enterprise, the way a business would do to cover the eventual bond redemption. The brick wall and sidewalk, and streetscape, while nice, are not profit centers and would not provide a measurable revenue stream. 

So, the prudent thing for the town to do would be to set up a sinking fund to save up to pay off the $6 million bond redemption 10 years hence. The sum of bond coupons ($90,000 semiannually) plus the sinking fund deposits ($234,882.77 semiannually) would be $650,000 annually for 10 years, assuming an annual interest rate of 5% earned by the sinking fund deposits, for a total of $6.5 million. Both the bond coupons and sinking fund deposits would have to be paid by the taxpayers, on average $191 per household annually, but many would pay significantly more, owing to the larger tax bite of more highly assessed homes and the fact that 100%-disabled veterans and means-tested seniors pay no tax.

 

Dave Goodridge

Smithfield