Municipalities across New York State had more than $14.4 billion in debt outstanding as of their respective fiscal years that ended in 2001. This balance has increased about 24 percent over the ten prior years. Total interest expense for all municipalities was nearly $745 million during 2001. During June 2003, the twenty-year bond index (a standard by which municipal bond yields are measured) interest rate hit the lowest point (4.33 percent) since August 1968.
When interest rates fall, state and local government officials often seek to reduce their borrowing costs by paying off outstanding bonds with new bonds issued at lower interest rates. As is the case with consumer debt, municipal debt in many cases can be refinanced (or “refunded” as it is termed for municipalities) if the debt is “callable,” that is, the principal may be paid before the scheduled due date. A refunding bond issue is one in which bond proceeds are used to retire the outstanding debt of a prior bond issue. Bond refunding can be an important debt management tool and cost savings strategy for local government issuers. The more common reasons for issuing refunding bonds are to take advantage of lower interest rates by converting from higher interest rate bonds to lower interest rate bonds, or to restructure or level annual debt service (principal and interest) payments.