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Economic Woes Hit Sewer Authority Wallet

Running a sewer system can be costly.

Running a sewer system can be a costly proposition.

SANATOGA PA – If a bank suddenly raised its interest rate on money you borrowed three years ago to make improvements to your home, you might

  • A) pay off the loan and say good riddance to the bank and the debt. Or
  • B) try to convince the bank it made a mistake and should re-think its ill-advised policy. Or
  • C) shop around for a new lender and a better rate.

If you chose A, you’re financially better off – and probably a little smarter – than most of us. If you chose B … well, good luck with that. If you’re the Lower Pottsgrove Sewer Authority, you chose C.

The authority and the township Board of Commissioners agreed earlier this month (Dec. 18, 2008) to sign up with a new lender to guarantee a $3.5 million loan Lower Pottsgrove took out during 2005. The borrowed money financed improvements to the township sewer system and pumping stations. Now economic woes facing the original lenders are driving up the loan’s cost, and changing bankers may save taxpayers as much as $82,000 a year.

The authority is one of 23 municipal entities that participate in what is known as the Emmaus Bond Pool. The group sold bonds worth millions of dollars, creating a pool of money from which each organization could borrow as needed. The pool is insured, so bond buyers can be guaranteed their loans – and the interest they earn – get paid.

Wachovia Bank, which faced collapse several months ago, was one of two guarantors of the pool. Both Wachovia and its partner had their credit ratings downgraded as a result of financial troubles. With poorer ratings, it became more costly for them to cover their guarantees.

Those rising costs were passed on to borrowers in the form of increasingly higher rates. Not higher annually, and not higher monthly; beginning Sept. 4, according to Harrisburg-based Public Financial Management Inc. (PFM) – the authority’s financial advisors – the rates were climbing every week.

PFM found a new lender, U.S. Bank, to provide a letter of credit guaranteeing the pool. U.S. Bank’s credit is strong enough, said PFM Senior Managing Consultant Jamie Doyle, that it can replace both Wachovia and its partner. Importantly, U.S. Bank’s expected interest rate, compared to the highest rate charged after Sept. 4, also should result in that $82,000 savings, she noted.

There was just one catch, Doyle added. All 23 pool members must agree to change guarantors from Wachovia and its partner to U.S. Bank or the deal couldn’t be completed. As of Dec. 18 all but six of the 23 decided the swap was a no-brainer. By night’s end, so too had the township.

Assuming all the necessary paperwork is finished, and no pool member objects, the change will occur early next year.

Related (from the Lower Pottsgrove Board of Commissioners’ Dec. 18 meeting):

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