Many of our governmental clients have been issuing crossover refunding obligations to take advantage of lower interest rates. While this is an advantage to the governments, it is important the transactions are properly accounted for.
With a crossover refunding, the original debt is still outstanding and is not callable until a later date. The governmental entity continues making principal and interest payments on the original debt per the original amortization schedule. The new debt is issued and placed in an escrow account. The escrow account makes the interest payments on the new debt until the original debt becomes callable. On the call date, the escrow account pays off the principal balance of the original debt. At that point, the governmental entity begins making the principal and interest payments on the new debt per the new amortization schedule.
There are several things to keep in mind when issuing crossover obligations. When the new debt is issued, the government is responsible for properly recording the transaction on its financial statements. The face value of the refunding debt should be recorded as well as any premium or discount on the issuance. The fees incurred for the debt issuance should also be recorded as debt service expenditures. The balance of the escrow account after recording the issuance becomes part of the County Treasurer’s monthly reconciliation. As the escrow account earns investment interest and makes the interest payments on the new debt, these transactions should be recorded on the general ledger. Interest payments from the escrow account should also be included in the County’s budget as debt service expenditures.