Wichita School Bond Cost Could Rise in a Big Way

USD 259 (Wichita public school district) officials have estimated that the interest rate for the proposed Wichita school bond issue would be 4.75%.

With the recent turmoil in credit markets, I think it’s impossible to forecast with any degree of certainty what interest rates on long-term bonds might be over the next few years when USD 259 would be selling bonds.

Long-term bonds like the 20-year bonds the Wichita school district wants to use are very sensitive to changes in the interest rate. Even a small change can have a big impact on the payment needed to pay off the bond each year. The impact on the bond’s total cost can be huge.


Click on chart for a larger version.

I made some calculations and illustrated them in a chart. The results concern me. At the district’s current estimate of 4.75%, the annual payment for the bond would be $29,063,673, with a total cost of $581,273,458 to pay for the entire bond. (See assumptions below.)

But if the interest rate were to increase by one percentage point to 5.75%, the numbers change. Now the annual payment would be $31,606,695, with a total cost of $632,133,891.

That’s an increase of 8.75% in the annual payment and total cost of the bond if interest rates increase by just one percentage point.

USD 259’s bond issue fact sheet, under the heading “Why now?” lists “Favorable interest rate on bond sales.” Will rates be favorable over the next few years? Will the district be forced to sell bonds in an unfavorable interest rate environment?

The bond issue resolution doesn’t specify a time frame for when the district must sell the bonds. I would imagine, however, that the school district will be under pressure to sell the bonds and borrow the money no matter what interest rates are at the time.

(Assumptions in calculations: Issue $370,000,000 in bonds at a single time, for 20 years, with a single annual payment. Bond underwriting and other fees are not included in these estimates. Microsoft Excel provided the calculations.)

9 Comments

  • According to Bloomberg, 20-yr municipal bond rates continue to rise. They are now up to 5.35% vs 5.28% one week prior and 4.5% one month prior.

  • 20-yr at 5.62% up another 15 bps today. It is starting to look like the 5.75% figure you used in your example could prove to be quite conservative. The rate could be above 5.75% tomorrow.

  • And yet, the president of the Wichita school board (Lynn Rogers) said in the Wichita Business journal that the financial crisis won’t “change the thinking” on the bond issue.

    Wow.

  • Hey Bob,

    If you had a really holey shirt and it was freying and coming apart. Would you still want someone to mend it or buy a new one? Needing something doesnt change the fact that you still need it regardless of the conditions.

  • True, John.

    I guess the difference between me and others is that I wouldn’t demand that other people pay for my things.

  • I assume that if you had this problem, I should just complain that you had holes in your shirt. Not help you get a new one even if there wasnt anything else you could do.

    So you have heard/read that the scores are not as they could be and all you have done is complain. Wow you are such a productive person. I can see why people would listen.

  • The mantra from the financial media today was that “credit conditions are easing”. One couldn’t tell it from the municipal bond market. The 20-yr finished the week at 5.78%, up from 5.35% last Friday.

    The amount that Rogers want to pick from my fraying wallet just keeps going up. I might have to counterattack next spring and challenge the assessed value of my property. I’m pretty sure the houses on my street have been selling for less than appraised value over the last year and a half.

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