In a news release, USD 259, the Wichita public school district, is claiming a huge victory in the first sale of bonds authorized by last year’s election. But if you place the facts in context, with proper background, it turns out the conditions of the sale are quite different from what USD 259 claims.
Here’s the biggest discrepancy in the Wichita school district’s telling of the story: During last year’s campaign for the bond issue, the district used 4.75% as an estimate for the interest rate for the bonds. The news release is correct in stating that the rate the district faced when they sold the bonds was 6.22%. That’s a rate 147 basis points higher than the estimate — a huge difference.
Another way to look at what happened is to examine the repayment costs of the bonds. Selling $132.5 million in bonds at 4.75% interest (the estimated rate) means the district would pay $6,293,750 in interest each year. The same amount at 6.22% interest (the actual rate) means paying $8,241,500 in interest. That’s an increase of $1,947,750 per year, or 30.9% more than what the district estimated residents of the district would pay. This looks like a big problem for the taxpayers living in the Wichita school district.
But wait: USD 259 is claiming the bond sale saved money. How so? Enter the United States government in the form of the Obama stimulus plan. Specifically, the “Buy America Bonds” program, which pays 35% of the interest for bond issuers. Subtract 35% from 6.22%, and you get 4.043%. That’s the effective interest rate the district is paying on these bonds.
This is the basis on which USD 259 claims victory. But consider a few questions:
Last year, did the school district know there would be a recession, and that a stimulus bill providing a subsidy would be passed? Of course not.
Then, consider who pays the 35% subsidy? The answer, of course, is you and I, as federal taxpayers. But the Wichita school district treats the subsidy as free money. These bonds are being issued all over the country, and Wichitans have to pay for them in order for others to help us with our bonds.
Cost-shifting to other taxpayers is a favorite tactic of the Wichita school district. Campaign buttons worn during the bond issue boldly proclaimed 25%, that being the percentage of the Wichita bond issue costs that taxpayers living in other Kansas school districts would pay. Not wanting to miss out on a good thing, many other Kansas school districts have passed bond issues that we in Wichita have to pay for.
There’s also the district’s contention that they sold the bonds in May to “take advantage of favorable interest rates.” There are a few problems with this statement, the first being that at any given moment in time, we really don’t know if interest rates are favorable. We can compare today’s rate to last month’s or last year’s, but that’s all. No one knows what rates will be in the future.
In any case, if USD 259 received advice that interest rates were going up, it was bad advice. That’s because the yield of these bonds on the market today is 5.475%. This implies that if the bonds were sold today, the district could issue them at that rate instead of the higher 6.22% rate they were sold at. Then, of course, we’d subtract the 35% Build America Bonds subsidy from that, for a net rate of 3.56%. That’s what we’re missing out on due to selling the bonds when the district thought rates were “favorable.”
So here we have the Wichita school district snatching apparent victory from the jaws of defeat. Discerning taxpayers will realize, however, that the circumstances surrounding this victory — such that it is — are only serendipity. For the district to claim otherwise is shameful.
Here’s the news release from USD 259, dated May 11, 2009:
First set of bonds sold — low interest rates save millions
The Wichita Board of Education approved the sale of $188 million of bonds from the $370 million bond issue approved by voters on November 4, 2008. The Board made the decision to sell to take advantage of favorable interest rates. The BOE approved bonds at rates below pre-election estimates, saving taxpayers more than $19.9 million in reduced interest costs.
The district marketed $132.5 million of the bonds as Build America Bonds. These bonds are a new option created by the federal Stimulus Plan of 2009. The bonds are issued as taxable securities with the district receiving a subsidy of 35% of the interest direct from the federal Treasury. This portion of the financing was sold at a rate of 6.22%; however, with the 35% subsidy, the net cost to the Wichita Public Schools is 4.043% interest.
The remaining Phase I bonds were issued as traditional tax-exempt bonds totaling $58.76 million. A portion of these bonds refunded previously issued bonds of the district, reducing the interest rate and saving approximately $368,000 in future debt service payments.
The combination of the Build America Bonds and traditional tax-exempt bonds resulted in an all inclusive cost of less than 4% for the district. Compared to the pre-election estimated of 4.75% for the financing, the reduced interest cost is $19,944,807.
USD 259 plans on the marketing of additional bonds in 2010 and 2011.
During the 2000 bond issue, the district was able to take advantage of lower interest rates which will save taxpayers approximately $49 million. The district has refinanced a portion of all three series of 2000 bond issue bonds to take advantage of lower interest rates, which saves taxpayers an additional $4 million.
They’ll always get me one way or another. At the end of the day taxpayers are still on the hook.
There is no FREE Lunch – the sooner we wake up to that the better
The only winners on this bond issue are the architect firm(s) and construction companies building the new schools. The district’s favority architect firm has already received millions for overseeing this bond issue for the district and will make a lot more when they get their architect contracts (I’m told this can be as high as 7% of a project–so a $20 million school is worth $1.4 million to the winning architect firm–will that ever get reported by the soporific Wichita news media–I’m not holding my breath) finalized.
[…] USD 259, the Wichita public school district, recently sold some bonds, they took advantage of a new program called Build America Bonds. This program was passed as part […]