Archive for Monday, July 1, 2013

Local governments breathe sigh of relief as bond market stabilizes

July 1, 2013


People who pay taxes to Douglas County and the Lawrence school district had a lot riding on events that happened on Wall Street over the last week.

But unless they paid extremely close attention to daily changes in the value of their IRA and 401(k) accounts, they probably weren't even aware of what was happening.

What almost happened was a sudden – and some say uncalled for - spike in interest rates just as the county and school district were about to issue bonds to pay for school building repairs, new emergency radio equipment and a new building for the county's Public Works Department.

Greg Vahrenberg of the firm Piper Jaffray, Douglas County's bond advisor, said the volatility began last week when Federal Reserve Chairman Ben Bernanke gave a speech indicating that sometime next year, the central bank might begin scaling back some of its policies that have kept interest rates at historic lows for the last two years.

“While that news was not necessarily surprising, the reaction by investors was surprising, at least from my perspective,” Vahrenberg told Douglas County commissioners Wednesday.

What happened as a result, he said, was a self-fulfilling prophecy. Investors anticipating that rates would soon go up began selling off shares in mutual funds that were invested in older, low-yield bonds. Mutual fund managers then had to sell off the actual bonds themselves in order to pay off their customers who were liquidating, driving prices for those bonds down even further.

That meant any school district, city, county or local government trying to sell new bonds at that was trying to sell new bonds at the time had to pay higher interest rates in order to attract buyers.

By Tuesday of this week, the average rate on a 20-year bond had spiked over 4.5 percent, compared to just 3 percent only a few months ago.

The spike was serious enough that the Douglas County Commission on Wednesday decided to hold off trying to sell $15.2 million in 20-year bonds that it needs to fund its radio project and new public works facility.

Experts say that for every $1 million in debt, a 1 percent increase in the interest rate costs about $6,400 a year, or $128,000 over the life of a 20-year note.

That means for Douglas County, the difference between 3 percent interest and 4.5 percent interest on a $15.2 million note would be about $146,000 per year in additional interest costs, or about $2.9 million over the 20-year life of those bonds.

County taxpayers would not have felt that directly because those bonds will be backed by sales tax revenues. But it would have forced the county to use that much more of its sales tax revenue for debt service, leaving less available for the sales tax's other main purpose, day-to-day operation of the county jail.

For the Lawrence school district, the rate spikes presented bigger potential headaches. On Monday, while the markets were still highly volatile, the school board was voting on a resolution authorizing issuance of the first $40 million worth of bonds out of the $92.5 million in bonding authority that voters approved on April 2.

For that $40 million issue, a 1.5 percentage point rate spike would mean roughly $7.7 million in additional interest costs over 20 years.

Furthermore, if the trend had continued, it could have threatened to negate the promise that district officials made during the campaign about it being a so-called “no tax increase” bond issue.

David Arteberry, the school district's bond advisor from George K. Baum & Co., said that when the school board was planning for the bond issue last fall, trying to figure out how much they could afford to borrow without raising taxes, interest rates were hovering around 3 percent. But they based their assumptions about future property tax rates on the assumption of paying about 4.5 percent in interest.

On Tuesday of this week, the day after the school board board voted to approve the first bond resolution, the average rate on 20-year municipal bonds topped out at 4.52 percent, and nobody was sure those rates wouldn't continue to rise.

Arteberry said that resolution did not actually result in a bond sale, but only set the process in motion for a sale to occur July 22. He told the school board on Monday that he anticipated the market would calm down before then.

And that now appears to be the case, at least for the time being.

By mid-day Thursday, Vahrenberg, the county's bond advisor, said rates had fallen back to about 4.0 percent, low enough that the county decided to proceed with its $15.2 million sales tax revenue bond issue.

Deputy County administrator Sarah Plinsky said those bonds were sold at 3.96 percent interest.


anotherview 4 years, 6 months ago

Since the school district promised the taxpayers that there would not be a tax increase, if they approved the bond issue, it looks like they will have to reduce the debt from $92.5 million to $84.8 million to make up for the added interest cost of $7.7 million.

Isn't that what we would have to do, if we were planning on buying a house and found out we could not afford the house we originally wanted because the payment was going to be higher than we thought.

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