Lawrence Public Schools (Shutterstock photo)

When the Lawrence school district issued more than $44 million worth of debt last week, it didn’t use a bid process to shop around for the lowest interest rate.

School district officials confirmed the most recent $44 million bond issuance was done without seeking competitive bids from banks and other bond buyers. A top school district finance official said that the no-bid process gave the district better flexibility to negotiate a deal that would avoid a property tax increase in the future.

“The flexibility is in the structuring of your payments and the mill levy is the result of that,” said Kathy Johnson, director of finance for the district.

Johnson confirmed last week’s bond issuance — the investment bank George K. Baum and Co. ended up being the buyer for the bonds — wasn’t the first time the district has decided to forego the bid process when issuing debt. She said the district commonly chooses to negotiate a sale rather than use a competitive bid process when a bond issuance involves refinancing existing debt.

“It is more common because districts, or the people selling the bonds, want to have more control over the structuring of the refinancing — how it affects mill levies, all of those kinds of things,” Johnson said.

That’s different than how some governments issue debt. A bond is essentially the way the school district takes out a loan to pay for big projects. The most recent bond issuance included $20.5 million of new debt to pay for a portion of the $92.5 million worth of school improvement approved by voters in 2013. The remaining $23.5 million was refinancing — much like a homeowner refinances their mortgage to get a lower interest rate — of previous debt the district had taken on in 2006. All the sales had a good credit rating, Aa2, assigned by Moody’s.

The city of Lawrence and Douglas County also both issue bonds to pay for projects, with the city always using a bid process and the county using negotiated sales in certain circumstances. A bond bidding is usually open to banks, investment firms and other qualified bond buyers. The bid normally consists of those institutions stating what interest rate they would charge for the loan.

An official with the city said that it follows the Government Finance Officers Association best practices for debt issues. Bryan Kidney, director of finance for the city, said for an issuer with a good credit rating in Kansas, his experience is that most independent municipal advisers would recommend a competitive sale.

“I’m not aware of the city ever doing negotiated,” said Kidney, who is also a current member of national GFOA debt best practices advisory committee.

Douglas County has done both bid and negotiated sales for its bonds. Officials said the particulars of the sale and circumstances of market would affect the decision to bid or negotiate.

“There is no one best way to do it,” said Craig Weinaug, Douglas County administrator. “It depends on the market situation, it depends on the size, it depends on a lot of variables.”

For the school district, a key factor in deciding to do a negotiated sale was controlling the effect on the district’s mill levy. The Lawrence school board’s commitment with the $92.5 million bond issue was that it would not increase taxes. The interest rate on the new bonds was about 2.3 percent. Johnson said to achieve a flat or decreasing mill levy, the district needed to structure the principal and interest in a certain way in certain years, and a competitive bid limits that.

“There’s very little flexibility,” she said. “Once you set those parameters, you set your bid date, you stick it out there, that’s what you have.”

As part of the $44 million bond issue last week, financial advisers told the Lawrence school board that the district’s mill levy will drop about 2 mills, which could lower property taxes or allow the district to issue additional bonds without increasing them.

The ability to issue more bonds without increasing taxes is important because the school district began planning this month for renovations to its six secondary schools. The renovations will amount to tens of millions of dollars and likely require another bond issue within the next two years, according to Kyle Hayden, assistant superintendent of business and operations for the district.

But the bond issue’s effect on the district’s mill levy was not the only consideration in the decision to do a negotiated sale. Johnson said other variables in the decision were the current market and the ability to generate interest premium.

“Interest premium is not even something that you can ask for in a competitive bid; you either get it or you don’t as a result of the low bid,” she said. Johnson noted last week’s bond issuance amounted to about $2 million of interest premium, which can be used as the district is set to begin the last phase of construction under the $92.5 million bond this summer.

The Lawrence school board made the decision to negotiate the bond issuance after review with the district’s financial advisers and the board’s finance advisory committee.

“I think they’re just always looking for whatever is in the district’s best financial interest,” said Vanessa Sanburn, president of the board.

Because of the multitude of variables, Johnson said there is not a set pattern and future bond sales or refinancing will be evaluated for both a negotiated and competitive sale.

“We’ll evaluate the circumstances, we’ll evaluate the market, we’ll evaluate the needs of the district, and we’ll determine which method will be the best at that particular time,” she said.