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Q

My county wants to issue $60 million in bonds for capital improvements to our school system. Many question the advisability of using bonds vs. some other form of ad valorem tax or use of a lottery or sales tax. I think alternatives to the bond issue might, in the long run, be more expensive and less suitable to the intended purpose. The bond issue seems to be advantageous in that it obtains the money up front and is, in effect, a sunset law that expires on the maturity date. As we all know, taxes go on forever, even after the original purpose has ceased to exist. Further, the cost to the taxpayer will be less with a bond issue than with any other means of obtaining funding. Assuming a 30-year issue with a base interest rate of 4.5%, the county would need to raise about $2.7 million annually for interest payments and create a sinking fund of under $2 million to cover payments at or before maturity. These funds could likely be obtained by some form of property transfer tax, so future residents would be assuming a fair share of the school expense burden. Am I off the wall? Is there a better way to raise this money? If bonds are the way to go, what interest rate and term should be expected?

A

James A. Klotz responds:

The traditional method for funding public school improvements is through the municipal bond market.

The bonds are typically General Obligations of the issuing municipality, secured by property taxes.

As you suggested, the debt service is usually structured in serial form (bonds would be retired each year), extending over the life of the facility. The quality of the issue would be based on the assessed valuation of the county and its history of tax collections. The expected interest rate would depend on the schedule of redemption and the credit quality of the issuer.