Published on November 01, 2022
Last week’s article explored when bonds are issued for funding Town and School projects. It discussed the different options of issuing bonds, if more than one bond could be issued, if bonds could be refinanced, and who is involved in the bond process.
There is currently a proposed school construction project with an anticipated cost of $115,943,324. If approved by the Town’s voters, this project’s funding would be by bonded debt. This article’s intent is to illustrate the different bond approaches discussed last week and what their respective potential impacts could be.
All of the debt service estimates are for 30 year bonds at an estimated four percent interest, with level principal and declining interest payments. The impact on the tax rate is based on the current tax rate of $21.15 and on the current assessed value of the Town. One caveat of the analysis is that currently interest rates are in a state of increase, and if / when such bonds are issued, the prevailing rates at the time will be the final determinant on interest payment amounts.
In the prior article, the first option was of issuing one large bond at the end of the project, consolidating a number of bond anticipation notes used to fund the project during construction. Applying this approach to the proposed school bond would establish a bond of $115,943,324 with a total interest payment for the term of $71,884,869, for a combined debt service of $187,828,193. This approach would result in an estimated first year increase in the tax rate of 22.6%. The impact on a home assessed at $400,000 would be $1,912 in the first year. The impact of the increase on a home assessed at $500,000 would be $2,390 in the first year. Estimated impacts for the $400,000 home and the $500,000 home are attached as Attachments A and B to this article.
The second option explored was to issue two bonds to fund the project. Issuing one bond at the beginning of the project, and one at the conclusion of the project spreads the tax rate impact over two issuing events, as compared to the full impact in the above example. This approach would be issuing the first bond at $57,971,662 with a total interest payment on the first bond of $35,942,426, for a combined debt service of $93,914,088. The second bond at the end of the project would have the same combined debt service, for a combined total debt amount between the two bonds of $187,828,176. The difference in this approach of issuing two bonds would be increasing the tax rate for the first bond at 11.3% in the year it is issued, and then when the final bond is issued at the conclusion, an additional increase in the tax rate of 11.3% would happen again. The impact on a home assessed at $400,000 would be $956.40 with the first bond, then a subsequent increase of $956.40 with the second bond issue. The impact of the increase on a home assessed at $500,000 would be $1,195 with the first bond in the first year, and an additional $1,195 in the first year of the second issue. Estimated impacts for the $400,000 home and the $500,000 home are attached as Attachments C and D to this article.
The final example discussed is the issuance of multiple bonds to fund the project. For this example, the entire project funding is with three separate bond issuances, one at the beginning, one mid project, and one at the conclusion. Similar to the approach of breaking the debt service in two, this would divide it by three, spreading the projected impact over three different points in the project. This approach would be issuing the first bond at $38,647,775 with a total interest payment on the first bond of $23,961,623, for a combined debt service of $62,609,398. The second and third bonds at the middle and end of the project would have the same combined debt service, for a combined total debt amount between the three bonds of $187,828,194. The difference in this approach of issuing three bonds would be increasing the tax rate for the first bond at 7.5% in the year issued, the second bond would increase the tax rate at 7.5%, and then when the final bond is issued at the conclusion, an additional increase in the tax rate of 7.5% would happen. The impact on a home assessed at $400,000 would be $637.60 with the first bond, then a subsequent increase of $637.60 with the second bond, and $637.60 with the third bond issue. The impact of the increase on a home assessed at $500,000 would be $797 with the first bond in the first year, and an additional $797 in the first year of the second issue, and a final increase of $797 with the third bond. Estimated impacts for the $400,000 home and the $500,000 home are attached as Attachments E and F to this article.
Ultimately when the bonds are paid in full, their impact would come off from the tax rate at a similar rate of their increase to the tax rate. With one bond that impact at payoff would be immediate, while the two bond approach and three bond approach would also come off the tax rate as each bond is retired, spreading that impact over multiple fiscal years.
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