School Bonds May Come With Guarantee Amendment Would Save Districts Millions In Interest

Idaho school districts could save millions in interest on school construction bonds if the state guaranteed the bonds.

Legislation that cleared a Senate committee Tuesday would allow the state to do just that. As a result, every school district in the state that issues a construction bond would have a Triple-A bond rating, the highest possible - translating into the lowest interest rates.

“From everything we’ve looked at, there’s no risk,” said Sen. John Sandy, R-Hagerman, the legislation’s sponsor.

No Idaho school district ever has defaulted on a bond. But under the legislation, if one did, the state would make the missed payment from its sales tax proceeds. Failing that, a loan would come from the $435 million school endowment fund.

Either way, the district would have to pay the state back, and if it didn’t, the state would intercept its school funding.

“It’s a pretty big stick,” said Tom Pitcher, vice president of Zions First National Bank in Salt Lake City.

Pitcher worked closely with the Utah Legislature when it enacted such a school bond guarantee a year ago. Already, Utah has saved tens of millions of dollars, Pitcher said.

To provide the guarantee, Idaho would have to amend its constitution. So the plan requires a two-thirds vote of the Legislature, then a majority vote of the people to become law.

More than a dozen states have enacted such laws. But not all were able to get the top bond rating. Idaho can get it because its school endowment fund is such a “big pot of money,” Pitcher said, and that’s what bond rating firms like to see.

On a typical $20 million bond issue to build a high school, Pitcher estimated, a school district could save $1.6 million in interest over the 20-year repayment period with the new rating. Savings on a $5 million, 20-year bond for an elementary school would be about $420,000.

Idaho has $500 million in outstanding school bonds now. If districts issued the same amount in bonds over the next 20 years, the savings statewide would total $40 million.

The biggest savings would come to the smallest districts, which now tend to have poor bond ratings because underwriters prefer the secure tax base of a large population. Depending on a district’s current bond rating, the savings would range from a third to two-thirds of a percentage point in interest rates, Pitcher said.

He said districts also could refinance existing bonds to gain the lower interest rate. Districts still would have to pay the costs of refinancing.

It’s unlikely that a state would actually let a school district default on a bond even now, Pitcher said, so the change is “simply codifying what you already would do.”

“You put that in a formal mechanism, and then derive a financial benefit from that reality.”

Sen. Jack Riggs, R-Coeur d’Alene, said, “As long as the safeguards are there, it makes sense to save the money on the interest rate.”

Riggs said the guarantee could make school bonds easier to pass.

“As long as the public understands it’s just a mechanism to help with the interest rate and the state is not going to pay the bond, it seems like it would encourage the public a little bit if they knew they were getting the best interest rate possible.”

, DataTimes MEMO: These sidebars appeared with the story: SENATE ACTION The legislation is a package consisting of a bill, SB 1503, and a constitutional amendment, SJR 106. The Senate Education Committee voted unanimously Tuesday to send SB 1503 to the full Senate with an amendment attached to clarify the role of the endowment fund, and to recommend full Senate approval of SJR 106.

HELP FOR SCHOOLS The school construction legislation is a package consisting of both a bill, SB1503, and a constitutional amendment, SJR106. The Senate Education Committee voted unanimously Tuesday to send SB1503 to the full Senate, with an amendment attached to clarify the role of the endowment fund, and to recommend full Senate approval of SJR106.