California school and community college districts are dedicated to providing quality education for their students. This is reflected by their extensive investment in improving facilities and infrastructure within their schools or campuses. To fund these improvements, districts often turn to issuing municipal bonds. The financial landscape for issuing bonds, however, is continuously evolving. It is important for districts to stay apprised of the current interest rate market in order to minimize costs for taxpayers. This can be done by refinancing bonds after they are sold. With the aid of a municipal advisor, districts can take advantage of beneficial interest rate environments by issuing general obligation bond refinancings (typically called "refundings”). In today’s article, Chet Wang of Keygent LLC has taken the time to discuss why California school and community colleges may pursue a bond refunding.
When California school and community districts issue its municipal debt, it is sold by an underwriter with interest rates that are determined by the market environment at the time of the sale. Interest rates, however, are constantly ebbing and flowing. Over time, a district may find itself in an interest rate environment that is lower than when its previous municipal debt was sold. How can a district take advantage of improved interest rates for debt that has already been issued? This is where bond refinancings come into play.
One of the primary motivations for California school and community college districts to issue refunding bonds is to take advantage of favorable interest rate conditions. “A municipal bond refunding allows school districts to capitalize on a favorable interest rate environment to replace existing bonds with new ones, at lower interest rates,” explained Chet Wang of Keygent LLC. Interest rates play a pivotal role in determining the total cost of municipal bond debt, and with the help of a municipal advisor, districts can monitor interest rates to identify an opportune moment to issue a bond refunding. By replacing existing bonds with lower interest rate refunding bonds, a reduction in overall debt service (principal and interest) is created, providing district taxpayers with savings in the form of a reduced annual tax rate. This cost-saving aspect is instrumental in alleviating the financial burden of municipal bonds to district taxpayers.
Staying ahead of the market to strategically refinance outstanding municipal bonds for California school and community college districts not only yields taxpayer savings but can also garner community support for future general obligation bond measures as well. When districts proactively capitalize on favorable interest rate conditions, it translates into savings for its taxpayers. Chet Wang of Keygent LLC explained, “By demonstrating a commitment to strategic debt management, districts can build trust and credibility among its residents. The community, recognizing the district's prudent financial management, may be more likely to endorse future initiatives aimed at further improving educational facilities and infrastructure.”
Keygent’s Chet Wang also noted that while refinancing outstanding general obligation bonds can prove to be quite beneficial, there are some risks associated as well. Market volatility is one of the biggest challenges districts face when issuing refunding bonds. As the interest rate environment is constantly changing, debt service savings are constantly fluctuating until the refunding bonds are sold. It is important for California school and community college districts to work with their municipal advisor and underwriter to achieve their desired debt service savings. Municipal advisors and underwriters typically will conduct market analysis to help districts properly time the issuance of their refunding bonds.
Most fees on a bond refunding are contingent on the sale of the refinancing. However, some fees, such as credit ratings, are not contingent. Typically, costs associated with the issuance of municipal debt are paid through proceeds generated by the financing. In the case of a bond refinancing, if interest rates were to become unfavorable and issuing refunding bonds no longer yielded savings, a district would still need to pay the credit rating fee. It is important for districts to work closely with their financing team to avoid delays in the issuance process, which could lead to interest rates moving in an unfavorable direction.
General obligation bond refundings serve as a financial tool that allows California school and community college districts to responsibly manage their debt in a beneficial manner for their taxpayers. By strategically refinancing existing bonds during periods of favorable interest rate market conditions, districts can achieve debt service savings and provide taxpayer relief. Along with that relief, districts can strategically gain community support for future general obligation bond measures. However, successfully issuing a bond refunding requires careful planning and collaboration with their financing team. As California school and community college districts continue to grapple with funding for the improvement and modernization of facilities and infrastructure, the use of bond refundings can be a powerful tool to optimize their municipal debt and benefit their taxpayers while continuing to provide for their students.
Keygent LLC is a municipal advisor firm based in El Segundo, California that provides municipal advisory services to California school and community college districts. If you would like to learn more or speak with a municipal advisor, please visit www.keygentcorp.com.
