California school and community college districts constantly face the challenge of procuring funding for necessary construction, modernization of facilities, or improvements to infrastructure to provide quality education for its students. Often, they turn to municipal bonds as a crucial tool to fund these projects. Issuing municipal bonds is typically part of a larger financing plan. Planning a successful general obligation bond program requires careful consideration of various factors. We asked Tony Hsieh of Keygent LLC to demystify the factors California school and community college districts should consider when planning their general obligation bond program.
Identifying district needs is a crucial step in planning for a general obligation bond program for California school and community college districts. The specific needs of a district may vary based on factors such as enrollment growth, age of infrastructure, technology requirements, and community priorities. Once a district identifies their projects, they then determine the estimated costs to complete these projects. Tony Hsieh of Keygent LLC explained, “Once their needs have been identified, a California school or community college district should consider assessed values, tax rate, interest rates, and municipal bond issuance timing when planning their bond programs.”
General obligation bonds are typically repaid from ad valorem taxes levied on property within district boundaries. Counties will set the property tax rate at the required amount to service the debt on outstanding municipal bonds. Tax revenue that is generated is based on a percentage of the assessed value of property within district boundaries. Tony Hsieh of Keygent LLC noted, “When planning a general obligation bond program, future assessed value growth must carefully be considered.” If growth is slower than assumed, projected tax rates may increase, and potentially result in a district’s inability to issue future municipal bonds. If assessed value greatly exceeds the assumed growth, the tax rate may be lower than anticipated and districts may have been able to ask voters for a larger bond authorization, which could have generated more proceeds for necessary projects.
General obligation bond programs include an estimated maximum tax rate and may also include a legal maximum tax rate. As previously mentioned, counties will set the necessary tax rate to repay outstanding municipal bonds. If districts do not carefully structure their municipal bonds, they have a risk of exceeding their tax rate limits, which would hinder their ability to issue future municipal bonds. When districts issue their municipal bonds, they are usually structured in a manner to provide financial flexibility for the issuance of future bonds.
It is also important for California school and community college districts to consider the potential rise or decrease in interest rates when planning their general obligation bond program. Tony Hsieh of Keygent LLC explained, “Like assessed value and projected tax rates, part of the planning process includes projecting future changes in interest rates.” Interest rates affect the overall borrowing cost of a municipal bond, which can increase or decrease the required tax rate to service the bonds. If interest rates increase higher than projected rates, districts may be unable to issue their future bonds to meet project needs. Assessed value, tax rates, and interest rates all work hand in hand to determine a district’s ability to issue its municipal debt on a timely basis to meet project needs.
Careful and strategic planning is essential for a successful general obligation bond program. Municipal advisors play a crucial role in assisting school and community college districts in planning their bond programs. These professionals provide expertise and guidance throughout the various stages of the bond program planning and issuance process. Municipal advisors provide districts with comprehensive financial analyses during the planning phase to determine the district’s borrowing capacity and assess the impact of proposed bond programs on local taxpayers. During the issuance process, municipal advisors work with districts to optimize the debt structure of the bonds. This involves determining the appropriate mix of current interest and capital appreciation bonds, principal amortization, and determining the financing term to ensure the district will maintain financial flexibility for future municipal bond issuances. By working in collaboration with districts, municipal advisors ensure that bond programs are tailored to their financial needs, while remaining fiscally responsible to district taxpayers.
As California school and community college districts embark on the process of planning their general obligation bond programs, they must navigate a complex landscape of educational priorities and financial considerations. By collaboratively identifying and assessing the district’s needs, engaging with professional consultants, such as municipal advisors, and maintaining a financially responsible strategy, districts can build a solid foundation for successful bond programs. With a focus on fiscal responsibility and a commitment to enhancing educational facilities, California school and community college districts can ensure that their general obligation bond programs align with the evolving needs of their communities, providing a brighter future 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 about planning a general obligation bond program or to speak with a municipal advisor, please visit www.keygentcorp.com.
