In order to save the school district money in the long run, Hays CISD school board trustees voted Monday to issue a portion of their bonds using a variable rate.
Until now, the district has only issued fixed rate bonds over a long period of time – as long as 25 years. District staff started looking at variable rate bonds, also known as soft put bonds, in order to take advantage of lower interest rates over the long term.
“I’m very excited about the opportunity to give us another tool in our debt portfolio to save substantial interest costs. Because we’re still seeing fast growth and, if we can add this tool to help us save money to build capacity and save time, then that’s good,” HCISD Chief Financial Officer Annette Folmar said.
Based on a $30 million project fund, the variable rate bond is expected to save $3.87 million over 5 years.
Variable rate bonds capture low interest rates on the short end of the yield curve and have that low interest locked in for a term of one to five years. At the end of the term, the bonds are able to be re-marketed at a new interest rate which could either be higher or lower (although capped at a high of seven percent), so there is some risk involved.
Fixed rate bonds have predetermined interest rates over a long term, and these interest rates are at the longer end of the yield curve, resulting in slightly higher interest rates overall.
Although there is some risk involved with variable rate bonds, Folmar seemed confident the change would result in savings for the district.
“These are the kind of savings that made us take a look and say ‘okay let’s just see if this is a good option for us.’ We asked the board for flexibility so that in August when we want to issue we see if the market still makes sense, does it make sense for our values. And if we still see substantial savings, the board gave us flexibility to lock in those savings for those five years,” Folmar said.
The board approved two bond parameters, one authorizing the issuance of fixed rate bonds with a principal amount not to exceed $75 million and the other authorizing the issuance of variable rate (put) bonds with a principal amount not to exceed $30 million.
The total amount of the bond needed to fund the second portion of building projects for the 2017 Bond is $75 million.
With the adoption of both types of bonds, district staff now have the flexibility to check interest rates in the fall to see if they would result in savings and then issue $30 million in variance rate bonds and the rest, $45 million in fixed rate bonds. Alternatively, they have the option to issue all bonds at the fixed rate.
“There’s enough variables that we still need to wait and see to see if it’s going to be good,” Folmar said.
Folmar was questioned whether people will still want to purchase bonds if there is less return on lower interest rates of the variable rate bonds.
Public school district bonds are tax exempt, have a lower interest rate, and are guaranteed by the permanent school fund, making the bonds attractive for buyers because they are low risk, the board was told.
This new type of bond savings was only introduced to trustees last week at their June 18 meeting, and the presentation was not listed in the agenda.
This made several trustees uncomfortable including Meredith Keller, board president, and Esperanza Orosco, board vice president.
Both Keller and Orosco voted against the recommended $30 million in variance rate bonds. The motion passed 5-2.
“The information came in very late and is still unclear, there’re still questions even today, so I’m going to need to vote no on this and maybe this is something we can do in the future. But I am definitely not ready to take this risky step,” Orosco said.
Last year, the school board approved a fixed rate bond issuance of $175 million to fund the first portion of building projects; however, variable rate bond interest rates were not attractive for the bond at the time, Folmar said.
The district currently has more than $4 billion in outstanding bond debt. Adding $30 million in variable rate bonds to the district’s portfolio would result in seven percent of the districts debt being variable. Rating agencies recommend no more than 25 percent of a district’s debt be in a variable rate mode.