Bond - School Bonds
If only school bonds could be more like James Bond… alas, they are nothing like James Bond. But, what is a school bond and how do they work?
School Bonds:
“School systems don't usually have a lot of extra cash on hand, so when they want to make large capital expenditures like building new facilities or making major repairs, they must borrow money. School bonds are a way for school districts to borrow money. Investors buy promissory notes like school bonds. The school district gets cash in the short term and agrees to pay the investor back over a fixed period of time.” ~ BizFluent
How are schools built?
School districts can build schools three ways:
Cash raised though property taxes raised through the capital fund, or
Issuing general obligation bonds which require voter approval, or
Issuing lease revenue bonds which require school board, but not voter, approval.
What is a bond?
School bonds work a lot like home loans or corporate bonds. A bond is a debt instrument issued by school districts to pay for new school construction, renovations and buying property for future schools. In Utah, a school bond can only be used for acquiring, improving, or extending any facility a school district owns. Just like other borrowers, school districts borrow money and make payments—usually annually.
What types of school bonds exist?
Two types of bonds typically are used to fund schools:
General obligation bonds
Lease revenue bonds
General obligation bonds are debt backed solely by the credit and taxing power of the issuing jurisdiction. General obligation bonds are issued with the belief that a school district will repay its debt obligation through taxation or revenue from projects. No assets are used as collateral. General obligation bonds are authorized by voters through a bond election.
Lease revenue bonds are supported by the revenue from a specific project or secured by a specified revenue source such as a municipal finance authority formed by a school district. Lease revenue bonds are similar to a mortgage for a homeowner, where the school is used as collateral. Lease revenue bonds are authorized by a school board, and do not require voter approval.
How do bonds work?
Bonds are authorized for a specific amount. The school district sells the bonds when funds are needed for capital projects, usually once or twice a year. Bids are taken from interested buyers, usually large institutional investors, and are sold at the lowest interest rate offered. The rate is usually based on a district’s bond rating: the higher the bond rating, the lower the interest rate to sell the bonds. However, the State of Utah guarantees all school district general obligation bonds issued by Utah districts—which allows all districts to take advantage of the State’s AAA bond rating. Principal and interest on the bonds are repaid over an extended period of time. General obligation bonds are paid for through the debt levy and the district’s debt fund. Lease revenue bonds are paid for through the capital levy and the district’s capital fund.
How is a bond acquired?
Issuing bonds is basically the same as spending public money, since the school district has to eventually pay the money back. As a result, school districts can't just issue bonds whenever they want. They have to win approval from local voters, partly by proving that funds are needed.
Once voters approve a bond measure, the school district begins selling bonds on the open market. Since school districts pay back the initial investment with interest, investors can earn profit when the district pays them back.
How are bonds paid back?
Bonds have to be repaid by taxpayers with interest. The interest rate, and thus the total cost of the bond, varies according to how risky the investment is. Citizens typically have to pay back bonds using property taxes. Voting for "yes" on a bond measure essentially means voting to increase property taxes to fund the school system.
Will bonds affect my taxes?
Yes, bonds affect your taxes. Property taxes are increased to pay the bond principal and interest over the life of the bond—typically 20 years. General obligation bonds raise property taxes though the debt levy. When the bonds are paid off property tax owners receive a tax decrease. Lease revenue bonds raise property taxes through the capital levy. Property tax owners receive a tax decrease when these bonds are paid off. School districts like to sell bonds to property owners as “no tax increase bonds,” but Forbes Magazine will tell you: “Like many terms in politics, putting “no tax increase” in front of “bonds” is supposed to blunt the opposition to new taxes. But let’s be clear, there is no special category of bonds that school districts issue that doesn’t increase your taxes. No tax increase bonds increase your taxes.”
How much debt does Alpine School District have outstanding?
The Alpine School District has $443,770,000 of outstanding debt and $538,847,876 of outstanding debt service including interest. Page 114 of the FY2023 Budget shows these amounts in a table and graph.
Alpine School District now has more than a $1Billion dollar of annual revenue and expenses in its FY2023 Budget. It can be a bit confusing and overwhelming even for professionals not familiar with fund accounting. This video and slide deck will help unravel what Alpine School District is really saying that its proposed $595M bond is a “NO TAX INCREASE” Bond! Hint–Forbes Magazine tells us what you likely already knew, but couldn’t explain, there is NO SUCH THING as a “no tax increase bond”.
Resource Links
OremCitySchools.Org - Article content credited to Orem City Schools.
Forbes Article - Yes, No Tax Increase Bonds Increase Your Taxes
Slides for Bond 101 Video