Municipal Bond Finance 101

Municipal Bond Finance 101

{{featured_button_text}}
Richard Wahlstrom

Richard Wahlstrom

Even the strongest supporters of the bond issue proposed by the Rapid City Area School District struggle to understand and explain the arcane complexity of municipal bond finance. I am hopeful this short column will reassure voters that the proposal arrives at the optimal time to borrow construction funds necessary for new schools critical to Rapid City’s future and the education of our children.

As all who have ever taken out a mortgage or car loan are well aware, one’s monthly payment is determined by two basic variables: the interest rate and the term or length of the loan. For a variety of reasons, interest rates in the U.S. are at historical lows, jobs are plentiful, and the economy is strong.

The upshot is, RCAS can save huge dollars for the taxpayer by issuing construction bonds in this environment to build and modernize educational facilities, improve security, address overcrowding, and prepare for population growth.

Furthermore, the low rates allow the bonds to be paid off in just 25 years, rather than 30 years like many home mortgages or 40 years as is common in the municipal bond arena.

Congress and the Supreme Court have determined that interest earned on municipal bonds is exempt from federal income tax in most cases. For this reason, school districts, cities, and other government entities borrow at rates much lower than an individual or business. While the interest rate on the RCAS bonds will not be set until about a month following a successful election, rates on similar quality bonds were 1%-2.5% as of 2/11/20, an astoundingly good deal for taxpayers in the District.

The paperwork for a municipal bond runs to hundreds of pages in the “Official Statement.” It includes assurances to the purchasers that their investment will be repaid. Borrowers in the strongest financial position, like RCAS, guarantee repayment by declaring their bonds a “General Obligation.” A G.O. bond receives the lowest possible interest rate because the borrower, RCAS in our case, pledges to raise the mill levy as a last resort only after all other alternatives have been exhausted. I call this the nuclear option. It will not be necessary.

While the future is unknowable, the School Board estimates the additional property tax levy needed to service the bonds is 0.85 mills, which is $0.85 per thousand dollars of assessed property value. According to zillow.com, the median home value in Rapid City is $211,000. The additional mill levy would raise taxes on that home by $179/year, about $15/month. Fifty cents a day.

The School Board has stated unequivocally that it will not consider the nuclear option. Instead, in a scenario where overall assessed value of the District averages below 4%/year, the School Board would access the Capital Outlay Fund, as it has in the past, without raising taxes.

The need is great, the time is right. Our children are priceless. Please vote yes.

(Richard Wahlstrom retired recently after 20 years as a financial advisor. Previously, he served as the City Finance Officer of Rapid City. He can be reached at rkw68@live.com)

You must be logged in to react.
Click any reaction to login.
1
0
0
0
1

Get Government & Politics updates in your inbox!

* I understand and agree that registration on or use of this site constitutes agreement to its user agreement and privacy policy.

Related to this story

Get up-to-the-minute news sent straight to your device.

Topics

News Alert

Breaking News