“The bond market has gone crazy”
At the same time that members of the RE1J school board campaign for voter consent to issue $55 million in capital improvement bonds, the bond market has been crippled by the frozen credit and liquidity problems plaguing some of the investors who would be looking to buy.
If money is still tight when the bond goes up for sale, the cost of borrowing the money might be more than the district can spend, leaving no funds to move the projects forward.
“The possibility that the bond might not sell like we had planned has been discussed between individual board members, but it hasn’t been discussed as a board,” says school board president MJ Vosburg. “The bond market has gone crazy since the last board meeting.”
According to Todd Snidow, a senior vice-president at George K. Baum and Company, the district’s bonding firm, the problem is real, but it could be resolved before the bonds go to market in late December or early January.
“A lot can happen between now and then,” says Snidow.
Prior to the upheaval in the credit system over the last few weeks, municipal bonds represented one of the most sought-after investments in the market. Snidow says municipal bonds are still attractive to investors due to their stability and often tax-free status, but the money has become harder to find at a reasonable price.
Last year more than $487 billion in municipal bonds were issued, according to the Securities and Exchange Commission.
Already this year, the market for tax-exempt municipal bonds has fallen by 8 percent, which is the largest loss since Merrill Lynch & Co started its Municipal Master Index nearly 20 years ago.
According to Bloomberg Financial, in the past three weeks, only $4 billion in bonds have been sold, down from an average of more than $6 billion a week through early September.
A scarcity of willing investors could lead the district down one of two roads: paying a higher interest rate to make the investment more attractive, or holding the bond for better days.
In the finalized bond language that is now on the ballot, the district capped the amount of interest that could be paid on the bond at 6 percent, although they are hoping not to have to go any higher than 5.5 percent.
“We didn’t know things were going to go so wacky when we set the rate but we wouldn’t want to go any higher than [6 percent]. Interest rates are up between three-quarters of 1 percent to 1 percent over what they were last year and over the last few years. I think they’re going to drop back down and that this is just a short-term phenomenon,” says Snidow.
Because there could be as much as $2.6 billion in municipal bonds being issued in Colorado after the election, Snidow says one of the firm’s jobs will be to time the sale of the bond with other municipal bonds, to avoid choking the market and driving interest rates higher.
“It’s going to require some coordination on the part of the [three] different bonding companies that deal with bonds for school districts,” explains Snidow. “If I try to bring Gunnison’s bond on the same day as everyone else, it’s going to force me to match their rate and we don’t want to do that.”
Because of the diversity in the district’s tax base and the type of bond—a general obligation tax-exempt municipal bond—it could represent one of the highest quality securities investments on the market, which could mean a good deal for the district if it is offered on the right day, he says.
Some of the security of investing in that type of bond comes from the “general obligation” repayment, which means the “interest that investors earn is backed by the full faith and credit of the school district,” he says.
With that, the school district is rated as a 1-A bond issuer, which is the third highest rating for security. Through a state “intercept” program, the Colorado Department of Education insures bond payments, boosting the district to a 2-A rating.
The only step that could be taken to further improve the district’s rating would be to seek outside bond insurance. But Snidow says that after the latest bout of financial trouble, most bond insurance companies have found themselves out of business.
The other option the district has if the market doesn’t improve is to hold the bond, which it can do for up to three years. The entire bond could be kept off the market or, because of the rapid pace of the planned renovations, pieces could be issued as they are needed.
“We have discussed staging it a bit. We would have to look at all of those options before we could make any of those decisions,” says school board president MJ Vosburg. “We might decide to issue $10 million of them then watch the market to see when to sell some of the others. It depends on the market and what interest rates are doing.”
According to Snidow, a bond of $10 million or less can draw investment from local banks and possibly decrease the interest rate by as much as a quarter of a percent.
There are disadvantages in how that type of funding will affect the renovation process. By holding the bond and leaving the projects untouched, the prices will continue to increase and eventually the $55 million bond will not be enough to cover the costs of the projects.
“The architect has plugged in estimates about inflation and the quicker the bond is issued, the quicker the contracts can be secured and the better our chances that it doesn’t chip at the hedge he has put in for inflation,” says Snidow.
Some of the uncertainty about when the bond will sell and what the interest rate will be is the result of having so many bond initiatives on the ballot in a year of so much financial unrest. This year’s $2.6 billion in bonds will more than double the previous state record of $1 billion set two years ago.
“I don’t think they are all going to pass this year. They load the ballot up because this is a presidential election year and that tends to get the best turnout,” says Snidow, adding that 2006 was the only year he has ever seen all of the proposed bond initiatives pass.
In 2007, 75 percent of the bond issues on the ballot passed and in 2005 only 55 percent of the bonds passed. But in 2004, the year of the last presidential election, voters passed nearly 90 percent of the bonds.
“We’re starting to see the markets come back. Things are starting to calm down and I can’t guarantee that it will continue, but with the price of gas coming down and the equity markets improving, things are getting better. But win, lose or draw, people will be going to [municipal bonds] for security,” says Snidow.