Bonds 101: Questions and Answers
What are bonds? How long does it take to pay them off?
Bonds for school projects are very similar to a mortgage on a home. To finance construction projects, the District sells bonds to investors who will be paid principal and interest. Bond repayment is limited by law to no more than 30 years from the date of the bonds. The District normally issues bond for 20 years, thus saving the taxpayer interest costs.
How do bonds work?
The sale of bonds begins with an election to authorize a specific amount which must be approved by 66 and two thirds percent of the voters. The school district sells them as municipal bonds when funds are needed for capital projects, usually once or twice depending on when funds will be needed. Bids are taken from interested buyers, usually large institutional investors, and are sold at the lowest interest rate offered. The rate is based on the District’s bond rating: the higher the bond rating, the lower the interest rate to sell the bonds. Principal and interest on the bonds are repaid over an extended period of time with funds from the bond tax rate that is certified to the property taxpayers annually.
How can bond money be used?
Proceeds from a bond issue can be used for the construction and renovation of facilities, the acquisition of land, and the purchase of capital items such as equipment. See Idaho Code sections 33-1102 for authorized uses.
What, other than bricks and mortar, is typically included in a facility bond referendum?
A referendum may include money for technology, buses, land for future schools, portable buildings, and the cost of selling bonds.
Why are bonds used to finance nonfacility items?
It is a financial advantage to the District to pay for some capital expenditures such as technology, buses, land, and portable buildings with bond money rather than from the General Fund. First, the cost of the purchases can be spread over the life of the asset rather than coming from a single year’s General Fund budget. The District’s General Fund does not have adequate annual revenues to fund capital projects and capital maintenance.
What is a bond election?
A school bond election gives individuals an opportunity to vote on paying for the construction and renovation of school facilities. It is a request to give the elected Board of Trustees the authority to sell bonds when facilities are needed.
What is the difference between a bond authorization and bond sales?
A bond authorization specifies the amount of bonds the District is authorized by the voters to sell. Bond sales may occur over a period of time with the date and amount of each sale determined by the Board on an as-needed basis.
If the bond election is passed, does the school district immediately incur the debt?
The bonds do not cost the District anything until they are sold. Even though the voters approve the bond issue, there are not costs incurred until the bonds are sold.
If the bonds are approved, is the District obligated to spend the money?
No. Voter approval is an authorization for the District to issue bonds. They will be sold in the future only when funds are needed.
Will my district be able to sell its bonds at a favorable interest rate?
Your district’s bonds should receive favorable interest rates due primarily to the District’s excellent bond rating and continued low interest rates.
Paying for schools
A school district’s tax rate consists of four parts: 1) Maintenance and Operations (M&O). 2) Supplemental Maintenance and Operations, 3) Tort revenues and 4) Bond (Principal and Interest). Maintenance and operations, supplemental and tort taxes fund the General Operating Fund, which pays for salaries, supplies, utilities, insurance, equipment, and the other costs of day-to-day operations.
The Debt Service tax pays off school bonds, somewhat like paying off the mortgage on a house.
What is the difference between the M&O and the Bond tax rates?
M&O taxes are used for day-to-day operations; to pay for salaries, supplies, utilities, insurance, fuel, etc. Revenue from the Bond tax rate can be used only to retire the bonds sold for specific purposes as authorized by the voters.