Opportunities and Challenges facing Missouri School Districts within the current Municipal Bond Market
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Many Missouri School Districts had general obligation bond issues and/or operating levy increases on the ballot for the April 6, 2021 election. Judging from the early results those issuers presenting no tax increase general obligation bonds fared very well. According to the information assembled by our firm, 33 financings totaling $535,600,000 in par value received voter approval in the designated category of no tax levy increase. Many of these received victory margins in excess of 70% with some at 80% or higher.
The message here is that in spite of the COVID-19 pandemic and all of the chaos created by it, a large majority of voters were supportive and able to recognize that continuing to fund facility improvements is important as long as no increase in the debt service fund levy is involved. For those issuers with increased levies, the outcomes were less favorable; however, about one half of those also passed.
Although the yields on the ten year U.S. Treasury Note (Please see Table 1) have climbed from 0.93% as of January 4, 2021 to 1.653% as of April 6, 2021, the interest rates achieved in the market for Missouri issuers remain very near their historical lows when evaluated for the last 60 years (Please see Table 2).
One of the challenges facing all issuers is the rapid increase in the cost of building materials because of production shortages resulting from the impact of COVID-19. This pandemic response caused several manufacturing plant closings as well as a reduced output for those still in operation. This situation likely means budget increases to cover higher project costs above the earlier estimates of the architects and construction managers. There is no existing data to indicate when this trend is going to reverse. While these factors are not necessarily a new market phenomenon, their impact appears to be more exaggerated due to the COVID-19 production disruptions.
Moving forward with a mention of the new opportunities facing municipal issuers (besides the very attractive current interest rate environment) we now have large amounts of funds available from the Elementary and Secondary School Emergency Relief (ESSER) program. These funds can be applied as reimbursement for improvements that Missouri School Districts make for their facilities including air quality upgrades to HVAC systems, window and door replacements, and other renovations that support student health needs. By utilizing a portion of the ESSER II and ESSER III allocations, benefits to the educational environment can be separately accomplished. This can mean that more funding becomes available for the other facilities improvements because the HVAC and some other energy efficiency improvements are covered from the ESSER funds.
Several Missouri School Districts are presently in the process of completing capital facilities lease financing programs for this purpose. The ESSER funding can also be applied towards other needs of the District; however, caution is important with regard to counting on it for a prolonged period to cover raises for salaries and benefits. To obtain more precise information on how some of the ESSER funding can help your individual District, we suggest you study all of the data available from D.E.S.E. concerning the District’s approved funding levels and develop an approximation of the specific eligible items to be included in the proposed project. L.J. Hart & Company is available to prepare sample repayment plans that fit the situation if that is helpful.
An additional topic of interest is current legislation that is expected to be contained in the Infrastructure Program bill. The United State Congress may reinstate the tax-exempt status of advance refundings of municipal debt. The tax-exempt advance refunding elimination that first became effective December 31, 2017, as a provision to the Tax Cuts and Jobs Act approved under the previous administration, severely curtailed the refunding volumes in the municipal bond industry. If the new proposal passes in its existing form, the issuance of many advance refunding financings will probably occur. Those issuers with shorter call features on the refunded debt securities can then proceed with a tax-exempt issue and potentially reduce the market risk of higher interest rates later. The net interest savings will still be impacted by negative arbitrage on the refunding escrow account, which is higher the more time in advance of the call date the refunding occurs. By having a tax-exempt interest rate on the refunding securities that is lower than the taxable rates otherwise required, the economics of an advance refunding improve. A refunding issue is considered advance if the call date of the refunded financing is more than ninety days after the issuance date of the refunding.
The professional staff of L.J. Hart & Company appreciates this opportunity to explore and explain some of the opportunities and challenges Missouri School Districts are facing in the present municipal bond market. We trust that the data is useful and welcome any questions that develop.
For additional information contact:
Larry J. Hart
L.J. Hart & Company