What are bonds? How long does it take to pay them off?
School districts can only sell bonds if authorized by the voters of the District, in an election held for that purpose. A bond is a debt instrument in which an investor or group of investors loans money to the District. The proceeds from the bond are used to finance capital projects and other long term items. The District repays the principal of the bonds, along with interest, over a period of time.
Under current Texas laws, the maximum maturity of a bond is 40 years. However, the maximum maturity ever issued by Cypress-Fairbanks ISD is 25 years, even though projects financed by the bonds have a longer life than 25 years. Assets financed by the bonds that have a shorter asset life, are sold with shorter maturities that align with their useful life.
How do bonds work?
The sale of bonds begin with an election to authorize a specific amount—the maximum amount of bonds the district is allowed to sell. The school district sells the municipal bonds as funds are needed for capital projects. On the day of the sale, interested investors submit orders for the bonds which have been priced according to market demands. Most bonds are purchased by large institutional investors or pension funds. Some may be purchased by retail institutions that sell them to individuals in the secondary market. Interest earned on Municipal bonds by purchasers of the bonds are exempt from Federal Income taxation.
Bonds are sold in multiple maturities meaning they mature at different times over a period of years. The interest rate is typically different depending on the maturity date. Longer maturities typically carry a higher interest rate. The interest rate is determined based on market conditions and the quality of the credit. In other words, the better the credit rating, the lower the interest rate on the bond and the lower the cost of borrowing.
Cypress-Fairbanks ISD is able to achieve a AAA bond rating from both Moody’s Investor Services, Standards & Poors’, and Fitch rating agencies by virtue of the bond payment guarantee by the Texas Permanent School Fund. The District’s underlying bond ratings are Aa1 from Moody’s and AA from Standards & Poors’.
Principal and interest on the bonds are repaid over a period of time with tax collections from the Debt Service tax rate.
How can bond money be used?
In accordance with the Texas Education Code, bond proceeds can only be used for the construction, acquisition, and renovation of school buildings, the acquisition of land and the purchase of capital equipment such as technology and school buses.
Why are bonds used to finance non-facility items?
The school finance formulas no longer provide the necessary funds that would allow the purchase of non-facility capital items through the General Operating Fund and still meet the ongoing day to day expenditures of educating students and running a large organization. In addition, it is advantageous to the District to pay for capital items such as technology, buses, land and portable buildings with bond money rather than from the General Fund as the cost can be spread over the life of the asset rather than a single purchase diluting the General Operating Fund.
If the bond election is passed, does the school district immediately incur the debt?
Debt is not incurred until the bonds are actually sold. Historically, not all of the amount authorized by the voters is sold at one time. Bonds are sold over a period of years up to the amount authorized, and in such a way as to fund certain capital project needs and to manage the impact on the debt service tax rate.
If a bond referendum is approved, is the district obligated to spend the money?
No. Voter approval is an authorization for the district to issue bonds. The bonds are sold in the future only when funds are needed.
What makes up a district tax rate?
A school district’s total tax rate consists of two parts: 1) Maintenance and Operations (M&O) and 2) Debt Service, or Interest & Sinking (I&S). Maintenance and operations taxes fund the General Operating Fund, which pays for regular operating expenditures of the District such as salaries, supplies, utilities, insurance, equipment and other costs.
The Debt Service tax pays for school bonds and can be used only to pay the principal and interest of the debt incurred by selling bonds.
The tax levy is based on the taxable value of property within the District boundaries as appraised by the Harris County Appraisal District, and a tax rate for M&O and I&S adopted by the District’s Board of Trustees. The tax rate is typically adopted in September or October of each year.
How will this bond election affect homeowners who are over 65?
Upon reaching the age of 65, homeowners can apply for an over-65 homestead exemption. An additional exemption of $10,000 is applied to the taxable value of property. School district taxes are frozen in the year the taxpayer turns 65 years of age. Taxes for homeowners who have an over-65 homestead exemption will not increase as a result of a school bond election.