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GRPS refunds bonds with lower rate

District said it hopes $5M in savings persuades taxpayers to vote for May 2 millage funding high school renovations.

March 17, 2017
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Grand Rapids Public Schools has refunded bonds originally sold in 1997 for capital improvements, securing a lower interest rate and saving taxpayers $5,007,680.

Larry Oberst, the district’s CFO, said bond refunding is a mechanism by which a school district may call bonds issued to investors before their 25-year maturity date to secure a lower interest rate and repay the debt faster. He compared it to a mortgage refinancing, but for school districts.

He said most school bonds have an initial call date after 10 years, at which point a district may go to the market and get commitments from investors on a new bond price and interest rate based on market conditions.

Then, the district sells the bonds to the purchasers, replacing the old bonds with new money and setting a fresh target date to pay back the original debt at a lower interest rate.

Each district may repeat the process once more, 10 years later at the second call date, which GRPS did in this case, selling the bonds for $45,760,000 on Feb. 22.

“The actual bond closing where we get the money happens next Tuesday (March 21),” Oberst said.

The effective interest rate for the first refunded bonds in 2007 was 4.19 percent. The 2017 bond refunding lowered the interest rate to 2.86 percent.

GRPS’s 2017 refunding bonds carry a final maturity date of 2029 — a repayment term of just less than 13 years.

Brokerage firm Stifel’s Michigan investment banking office and the financial advising firm PFM Financial Advisors conducted financing for the bond refunding. Varnum law firm served as bond counsel.

Teresa Weatherall Neal, GRPS superintendent, said the decision to refund the bonds was a no-brainer for the district.

“As interest rates remain historically low, we saw an opportunity to save the district and taxpayers substantial interest costs by doing this refunding,” she said. “I am happy to report that our refunding was a tremendous success. Strong demand for our bonds resulted in a lower interest rate and a savings of over $5 million in interest costs.”

Neal and Oberst stressed that while the refunding does not add money to the district’s coffers, it has a few other benefits.

“On a long-term basis, (the bond refunding) provides us additional borrowing capacity,” Oberst said.

Because of its consistent debt reduction, the district has been able to maintain a stable bond credit rating from Moody’s for the past few years, he said. The rating currently stands at Aa2, which indicates GRPS has very strong capacity to meet financial commitments.

“Our legal debt limit right now is $540 million,” Oberst said. “After the bond refunding, we’re at about $180 million (in debt). When you look at the rating agencies, one of the things they look at is they do ratios of debt per student and other comparisons, and the lower your debt margin, the better for them. Anytime you can reduce your debt load, it’s a positive from a financing perspective.”

Neal said she hopes the bond refunding will strengthen public trust in the district.

“It’s important to tell the story and change the narrative of what people believe we are doing as good stewards of the public dollar,” she said. “It also reassures the business community that we are moving in the right direction.”

Oberst said the refunding, which saved property owners one-tenth of a mill, may give GRPS an edge when it comes to the Kent County millage vote for school districts May 2.

“The county is looking in May at (a regional) enhancement millage, which we have to vote on, an increase in taxes that would be nine-tenths of a mill,” he said. “Because we’ve saved one-tenth of a mill for city taxpayers, we can turn around and ask them for nine-tenths.

“One-tenth of a mill on the $50,000 average taxable value (of a home in Grand Rapids) is $5 annually. So, the bond refunding will save our average homeowner in GR $5 annually in property taxes.”

He said in total, the district has saved more than nine-tenths of a mill, and it feels confident about the chances for the new millage.

“Over the last three months, we’ve saved our taxpayers 1.1 mills by letting the sinking fund expire and doing this bond refunding.”

He explained the sinking fund “is a property tax that funds major repairs and maintenance for the district. Over the past 10 years, we’ve had a sinking fund,” and the district let it expire at the end of last year to save money.

Oberst said if the millage passes in May, “it will cost the average homeowner in Grand Rapids an additional $45 annually in property taxes” for 10 years.

The funds, Neal said, largely would go toward renovations and new construction at various GRPS high schools. According to accessKent, the millage will give the 20 school districts in the Kent ISD an additional $19.9 million in funding, or $211 more per pupil annually.

GRPS put funds from the last millage toward elementary and middle school improvements, Neal said.

She said she believes it is important for the district and taxpayers to keep in mind that every bit of money spent is for the good of the children.

“It does help the district in the long run, because we are doing right by children, staff members and parents,” she said. “Because the majority of our students live within city limits, we are helping their parents help their children.

“When you’re living in poverty, every little bit helps.”

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