How school bond refunding saves money for Federal Way taxpayers

While walking his dog Wednesday afternoon at Celebration Park, Federal Way resident Steve Watt was popped with a question he probably was not expecting: Did you know that the Federal Way Public Schools recently refunded some of its bonds?

Watt’s a sharp guy. He works as a pilot for Alaska Airlines and is the father of six children, one a Decatur High School graduate. But he was neither aware of the bond refunding, nor familiar with what exactly it is. Watt was pleased to hear it’s going to save him and the school system and taxpayers some money.

Bond refunding is not sexy and may sound complicated, like “credit default swaps” or “constant maturity indices” — and it may even sound like taxpayers are getting money sent back to them. However, it’s an important financial maneuver that affects the bottom line of your tax bill and the school district’s credit rating.

On Tuesday night, the school board approved a measure that would keep the 2011 tax collection level with 2010 as a result of recent bond refunding efforts. King County calculates the tax rate by dividing the assessed value of all the property in a school district by the amount voters approved the district to collect. In 2010, the district collected $1.24 for every $1,000 of value in a given piece of property. Though assessed values are predicted to decline for 2011, the district will collect the same as it did in 2010.

Bond refunding is similar to a homeowner refinancing a mortgage to get a better interest rate. The district is essentially issuing a new bond that will be bought by a bondholder that will charge a lower interest than the previous one. Bond refunding allows the district to swap old higher interest debt with new, cheaper debt.

On Sept. 28, the school board voted to issue just such a refunding bond. It was a $16.3 million refunding bond to replace a bond issued in 2002, part of a series approved by voters in 1999 that paid for the building of Sequoyah Middle School, Todd Beamer High School and Truman High School.

In June, the school district refunded $20.4 million in bonds from 2000 and 2001.

The school system solicited bids to find a buyer that would offer the lowest interest rate. The bonds issued as a result of the Sept. 28 vote went to Raymond James and Associates, a Florida based financial services firm. Raymond James offered an interest rate of 2.37 percent, compared to the old rate of around 4.5 percent. Other firms submitted bids that would offer interest rates between 2.38 percent and 2.62 percent.

Sally McLean, the school district's chief financial officer, predicted that the refunding on the 2002 bond would save around $1.4 million on interest costs. Between the June and September refunding efforts, McLean estimated a taxpayer savings of $3 million. McLean estimated that the district spent around $50,000 on the refunding process, hiring attorneys and paying for updated credit ratings.

McLean said that interest rates are low because the Federal Reserve has lowered long-term interest rates in response to the recession.

As the district goes through the refunding process, it also receives a credit rating. Major ratings agencies like Moody’s and Standard and Poor's assign a grade to the district, and Federal Way has maintained high marks: Aa2 and AA- from Moody’s and Standard and Poor's, respectively. These ratings tell private sector lenders how financially healthy the district is, similar to how private citizens show their worthiness through a numerical credit score.

“The Aa2 underlying rating primarily reflects the district's sizable tax base, conservative financial management, and manageable debt profile,” Moody’s wrote in its report. However, Moody’s noted that the district’s tax base has declined: Around 14 percent from $14 billion to $12 billion between 2009 and 2010. Moody’s predicts the tax base will drop further to $11.5 billion in 2011.

Federal Way resident Steve Watt has strong opinions on financial austerity when it comes to his tax dollars. He says he’s not a Tea Party type, but votes against any new tax increases. He remembered voting against the bonding initiative that went before Federal Way residents in 2007 for a $149 million bond package for constructing new schools. But after a conversation about bond refunding, he was glad it’s being done.

“If it saves the taxpayers money and doesn’t threaten the integrity of the bonds, I’d support that,” he said.

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