Last night I spoke at the Board of Supervisors meeting, in order to make sure that both they and the public were aware of the options available to them in response to the consolidated middle school resolution passed from the School Board.
Their options are as follows:
- Do nothing- The Board of Supervisors is not obligated, by statute, to do anything
- Vote to build the school, issue the bonds, and begin the construction process.
- Vote to send the resolution to a referendum, either as written by the School Board or in an amended form.
Critically, I think it’s important to realize that the Board of Supervisors can only send an issue to a referendum if it is something they have the inherent power to do on their own. I encouraged them to vote for building the school, issuing the bonds, and beginning construction without delay as that would allow us to get the most favorable rates from the market for our bonds. I also stated that the process for issuing bonds should not delay them from voting in favor of the middle school project, as the issues are generally straightforward.
I had to leave early to put my children to bed, after which I understand that Mr. McCready responded to my comments at some length, discussing the process of issuing the bonds and the work that the Board would need to do. So I thought it might be useful for everyone to understand how exactly these kinds of bonds are issued.
The Board of Supervisors has to choose between two general paths to go through in order to issue the bonds. The County can issue what are called “general obligation” bonds (“GO Bonds”), the proceeds of which can be used for any normal governmental purpose. The County can also choose to sell bonds to the Virginia Public School Authority Pooled Issue (“VPSA Pools”), which restricts the use of the funds to the construction or remodeling of primary or secondary schools. If you read my prior piece on the “wrapped” debt service option presented by the School Board, that option is only available through the VPSA Pools. The County would apply to the VPSA to be included in their next bond sale in December, but the application is due in September and therefore a referendum would push the issuance into 2018. As of 2016, the VPSA services over $3 billion dollars in bonds for Virginia school districts, and has an Aa1 rating from Moody’s.
In order to issue GO Bonds, the Board of Supervisors would have to contract with an underwriter of municipal bonds. The underwriter would help the County structure the debt offering, and then agree to purchase the entirety of the bond issuance at first. Typically, the underwriter (or underwriters) would then resell those bonds to other banks, investment funds, and individuals (due to their tax exempt status, municipal bonds are very popular with retirees). The County has an Aa2 rating from Moody’s, which is one grade lower than the VPSA. This means, despite my understanding of Mr. McCready’s comments at last night’s meeting, that the County will be highly unlikely to find a better interest rate than that offered by the VPSA. Municipal bond investors, both individuals and institutions, focus very closely on credit ratings when reviewing bonds.
Also, the VPSA charges a mere 10 basis points (or .1%) to cover all of the costs of issuing bonds. If the County seeks to issue its own bonds, it will have to pay for a bond counsel, financial advisor, rating agency fees, and other costs on its own. All of the surrounding counties issue debt through the VPSA, including Pulaski County. In addition, GO Bonds will be priced with an underwriter’s discount, essentially a fee charged to the County as part of the bond offering. VPSA, as a governmental agency, does not charge an underwriter’s discount and, by statute, must pass through to issuers any savings they generate servicing the bonds. All of that together means that the cost of issuance for VPSA will be around $100,000, while using a private underwriter will probably cost around $450,000. Mr. McCready mentioned in last night’s meeting that the Board could negotiate each individual year of the bond, and while there could be some savings generated by this activity, I’m doubtful that the combination of the County’s lower credit rating and the higher costs of issuance will result in a better financial arrangement than the one put forth by the School Board through the VPSA.
Another major difference between the GO Bonds and the VPSA pool is one regarding the use of the funds. VPSA bond proceeds must be used for school construction or remodeling, so if $45.7 million is raised then that amount must be used for schools. If the County decides to issue GO Bonds, they can use the proceeds for any purpose. So if the County issues $50 million in bonds, some or all of that amount can be used for building the middle school but it can also be used for other projects. What those projects may be, I personally have not heard, so I plan to ask Mr. McCready on Friday, June 30 at 4 PM when the Board will have its first work session at 89 Commerce Street in Pulaski. It’s open to the public, I hope to see you there.