USD 259 (Wichita public school district) officials have estimated that the interest rate for the proposed Wichita school bond issue would be 4.75%.
With the recent turmoil in credit markets, I think it’s impossible to forecast with any degree of certainty what interest rates on long-term bonds might be over the next few years when USD 259 would be selling bonds.
Long-term bonds like the 20-year bonds the Wichita school district wants to use are very sensitive to changes in the interest rate. Even a small change can have a big impact on the payment needed to pay off the bond each year. The impact on the bond’s total cost can be huge.
Click on chart for a larger version.
I made some calculations and illustrated them in a chart. The results concern me. At the district’s current estimate of 4.75%, the annual payment for the bond would be $29,063,673, with a total cost of $581,273,458 to pay for the entire bond. (See assumptions below.)
But if the interest rate were to increase by one percentage point to 5.75%, the numbers change. Now the annual payment would be $31,606,695, with a total cost of $632,133,891.
That’s an increase of 8.75% in the annual payment and total cost of the bond if interest rates increase by just one percentage point.
USD 259’s bond issue fact sheet, under the heading “Why now?” lists “Favorable interest rate on bond sales.” Will rates be favorable over the next few years? Will the district be forced to sell bonds in an unfavorable interest rate environment?
The bond issue resolution doesn’t specify a time frame for when the district must sell the bonds. I would imagine, however, that the school district will be under pressure to sell the bonds and borrow the money no matter what interest rates are at the time.
(Assumptions in calculations: Issue $370,000,000 in bonds at a single time, for 20 years, with a single annual payment. Bond underwriting and other fees are not included in these estimates. Microsoft Excel provided the calculations.)