In the current climate, not all school districts can afford to support the capital projects of the schools within them. Therefore, they are forced to explore other financial avenues, including bonds. Bonds can provide schools with resources to meet immediate specified needs or fund long-term projects that require substantial and continuous investment. This essay will consider school bonds, the reasons behind the school district opting for the “bond route,” and discuss bond ratings and elections.
Bonds are one of the financial avenues available for schools. They can be defined as a loan made from an investor to a borrowing organization. Thus, if a school requires financing, it can offer to sell promissory notes to investors, which they are required to pay back over a fixed period, limited by law (Robinson, 2018). A school district can choose to go the “bond route” if schools require urgent cash investment to fund capital projects, including maintenance and improvement of the existing facilities. Such projects are often costly, and schools may lack the resources to fund them in their entirety. Thus, they are forced to borrow money in the form of bonds from investors.
The financial health of the school district can impact the sale of school bonds. The ability of the district to pay back the borrowed bonds and meet its financial obligations to the investors is taken into consideration when the school district is awarded its bond rating (My Texas Public School, 2021). A high-grade bond rating can translate into the ability of the schools to sell bonds at a favorable rate. Bond ratings are developed based on specific internal and external factors, including financial health, local legislation, and federal support available to the organization (Pinkasovitch, 2020). The ratings are given by three independent awarding bodies: S&P, Moody’s, and Fitch (Corporate Finance Institute, 2019). Although these organizations use their own codes to describe the viability of bonds, all of them classify bond investment by quality from investment-grade to non-investment grade (Corporate Finance Institute, 2019). Thus, investment-grade bonds, such as S&P’s AAA, Moody’s Aaa, and Fitch’s AAA, describe bonds considered a safe investment. Meanwhile, non-investment grade school bonds are risky but can yield higher profits (Corporate Finance Institute, 2019). Thus, bond rating signals to the investors the school district’s credit quality.
If a school district wishes to finance their capital projects, they are required to vote for bonds being issued. According to Meador (2019), community members of the district in which a school needing financial investment is located can vote for the bond issue. Most states require a “three-fifths (60%) super-majority vote” to pass a school bond issue (Meador, 2019). However, there are states where the members of the community do not vote for such issues. For example, in Mississippi, bond issues are approved by the Mississippi Bond Commission, and elections involving school bonds are not required (Ballotpedia, 2021). When voters choose to vote yes for a bond issue, they authorize the school to offer bonds to potential investors and approve of the proposed capital project. In addition, the “yes” vote often translates into the property tax in the district being increased (Robinson, 2018). The property tax raise is unavoidable if the bond issue is approved as it is used to pay the bonds back.
Furthermore, the investors contemplating the purchase of school bonds should take several factors into consideration. They should be aware that bond repayments are not always guaranteed (Robinson, 2018). The city can choose to default on bond payments if the property tax revenue declines substantially due to the fall in the population (Robinson, 2018). Therefore, investors are recommended to account for the school district’s bond rating, the value of property in the area, and the sociological characteristics of the population.
As the school system repays bonds from the funds collected from the property tax, the bond issue can be a challenge to pass. Nevertheless, it is essential for school maintenance and the quality of the offered education to ensure bonds are issued for capital projects. Schools are advised to build strong relationships with the community and inform it of all the critical events and changes (Meador, 2019). The community is more likely to approve of the bond issue if they realize the urgency and necessity behind the request. An effective strategy for the successful passing of a bond election is the multipurpose framing of the school needs (Meador, 2019). Thus, schools need to emphasize that the bond issue will benefit the school and all individuals in the community. Overall, it is vital for the schools to be honest about their needs with the voters and illustrate how the bond issue will benefit all parties involved.
In summary, bonds are instrumental for funding urgent or long-term capital projects required by schools. In most states, the bond issue is voted for by the members of the community, who repay the bonds to the investors through property tax. The bond rating of the school district depends on several factors, including the school’s financial health and other financial avenues available to it, and are considered by the investors before bond purchase.
References
Ballotpedia. (2021). Voting on school bond and tax measures. Web.
Corporate Finance Institute. (2019). Bond ratings. Web.
Meador, D. (2019). 6 strategies to successfully pass a school bond. ThoughtCo. Web.
My Texas Public School. (2021). Bonds 101: Questions and answers. Web.
Pinkasovitch, A. (2020). How are bonds rated? Investopedia. Web.
Robinson, N. (2018). How do school bonds work? Bizfluent. Web.