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Long-Term School Corporation Financial Planning-Part 2

By Belvia B. Gray, CIPMA, Principal, January 26, 2017

In a prior issue of Vision we talked about how important long-term capital planning is for managing the overall debt payments for a school corporation. We talked about different ways in which new money bonds could be structured to meet the current and future needs of the school corporation. In this article, we’ll focus on another tool for managing the overall debt payments – refunding of existing debt.

When considering the refunding of debt there are several questions that should be discussed, including the following:

  • How much can be saved if the bonds are refunded now versus waiting until closer to the call date? This is important because an escrow account has to be funded to pay off the old bonds and this includes principal outstanding plus interest due up to the call date. The closer the bonds are to the call date the more efficient the escrow account becomes.
  • Is this an advance refunding? Bonds that are refunded more than 90 days before the call date are called advance refunded. Bonds can only be advance refunded once. Bonds that are within the 90 day window are called current refunding bonds and there is no limit to the number of times they can be refunded. This is important because the closer the bonds are to the call date there is less money needed to the fund the escrow fund; thus, there could be more savings if you wait. The tradeoff is that interest rates could change, which could impact total savings.
  • How should the savings be applied? A refunding can provide school corporations an opportunity to lower its payments, pay debt more quickly or to issue new debt to keep payments at the same level. The decision on how to proceed would take into account current and future capital needs of the school corporation.

 

Below are illustrative examples for how the savings from a refunding could be structured. The first shows savings taken on a uniform basis (in other words, the same savings in each year):

           

 

Another option is to shorten the repayment of the refunding bonds (in other words, take all of the savings in the last year(s)):

           
 

It could also help the school corporation reshape its current debt structure to create capacity for future borrowing:

           

 

If the school corporation has capital needs, it could refund the existing bonds and at the same issue new money bonds that would have payments matching the annual savings of the refunding bonds:

            

 

Depending on the structure of the existing bonds, one or more of these options could be viable for the refunding of debt. Umbaugh is here to assist you in considering all of these possible options and to help with planning for long-term financial and capital needs.

If you have any questions, please contact us at .(JavaScript must be enabled to view this email address).

Information in this article was believed current as of the date of publication. As you know, changes occur frequently. The information presented is of a general educational nature. Before applying to your specific circumstances, please contact us at vision@umbaugh.com.


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