Durango School District 9-R plans to issue $90 million in bonds in late January or early February, but the amount raised could increase by tens of millions of dollars through the use of bond premiums.
Bond premiums allow for a higher amount of money to be raised because interest rates on the bond are slightly higher than the market rate, making the bonds more attractive to investors and creating conditions in which the bonds trade for more than their face value.
At least one Durango resident, John Simpson, said the school district should have been upfront with taxpayers about its plans to use bond premiums in the lead up to the Nov. 3 general election, when voters, by a 72% to 28% margin, approved issuing the bonds.
“The debt, the total debt, when they close this is going to be more than the $90 million. That was the question people thought they were voting for. Shall debt be increased by $90 million? Yes or no. That is the problem,” Simpson said in a telephone interview.
Samantha Gallagher, 9-R’s chief financial officer, said bond premiums are commonly used by Colorado school districts and have been standard practice for the past decade to spur interest in the school and municipal bonds in an era of low interest rates.
“Essentially, it’s just a tool that’s used to try to get better return rates for the buyer,” Gallagher said. “It’s not something that we really have much control over in any way, shape or form. This is something that is done in situations like we’re in right now, when interest rates are extremely low.”
Bond premiums are allowable because the increased revenue will not violate caps set in Ballot Issue 4A that limited total payments for the $90 million in bonds plus interest to $149.2 million with no annual payment above $8.215 million, she said. In addition, interest rates cannot exceed 3%.
The bond premiums also won’t require an increase in the school district’s 5.776 mill levy, which was a selling point 9-R used in the campaign to pass the bonds.
Superintendent Dan Snowberger has estimated use of bond premiums could likely raise an additional $10 million beyond the $90 million sought in Ballot Issue 4A.
“Even back in 2002, the last time that the school district passed a bond measure, when they sold those bonds, there was premium on them,” Gallagher said. “It was not as high as it’s looking like it could be now because interest rates were nowhere near as low as they are now. But there was some premium that was achieved on that offering.”
If bonds were issued this week, Gallagher said the interest rate would be about 1.78%, but that would make the bond unattractive and difficult to market. A currently accepted premium would market the bonds at 2.08%, she said.
“A multitude of caveats exist for the market at the point of sale, but that is what it is looking like at this point,” Gallagher wrote in an email to The Durango Herald. “That being said, the premium bond would have a 10-year call with an option to refund at a lower interest rate ... basically we could restructure the debt 10 years down the line for a lower interest rate. And again, any sale of bond will have to work within the confines of the approved ballot language, regardless of the market situation.”
While the use of premiums is legal, Simpson said the district would have been better off to be up-front about the practice. He estimates as much as $120 million might be raised through bond premiums.
“The ballot issue should have said, ‘Shall debt be increased by $110 million or $120 million.’ Just because there’s this loophole in the ballot question doesn’t make right,” he said. “When the district’s financial statements come out next year, and we look at them, their debt is going to be increased $110 million. When you see that, compare it to the ballot issue, which asked for $90 million, that’s the problem.”
Simpson said even if 9-R used bond premiums, nothing prevents it from issuing $80 million in bonds and then receiving an additional $10 million in premiums to still meet the $90 million sought in Ballot Issue 4A.
Bond premiums were used in Mesa County Valley School District in 2017, and became a key point of debate in 2019, when voters rejected another bond offering by the district.
“Everyone kind of figured out what they did,” Simpson said. “And then basically, the school district came back to try to replace Grand Junction High School in 2019. And that whole thing got shut down. Because the people said, ‘You’re going to pull the same trick on us.’”