Printed July 7, 2010 Reprinted upon request
By Joe Cohen
While attending the 4th of July parade on Saturday I stopped at the school bond booth – and had a lively discussion with a host of friends and other people. I listened to a number of great questions about the bond issue – and was pleased with the substance of the answers provided. And yet one important question has not been fully vetted: What is the cost of waiting – in effect doing nothing now if bond issues fails but is then passed at a later date?
The answer to financial questions always starts with the caveat – it depends. The cost of waiting to fund the school bond (an approval vote in the future) depends on many factors including construction costs (presumably higher than today). However the most significant cost in any bond is the interest rate that attaches to the bond. The interest rate (much as in a mortgage on your home) remains the same over the life of the bond. So what is the interest rate today for bond issues like the one we are considering?
The really good news is that interest rates are at historical lows. From a timing standpoint – there couldn’t be a better time to pass a school bond issue. The bond interest rate is set at the time a bond is issued and sold to investors. While we will not know with certainty what that interest rate will be now (or in the future) – there is some likelihood that interest rates will be higher if we wait 1-2 years before passing the school bond issue. Suppose for example that interest rates in the future are just one percent higher than today. What will be the cost of waiting?
The answer is found in a simple equation on my Texas Instruments calculator. The cost of waiting to pass the bond issue – and then incurring a one per cent higher interest rate is $4,472,000! This additional interest cost is incurred month by month over the 25 year life of the bond. You can buy a lot of books on your Kindle with that kind of savings.
Now here is a strong financial incentive to vote YES now, improve our school infrastructure, and save money by doing so.
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Thanks, Joe, for a very factual and sobering analysis. I think most people intellectualize that it would cost more when the economy is better, but this puts real dollars into “sense.”