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What Superintendents Should Know About Municipal Bonds

Public school systems rely on municipal bonds to fund various types of projects. Ensuring such bonds are structured beneficially and used appropriately requires a fundamental understanding of municipal bonds, budgeting and auditing for accountability. The online Education Specialist (Ed.S.) in Educational Leadership, Superintendency program from Arkansas State University (A-State) explores these subjects in depth through the study of school business management.

What Are Municipal Bonds?

According to Investopedia, “A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments.” Essentially, the borrower (or issuer) issues the bond, promising to repay the lender (or investor) the principle of the loan plus interest over a set period of time.

Municipal bonds are issued by governmental entities, including states, cities and counties. Bonds issued by a school district would fall into this category.

The interest lenders earn on municipal bonds is tax free in many cases. As a result, municipal bonds are considered low-risk investments. They may not provide as much potential return on investment to lenders as riskier securities, but the dependability and steady, tax-free interest income of municipal bonds is attractive to risk-averse lenders.

The municipal bond issuer benefits from paying relatively low interest rates on the loan principal and structuring repayment in manageable ways. Additionally, the borrower can issue a large quantity of bonds to many lenders, enabling borrowers to raise far more capital than possible with a typical bank loan.

Why Do School Systems Use Bonds as Funding Sources?

School districts issue bonds to raise capital needed for large projects like renovating, updating or building new schools, buying buses or funding technology integration initiatives. These types of projects require a substantial amount of upfront capital, beyond what can be allocated from typical annual budgets.

By issuing bonds to raise capital, school systems can spread debt repayment over an extended period. Debt is generally repaid through an allocated portion of property tax rates.

What Does the Bonding Process Look Like for School Systems?

A large-scale municipal bond issue involves many factors and stakeholders. When law demands that voter approval is required to increase municipality spending, debt or tax rates, the bond issue will be put to voters as a referendum.

A successful bond referendum requires an intensive voter outreach and education campaign, community involvement and advocacy. Voters need to know where their dollars are going, why the school system needs funding and how the project will benefit students, teachers and the community.

A-State’s superintendency Ed.S. program examines the complex relationships supporting these campaigns. The superintendent fosters support and involvement from school board members, educators and school administrators, local businesses and the community. These relationships and advocate networks are central to garnering the voter support needed for successful bond referendum campaigns.

But, as American School & University notes, “By the time a bond referendum is put before voters, it may have gone through years of planning, strategizing, and communicating to the public.” All the relationships superintendents form are central to this planning process.

Representatives from all groups of stakeholders may form a steering committee, engaging the community and gathering input through focus groups, opinion polls and other methods. From this input, the committee can determine issues that community members feel are significant.

The projects with the highest need and public support are assessed for estimated cost, timeline, etc. As the financial scope takes shape, the school district will generally engage outside financial companies (bond underwriters and financial advisors) to structure bond proposals and deals. Ideally, financial companies work to structure bonds as favorably as possible for the district.

Although, as The Hechinger Report points out, this is not always the case. Financial companies may charge exorbitantly high fees. These companies may also be inclined to structure bonds with higher interest rates, making them easier to sell. Poorly structured bonds can cost school districts and taxpayers millions in unnecessary interest payments and fees.

Plus, school districts with a poor credit rating and/or those without financially savvy administrators may not seek better, competitive bond deals. This another an important reason why school superintendents should fully grasp the ins and outs of municipal bonds.

School district administrators must also ensure bonding and spending are monitored and managed carefully following a successful bond referendum. For instance, Cleveland included the creation of a Bond Accountability Commission in a bond proposal, helping voters feel confident about the responsible expenditure of tax dollars.

All aspects surrounding the use of municipal bonds by school systems impact a superintendent’s short- and long-term responsibilities. Superintendents can be instrumental in maintaining beneficial, well-managed bond programs for their school communities by developing municipal bond expertise, leadership skills and strong community relationships.

Learn more about Arkansas State University’s online Ed.S. in Educational Leadership, Superintendent program.

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