By Kevin McNabola
Orange Board of Finance
Kevin McNabola
If you’re a mayor, first selectmen or superintendent of schools, you better be dialed into the state’s school construction grant program. It’s now at the forefront of discussion with every official in Connecticut.
Based on today’s volatile economic market conditions and with the 10-year Treasury yield now over 5 percent for the first time since 2007, there are a lot of leaders considering various financing options. They’re wondering whether they can move forward with bonding for large capital projects with the borrowing rates today.
Orange is a AAA-rated town by S&P on Wall Street. Eight months ago, a AAA-rated town could have gotten a 3.5 percent interest rate on a $20 million bond issuance. Today, that same bond will likely be between 4 and 4.25 percent. That raises the cost to borrow $20 million by between $1.1 million and $1.6 million over the life of the loan.
What drives the higher cost of borrowing? First, the Federal Reserve increased its target federal funds interest rate by 0.25 percent to a range of 3.75 percent to 4 percent, a decision most investors expected. It was the first Fed rate hike in more than three years, and there will be surely more over the next year.
Second, rising oil prices this year drove rate hike expectations higher, in turn pushing both short- and long-term bond yields up.
Longer-term inflation expectations remain well-anchored, with investors anticipating that rate hikes will eventually bring inflation under control.
Fortunately, there is some good news in Connecticut. The state provides school construction reimbursement on eligible expenditures for municipalities that have an approved capital plan. Compared with other states, Connecticut has a substantial role in capital construction and is somewhat unique in that its formula is based on redistributing funding toward municipalities with lower property and income wealth.
For example, Meriden is AA rated by S&P. The city recently approved a new elementary school for $122 million. That project has a 75 percent reimbursement on all eligible expenditures for construction, equating to a $91.5 million state reimbursement.
Conversely, Woodbridge has a higher bond rating at Aaa and is a more affluent community. In that town, a $118.5 million elementary school replacement has a state reimbursement rate of just 38 percent, or $45 million.
Connecticut recently passed legislation that incentivizes cities and towns to build new or renovate existing schools. There is also an additional 15 percent reimbursement if the school district builds a new school that includes additional square footage dedicated for pre-K. In Meriden that would be equal to a 91 percent reimbursement, and in Woodbridge it would be 53 percent.
If the state funds an additional $17.8 million to Woodbridge for this dedicated square footage, the town saves $7.8 million in interest that would normally be funded through the town’s operating budget.
Branford, which has the same AAA rating as Orange, is renovating two existing elementary schools at a cost of $196 million. Branford is receiving 72 percent state reimbursement which includes that additional 15 percent pre-K reimbursement. So Connecticut is funding $141 million, and Branford’s share is only $55 million bonded over 20 years. Branford saves $11.3 million in interest for the project.
There has been a lot of discussion about the age of the elementary schools in Orange, with Racebrook School built in 1959, Turkey Hill in 1964, and Peck Place built in 1968. As a member of the Board of Finance, I can attest that there have been significant upgrades and investment throughout the past two decades. However, there needs to be a strategic plan for the future useful life of these schools.
If there was ever a time to take advantage of an opportunity to build a new school or renovate an existing school, that time is now.
Kevin McNabola is the chief financial officer for the city of Meriden and a member of the Orange Board of Finance.