School Bond FAQ
How are schools built?
School districts can build schools three ways: 1) cash raised though property taxes raised through the capital fund, 2) issuing general obligation bonds which require voter approval, or 3) issuing lease revenue bonds which require school board, but not voter, approval.
What is a bond?
A bond is a debt instrument issued by school districts to pay for new school construction, renovations and buying property for future schools. In Utah, a school bond can only be used for acquiring, improving, or extending any facility a school district owns. Just like any other borrower, school districts borrow money and make payments—usually annually.
What types of school bonds exist?
Two types of bonds typically are used to fund schools: general obligation bonds and lease revenue bonds.
General obligation bonds are debt backed solely by the credit and taxing power of the issuing jurisdiction. General obligation bonds are issued with the belief that a school district will repay its debt obligation through taxation or revenue from projects. No assets are used as collateral. General obligation bonds are authorized by voters through a bond election.
https://www.investopedia.com/terms/g/generalobligationbond.asp
Lease revenue bonds are supported by the revenue from a specific project or secured by a specified revenue source such as a municipal finance authority formed by a school district. Lease revenue bonds are similar to a mortgage for a homeowner, where the school is used as collateral. Lease revenue bonds are authorized by a school board, and does not require voter approval.
https://www.investopedia.com/terms/r/revenuebond.asp
How do bonds work?
Bonds are authorized for a specific amount. The school district sells the bonds when funds are needed for capital projects, usually once or twice a year. Bids are taken from interested buyers, usually large institutional investors, and are sold at the lowest interest rate offered. The rate is usually based on a district’s bond rating: the higher the bond rating, the lower the interest rate to sell the bonds. However, the State of Utah guarantees all school district general obligation bonds issued by Utah districts—which allows all district to take advantage of the State’s AAA bond rating. Principal and interest on the bonds are repaid over an extended period of time. General obligation bonds are paid for through the debt levy and the district’s debt fund. Lease revenue bonds are paid for through the capital levy and the district’s capital fund.
Will bonds affect my taxes?
Yes, bonds affect your taxes. Property taxes are increased to pay the bond principal and interest over the life of the bond—typically 20 years. General obligation bonds raise property taxes through the debt levy. When the bonds are paid off property tax owners receive a tax decrease. Lease revenue bonds raise property taxes through the capital levy. Property tax owners receive a tax decrease when these bonds are paid off. School districts like to sell bonds to property owners as “no tax increase bonds,” but Forbes Magazine will tell you:
Like many terms in politics, putting “no tax increase” in front of “bonds” is supposed to blunt the opposition to new taxes. But let’s be clear, there is no special category of bonds that school districts issue that doesn’t increase your taxes. No tax increase bonds increase your taxes.
How much debt does Alpine School District have outstanding?
The Alpine School District has $443,770,000 of outstanding debt and $538,847,876 of outstanding debt service including interest. Page 120 of the FY2023 Budget shows these amounts in a table and graph.
The debt and capital funds are vital for creation of schools and allow taxpayers and constituents to track the cost of schools. In 2017, Rob Smith, Director of ASD’s Business Services group showed the Orem City Council that Orem pays millions more into the debt and capital funds that it receives.
Why didn’t ASD include the debt and capital fund in their 2021 Orem only estimate? Could have they though the debt and capital funds are unimportant? No. Then why would experts in fund accounting exclude these critical funds? There is only one rational explanation. Today, Orem residents pay 20 percent, almost $19 million, of the funds into the ASD debt fund annually. About $16 million is used to pay down the principal and interest on general obligation bonds. The extra $3 million is a surplus that adds to the debt fund balance to pay down future debt. Of the $16M in principal and interest, Orem only received benefit for 11.5 percent of the debt–so approximately $8 million is a “contribution” to the district. Orem also contributes $2-5 (let’s say $3.5) million in surplus to the capital fund on an annual basis.
When the $5 million Orem deficit in the general fund is combined with Orem’s $11 million contribution to ASD in the debt fund and Orem’s $3.5 million contribution to the capital fund Orem provides a 8.5M million total contribution to benefit the ASD. That is why the ASD is so adamantly opposed to an Orem only district.
