District: Heavy bidding on $10M Knapp bond issue
Two bidders go down to wire on bond issue
LANSDALE >> The bond market is buying what the North Penn School District is selling. Director of Business Administrator Steve Skrocki reported Monday night on the results of a bond sale conducted earlier that day, and the stiff competition to lend to North Penn.
“You had two firms that were going, head to head, and the spread — you had to go out to four decimal points before you got the difference, the spread was so tight,” Skrocki said.
“When you see spreads that tight, you know there was good competition,” he said.
Earlier this month the school board authorized Skrocki and the district’s finance office to proceed with going to market on a $10 million bond borrowing, earmarked for renovations and upgrades to Knapp Elementary School.
Knapp had been a subject of discussion since late 2016, when parents raised concerns about high temperatures due to a lack of air conditioning, and the board evaluated several different systems and sought bids in 2017, before awarding a contract for air conditioning at two other schools in December 2017.
The parameters of that borrowing were spelled out in the motion approved on Oct. 18, and Skrocki reported back to the full board in their capacity as the board’s finance committee on the results.
The bond sale took place around noon Monday, Skrocki told the board, and resulted in a 15-year bond issue at an interest rate of 3.580410 percent, which he
said was about two-tenths or twenty basis points below what staff had estimated.
“There was excellent competition during the auction. We had two underwriters in particular that were battling it out, and submitting last-minute proposals, which was pretty neat to see,” Skrocki said.
A total of 59 bids were submitted by four underwriters before the bids narrowed down, and Skrocki said that means the total proceeds to the district will add up to roughly $9.7 million, with the rest going to the underwriter for fees.
Before going to market, Skrocki told the board, the district held a ratings call with rating agency Moody’s last week to try to seek an upgrade to its Aa1 rating.
That call produced both good and bad news.
“I guess fortunately, we were able to keep our Aa1 rating. Unfortunately, we didn’t get a bond rating upgrade,” Skrocki said.
Two main factors were cited by the ratings agency, he said, including the recent turnover on the school board itself. Five new board members were elected in November 2017, then two more incumbents and one new member resigned in the first half of 2018, leaving a board with only two of the nine members from this time last year still seated.
“Sometimes with turnover comes instability, and the debt markets don’t like instability,” Skrocki said.
The other factor the ratings agency cited was the district’s total fund balance and capital reserves, wen compared to the total annual revenues each year, a combination he said fell short of other school districts such as Downingtown, West Chester, and Tredyffrin-Easttown, which maintain higher ratios and have AAA ratings.
“We’re several points shy of some of those other AAA-rated school districts,” Skrocki said, adding that only seven districts in Pennsylvania are currently rated AAA and 12 including North Penn are rated Aa1.
During the Oct. 29 meeting, school board members saw various options for renovating Knapp and several other schools in the district, with costs for Knapp ranging from $20 to $40 million depending on the size of the project. Skrocki said the borrowing amount was set at $10 million in order to achieve bank-qualified status, which provides a better interest rate but can only be done once per calendar year, and said national and global economic trends have already causes rates to rise since a similar borrowing in early 2017.
“We’ve seen a significant increase in interest rates over the past year, since the second phase Montgomery (Elementary School) borrowing) was issued in January 2017,” Skrocki said.
That bond borrowing
produced a rate below two percent, roughly one and a half percent below the 3.58 percent secured for Knapp, he said, a difference caused by a combination of rate increases from the Federal Reserve and a longer 15year borrowing for Knapp versus ten years for Montgomery.
The board plans to hold a facilities forum public meeting on Nov. 13 to discuss several upcoming capital projects, including renovations to North Penn High School, the high school’s Crawford Stadium, and Penndale Middle School, and Skrocki said staff will aim to give the board as full a picture as possible.
“It isn’t just the Knapp project, it isn’t just the stadium project. They’re not silos, they all impact one another,” he said.
“The board is committed (to Knapp), otherwise they wouldn’t have approved the borrowing. The board is committed to something, they’re just hearing the options,” Skrocki said.
North Penn’s school board next meets at 7 p.m. on Nov. 13 in a special facilities forum at Pennbrook Middle School, 1201 North Wales Road.