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How do school bonds work?

Likened to a home mortgage, a voter-approved school bond allows a school district to borrow funds. The Board of Trustees authorizes bond elections, and State law grants the Board the authority to sell bonds.

Response from “Ask Former Trustees – Clear Creek ISD Chapter”: Joanna Baleson, Ken Baliker, Jennifer Broddle, Bob Davee, Glenn Freedman, Ann Hammond, Charlie Pond, Page Rander, Dee Scott, Win Weber

How are Texas schools funded?

A school district’s tax rate consists of two parts:

a) Maintenance and Operations (M&O) that funds the General Operating Fund, which pays for salaries, supplies, utilities, insurance, equipment, and the other costs of day-to-day operations; and

b) Debt Service (Interest & Sinking or I&S) which can be used for a variety of special purposes; for example, to finance facility construction and renovation projects, to acquire land, and to purchase capital equipment, such as technology, and vehicles, such as buses.

Where does the I&S money come from?

From school bonds. Likened to a home mortgage, a voter-approved school bond allows a school district to borrow funds. The Board of Trustees authorizes bond elections, and State law grants the Board the authority to sell bonds. Prior to any bond vote, a volunteer citizen committee typically develops the bond package (uses of funds and cost estimates) for presentation to the Board of Trustees.

After voter approval, the district can sell bonds to investors who are paid principal and interest. Payout is limited by law to 40 years. The district sells bonds that mature at different times, so bond expenditures for items with a shorter lifespan are paid off before the purchase becomes obsolete.

This also allows the district to capture the lowest interest rates available. Importantly, bonds do not cost the district anything until they are sold.

A district secures a high bond rating thanks to the guarantee by the Texas Permanent School fund, its strong fund balance, and its record of financial management excellence. In addition, market conditions also affect actual interest rates.

Why are school bonds a good idea?

As state agencies, school districts rely on M&O to pay for the education of the Texas’ children. With voter approval, bonds allow a way to spread the cost of expensive projects across time without affecting the district’s normal educational operations.

Also, bond funds all stay in the district, as they are not subject to state recapture, fluctuations in revenue due to state mandates or other negative economic influences. In short, bonds save and protect taxpayers while allowing for ongoing facilities development and other capital expenses.

How do bonds work?

The sale of bonds begins with an election to authorize a specific amount—the maximum the district is allowed to sell without another election.

The school district sells them as municipal bonds when funds are needed for capital projects, usually once or twice a year.

The interest rate paid is based on the district’s bond rating: the higher the bond rating, the lower the interest rate to sell the bonds.

Principal and interest on the bonds are repaid over an extended period with funds from the Debt Service tax rate. (Source: TASB). Thus, there are two parts to any bond process: a) bond authorization that specifies the amount of bonds the district is authorized by the voters to sell, and b) bond sales that may occur over a period of time with the date and amount of each sale determined by the Board on an as-needed basis. (TASB).

Note that a district is not obligated to spend all the authorized monies but cannot exceed the authorization.

Can a school district use bond dollars for things not explicitly voted upon?

Yes, if…. And that is a big ‘if.’ The district can reallocate bond savings from a given project to another project IF the specified project is completed satisfactorily and IF the new project fits into the bond language and IF the board approves the allocation. For example, with board approval, funds for renovation for School-A could be used for School-B (assuming the first school’s project is done satisfactorily), but not for buying a new school bus. Again, reallocating bond funds can save money in the long run, reward efficiencies, and upgrade the district.

For more information on school bonds and the source for the Q&A, check the Texas Education Code.

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