School district facility needs exist regardless of economic health. But in the face of ongoing volatility that has increased materials costs and inflation, it’s more important than ever for K-12 districts to move rapidly and carefully to maximize project financing before interest rate growth continues.
“What you’ll see moving forward is that districts pursuing bond-funded facilities projects will get less for their dollar than they would have even 6 months ago,” says Pete Perez, Boyd Jones’ Director of Education Services. “That’s because the cost of money increases in lockstep as rates go up, so a rate increase of 1% over a 30-year period really adds up.”
Rising interest rates mean districts will have to sell more bonds to achieve the same scope for projects they’ve already been planning but haven’t yet financed. That means time is of the essence—and now is still a great time to do a project. Choosing a skilled and budget-conscious construction manager to help stretch an already-tight budget can make the difference between preserving scope and slashing scope.
Let’s use a hypothetical $20 million bond-funded project as an example (see table). At a 2% interest rate, a district making $1 million in annual payments over a 20-year period would pay over $3.6 million in interest expenses over the full term, with approximately $16.4 million available for project scope. At a 3% interest rate, the cost to finance the same amount tops $5.1 million for the same $20 million project. At 5%, total interest amounts to more than $7.5 million over the 20-year term, leaving less than $12.5 million available for project scope.
“Think of how much more scope you fit into a project for another $3.5 million to $4 million,” Perez said. “In times like we’re about to see, annual interest rate payments will have a significant impact on how far project budgets will go.”
The tax-exempt privilege of bonds issued by public agencies such as school districts provides a small cushion in the current rising rate environment, since rates for these bonds tend to track lower than for taxable bonds. Unfortunately, it’s likely the door has shut on rock-bottom rates that have been the norm since the 2010s—and you can be certain that rates will only increase from here.
Unfortunately, it’s likely the door has shut on rock-bottom rates that have been the norm since the 2010s—and you can be certain that rates will only increase from here. The good news? Leading indicators of cost escalation for construction are slowing, including for school facilities: costs were up nearly 16% from June 2021 to June 2022, but escalation has shown signs of slowing in recent months, according to industry data.
Boyd Jones is proud to stand with our K-12 district partners and lead the way through these turbulent times. Our expertise from pre-bond planning through facilities construction helps districts maximize their funds and get the most for their bond-funded projects.
