California school and community college districts rely primarily on the issuance of municipal bonds and other municipal debt financings to fund the construction, renovation and modernization of school facilities. These municipal debt issuances are a crucial tool for the undertaking of capital projects and infrastructure improvements and are linked to the constantly changing interest rate environment. California's school and community college municipal bonds, like many other financial instruments, are impacted by the volatility of interest rates.  Interest rates can influence the issuance timing, pricing of debt, and future issuance plans.

Municipal bonds are debt securities issued by local governments, including school and community college districts, to raise funds for capital projects. Investors purchase these bonds with the expectation of receiving periodic interest payments, if current interest bonds, and the return of the principal amount when the bonds mature. At the time of purchase, interest rates for the bonds are locked in.

What causes interest rates to rise and fall? Factors that can generally affect interest rates include global events, economic data, and supply and demand. Investors are constantly reacting to global events and economic data, which in turn also has an impact on the demand for municipal debt. In uncertain times, investors may seek to invest in municipal debt since they are typically considered a “safer” investment. If demand is high for municipal bonds, investors generally are willing to purchase bonds at a lower interest rate and conversely if supply is high, investors are generally more attracted to bonds with higher interest rates. These factors cause the interest rate environment to constantly fluctuate, which affects the interest rates that California school and community college districts receive on the municipal bonds and other debt financings that they issue.

What effects do fluctuations in the interest rate environment have on municipal bonds and other debt financings? Typically, these fluctuations will affect the overall borrowing costs on debt issued by California school and community college districts. As interest rates rise, to attract investors, municipal bonds are typically sold with higher rates resulting in a higher overall borrowing cost. Inversely, if interest rates decline, municipal bonds are typically sold with lower interest rates resulting in a lower overall borrowing cost for a district. The potential shifts in overall borrowing costs for their debt issuances have an impact on the long-term planning for future debt issuances for districts.

When California school and community college districts are planning their general obligation bond programs, it is important to consider the potential rise, or decline, in interest rates, future assessed value growth and their targeted tax rates. If interest rates increase to levels higher than anticipated, districts may find themselves unable to issue their municipal bonds in a timely fashion to meet their capital needs. By carefully planning their general obligation bond programs, districts can ensure that they will be able to provide their students with the facilities needed to receive a quality education.

Keygent LLC provides municipal advisory services to California school and community college districts. If you would like to learn more, please visit www.keygentcorp.com or contact us at info@keygentcorp.com.