Board of Education Votes to Authorize the Issuance of Green Bonds for the School District
At the October Action Meeting the Board of Education approved a number of bond transactions designed to fund necessary capital improvements and refund certain bonds to achieve savings.
The District generated $530 million for its Capital Improvement Program, which will enable a more comprehensive approach to work on the District’s facilities. A portion of the funds will also be utilized to increase internal project management capacity, and contract with an outside firm to assist with selection and sequencing, cost estimation and budgeting and project scheduling and logistics.
“These funds will allow us to address capacity issues that we have, so that we’re able to better manage the many projects that we’re working to complete in our schools,” said Dr. William R. Hite, superintendent of The School District of Philadelphia.
A portion of the bonds ($30 million) were issued as Green Bonds, the proceeds of which are dedicated to energy efficiency projects at facilities across the District. These funds will be utilized to support the Guaranteed Energy Savings Act program recently approved by the Board, which is designed to improve learning environments, reduce environmental footprints, and lower operating costs through more efficient lighting; boiler replacements; cooling infrastructure improvements; temperature control systems; and, heat and ventilation improvements.
The School District benefited from its two notch bond rating upgrade by Moody’s last December, restoring the District to investment grade for the first time since 1977, and a two notch upgrade by Fitch in early October. The combination of improved finances and a low interest environment, along with the efforts of the Finance Team, resulted in a Total Interest Cost of 3.086%, as compared to a 3.7% rate for its March 2018 bond issuance. When considering just the District’s improved fiscal situation, the credit spread was 59 basis points, 13 basis points less than the 2018 issuance, resulting in over $9 million in interest savings. When compared to the District’s issuance just three years ago, when the spread was 125 basis points, this transaction resulted in a $50 million interest savings.
The District took advantage of these conditions to refund nearly $340 million in existing GO bonds and State Public School Building Authority Lease Revenue Bonds. Combined, these refundings resulted in over $27 million in total savings through 2034. “We had a strong positive response to all of our transactions with over $6 billion in orders for $1.1 billion in bonds,” said Uri Monson, Chief Financial Officer for the School District. “ The result is lower interest costs so we can invest more of our funds in meeting the core mission of educating the students of Philadelphia.”
The District refunded its short term Tax and Revenue Anticipation Notes (TRAN) and issued its first public TRAN in a decade. With ratings of MIG 1(Moody’s) and F1+ (Fitch), the TRANs priced at a yield of 1.42%, well below the budgeted figure. The District was also able to manage its cash flows so as to reduce the principal borrowing amount by $25 million. The net result is a savings of over $7 million from the amount budgeted in the current fiscal year.
The Board also provided the authority for the School District to unwind its last remaining basis swaps. These interest rate swap agreements constitute the biggest risk to the District’s debt portfolio, as noted by both Moody’s and Fitch. The current interest rate environment has provided a unique opportunity for the District to unwind these swaps and receive a cash payment to do so. In addition, since the execution of the swaps the District has been a net receiver of more than $28 million.