Kansas Cities, School Districts Rush To Save Millions Before Federal Tax Plan Stops Them

Dec 18, 2017

Kansas school districts and municipalities are rushing to save millions of dollars before the Republican tax plan makes that impossible.

The tax plan eliminates advanced refunding bonds, a tool used to refinance bonds held by school districts and local governments ahead of schedule. Early refinancing can lead to millions of dollars in savings.

“It gave issuers a lot of flexibility as to take advantage of opportunities of marketplace low interest rates,” says Steve Shogren, a vice president with the investment banking firm George K. Baum & Company.

And rates are low — not as low as the historically low rates of 2016, according to Shogren, but still low enough that municipalities and school districts want to move before it’s too late.

That’s what motivated Wichita's Board of Education to give final approval on Friday for Shogren to refinance the district's bonds, which Shogren says will save about $4 million.

If Wichita’s school board did not refinance its bonds before the federal tax plan is enacted, it would have had to wait until 2020.

“And who knows what interest rates will be three years from now?” Shogren says.

The Liberal school district in western Kansas was planning on refinancing its bonds at the start of 2018. The new deadline forced the district to quicken the pace instead of waiting for the best deal.

What would normally be a two-month process was completed in 45 days, according to the district ’s finance director Jerry Clay. Before the sped-up timeline, the district was expecting to save a little more than $18 million. Instead, it will save $16.7 million.

"We couldn’t have waited to see if it would have turned out better,” Clay says. "We didn’t have that option anymore."

Beyond a hastened process, Clay says the district ended up saving less because of all the other school districts and municipalities looking to refinance at the same time.

“We flooded the market, so I don’t think we would have been able to get as good of an interest as we would have wanted to,” he says.

Shogren says Wichita also saved slightly less than was originally estimated for the same reason.

“It’s a supply and demand market,” Shogren says. “There are only so many dollars."

Shogren says the normal volume in the market is about $8 billion a week, but lately he’s seen that same amount in a day. But he says this is just a short-term boost, and keeping the status quo would be better for his business in the long term.

"Advanced refunding's been an important part of our market, and the elimination of that, I think, will hurt business in the future," Shogren says.

The Kansas Department of Education says it has not heard of an unusual amount of school boards looking to refinance, though it does not formally receive such data until the end of the year.

Joe Norton with Gilmore and Bell, a public finance law firm with offices in Wichita, says he has noticed more municipalities and school boards looking to refinance in response to the federal tax plan. He says both the city of Wichita and Dodge City are looking to quickly refinance municipal bonds.

Trey Cocking, deputy director of the League of Kansas Municipalities, says he has also noticed an uptick.

"I have had a conversation with several financial advisors across the state and their clients, namely cities and municipalities, are concerned," Cocking says. "They want to move forward and refinance ahead of time to remove uncertainty."

The League of Kansas Municipalities and the Kansas Association of School Boards have spoken out against the tax bill.

Shogren says the bonds are being eliminated by the Republican tax plan because it puts more money toward taxable investments. Both the House and Senate versions of the tax plan end the bonds, and the same is true for the final bill released on Friday

“The inability to do this, I think in the long run, will not be positive for taxpayers,” Shogren says.

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Follow Stephan Bisaha on Twitter @SteveBisaha.

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