School districts can utilize various options to fund their expenditure. One of them is to issue bonds. Bonds are debt instruments where the school district borrowing is the issuer, and the entities lending the money are the buyers.
The structure of a school district bond is typically similar to other types of bonds. It includes a principal amount that the school is raising and an interest. The school will pay back the principal amount plus interest over time.
School districts can issue bonds to fund capital projects, meet working capital needs, or refinance prior debt. Capital projects are the primary use case for school district bonds. They include the construction of new school buildings as well as the repairing, reconstructing, altering, and equipping of existing buildings. Typically, bonds for financing capital projects are long-term (principal and interest payments are spread out over many years), unlike bonds for working capital. Such bonds are usually short-term as they are meant to cover temporary operating cash flow gaps.
In Illinois, there are several types of bonds a school district can issue. They include general obligation bonds (GOs), alternate revenue bonds, and working cash fund bonds. According to the School Code of the State of Illinois (the Code), a school district can issue a GO for any lawful project backed by the faith and credit of the district as well as the share of state taxes it receives. The Code, however, limits the amounts school districts can borrow for particular purposes.
Alternate bonds are also called double-barreled bonds. School districts can issue these under the Local Government Debt Reform Act and use any revenue source available as security for the bonds. However, the law requires them to prove that the pledged revenue is enough to cover 1.10-1.25 times the annual debt service costs for every year the bond remains outstanding.
Working cash fund bonds are specifically issued to establish or increase a school district’s working cash fund. They are backed by the share of taxes the school district receives and are also subject to limitations regarding how much a district can raise through them. Other types of bonds recognized by law in Illinois are limited bonds and debt certificates.
The procedure a school district must follow before issuing a bond varies, depending on several factors, including the type of bond and its intended use. For example, for working cash fund bonds and alternate revenue bonds, a school board must adopt a resolution declaring its intent to issue a bond and publicize this intent in a newspaper with general circulation in the district. The notice informs voters that the board will issue the bond unless it receives a petition signed by a certain number of voters within 30 days of publication. If it receives such a petition, it will subject the bond decision to a public referendum.
For GOs issued to pay teachers’ salaries or facility leasing fees, the bond issuance procedure is the same as above. However, GOs for acquiring new school sites, building new schools, or equipping and reconstructing existing schools can only be approved by voters in a public referendum. GOs for enhancing the life span and safety of facilities that house students through reconstruction are subject to the approval of regional and state superintendents. Voters do not decide on them.
Even after a school district has secured approval for its bond issuance, how it conducts the issuance can vary. Districts have different options for finding buyers and usually choose the lowest-cost option.
For example, a district can issue a bond through a negotiated sale where the district negotiates with a bond underwriter on the bond terms. After they agree, the underwriter buys the bond and markets it to investors. Alternatively, the district can market the bond through a competitive sale and accept bids from different banks before settling on one with a low-interest cost. Another issuance option is an outright direct sale to a bank, mutual fund, or pension fund.
