By Staff
Several members of the community have asked about the interest costs when you borrow $105 million dollars over a long period of time. The simple answer is a lot. Not unlike the 30-year mortgage on your house, the interest you pay, depending on the interest rate, usually is a little more than the principal you borrowed. In our case, the interest for the bond issue is a little less than the principal because we estimate to sell the bonds for an average interest rate of 5.0 percent. Until we sell the bonds we won't know the exact amount, but we are still in a good interest rate market and might even beat the 5.0 percent budgeted amount. The estimated cost of the interest on $105 million bonds over 32 years is $102.6 million. It is our plan to make some of these bonds available to citizens in the community so they can invest in the future of our district.
We don't live in a rich school district. We don't have a nuclear power plant or steel mill or auto factory in our district. If we did, the millage rate would be less, as a big plant would pay for a large portion of our building project. The proposed project is an aggressive way to deal with most of the needs addressed in the facility study. In many states, the state will help pay for new school buildings and renovations. Unfortunately, Michigan is not one of those states.
Because we don't live in a rich district, the State of Michigan does have a program to help us even out our millage. This is called the School Loan Revolving Fund (SLRF). This program is designed specifically for districts like ours that don't have a “sugar daddy” to help pay for buildings. What happens is that the SLRF will help cover the high payments at the beginning of the bond issue and then we pay the state back, with interest, over the last 10 - 15 years of the bond issue. This helps even out our payments, much like an equal payment plan for your utilities. The state will be lending us tens of millions of dollars and not expect any pay back for the first 20 years. This will cost additional $70 million dollars in interest. The length of the millage is expected to be from 32 to 37 years. The actual term will depend on the amount of growth our community experiences.
If the bonds were to sell at the current interest rates, and our growth continues at the recent 5 year average, the bond interest would be approximately $88 million dollars, and the SLRF interest would be approximately $10 million, and the millage term would be 30 to 32 years.
The only way to finance a project this large, in a community like ours, is to use bonds and the School Loan Revolving Fund. Ask any large business owner or bank and they will tell you this is the best way and the cheapest way to structure our debt. No one likes to pay interest and since we live in a state that doesn't provide any help for building projects we have to borrow the money. The fact remains that the bond issue is asking for 7 mills, this includes all of the construction costs and interest payments.