Legislation in Kentucky would let school districts issue their own GOs

In a move to help local schools across Kentucky deal with rising inflation and soaring building costs, the Legislature has passed a bill to let the districts directly issue general obligation bonds.

“Construction inflation has created unprecedented infrastructure challenges for our public schools,” said Rep. Michael Meredith, R-District 19, who sponsored the bill. “HB 727 will provide additional financing options to help address these challenges. It will also improve administrative efficiencies by simplifying and streamlining the bond issuance process.”

The bill was passed by both houses of the state Legislature and has been sent to Gov. Andy Beshear, where it awaits his signature.

The bill was not controversial. It passed unanimously out of the House and okayed by the Senate last week. Supporters said it received a favorable response once the purpose of the bills was explained, and it didn’t meet any resistance.

“I commend my colleagues in the House and Senate for supporting this bill,” Meredith told The Bond Buyer. ”I would also like to thank Compass Municipal Advisors and Dinsmore & Shohl for their assistance and expertise in crafting the bill and addressing concerns along the way.”

The bill has three components.

The first — and most important — allows Kentucky school districts to issue GO bonds. Under current law, school districts in Kentucky can’t directly issue general obligation bonds to finance their infrastructure needs.

Secondly, it specifically allows them to sell the bonds directly to banks, which they can’t do now.

The third thing the bill does is to extend language from a previous House bill that speeds up the state’s bond approval process for debt issuance.

Currently, if a school district wants to issue bonds for capital improvements, it has to work through a separate non-profit entity. So, generally, school districts have set up finance corporations that will issue lease revenue bonds, which are secured by a lease between the school district and the finance corporation as well as by a statutory mortgage lien on the facility.

An appropriated debt structure for GOs has been traditionally used by cities, counties and other special taxing districts in the state. They have been able to issue GOs for about 30 years and the new bill would extend this same authority to local school districts.

The bill simplifies the process to allow the districts to issue GOs without the need for a finance corporation or for a mortgage. It also aims to lower borrowing costs through the general obligation pledge of the district.

“Our firm is grateful for the opportunity to push for legislative changes that modernize Kentucky school finance,” said a spokesman for Compass Municipal Advisors.

“HB 727, if signed into law, should lower borrowing costs for Kentucky school districts and will serve as a critical tool in dealing with cost overruns and other inflationary pressures,” the spokesman told The Bond Buyer.

“We are very appreciative of the efforts of Rep. Meredith, who sponsored HB 727, and others who advocated for the bill,” he said.
Kentucky has a total of 171 school districts and 1,477 schools, according to state data. Of the 171 districts, 120 are public school districts and 51 are independent districts, meaning they are run by local municipalities.

As of July 1, 2016, Kentucky had an estimated population of 4,436,974, a gain of 12,363 from 2015 and up 97,607 since the 2010 census.

The number of public school students totaled 638,236 for the 2020-2021 school year, the latest year for which data was available. This included 475,453 White students, 68,784 African-Americans, 50,554 Hispanics, 12,295 Asians, 908 Hawaiian/Pacific Islanders, 834 Native Americans and 29,545 of two or more races.

In January, Beshear proposed a $136.6 billion 2024-2026 biennium budget that focused on ways to continue the state’s economic rebound and provided new funding for education and infrastructure.

When the governor submitted his “education first” budget proposal, he included a $400 million increase in education spending over the next biennium.

That investment would have allowed for an increase in the Support Education Excellence in Kentucky (SEEK) formula.

SEEK is a formula-driven allocation of state-provided funds to local school districts for costs, including transportation and help for low-income and special needs students.

Last week, lawmakers approved a $128 billion spending plan and sent it to the governor who can sign it or use his line-item veto to reject this spending. The governor is a Democrat, while the Legislature is dominated by Republicans who have a supermajority and can override any vetoes.

Lawmakers approved an almost 3% increase in funding for school districts to $6.6 billion.

Beshear had urged an 11% across-the-board raise for school employees including teachers and was quoted in a published report as saying he was “disappointed that there is not mandated teacher raises” and funding for universal pre-kindergarten education in schools.

Last year, S&P Global Ratings upgraded Kentucky’s issuer credit rating to A-plus from A.

“The upgrade reflects our view of Kentucky’s commitment and execution to strengthen its budgetary flexibility and long-term financial stability, which we expect will continue in the current and future budget cycles,” said S&P credit analyst Anne Cosgrove.

The rating outlook was revised to stable from positive.

Also last year, Fitch Ratings upgraded Kentucky’s issuer default rating to AA from AA-minus and raised the state’s annual appropriation-backed debt and other commonwealth IDR-linked debt to AA-minus from A-plus. Fitch assigned a stable outlook to the state.

Moody’s Ratings rates Kentucky Aa3 and Kroll Bond Rating Agency rates it AA-minus. Both agencies give a stable outlook on the credit.

Issuers in Kentucky sold $4.3 billion in 152 deals last year, up 12.2% from $3.8 billion in 143 deals in 2022. In the first quarter of 2024, the state ranked 18th in bond volume, with issuers in the state selling $1.65 billion of debt, up from 33rd with $346 million in the same quarter last year.

Separately, the Kentucky State Property and Buildings Commission has $649 million of bonds on the calendar next week in a deal that will refund all of its outstanding Build America Bonds, provide new money for capital projects and includes a tender offer.

The Project 130 bonds will be priced via negotiation on April 10, according to an offering published on the state’s bond investor relations page. BofA Securities will be the lead manager on the deal.