Rising interest rates hit new school cost

Rising interest rates are impacting the projected cost of Evanston/Skokie School District 65’s new 5th Ward School.

On March 8, in response to emailed questions from Evanston Now, the district’s chief financial officer, Raphael Obafemi, said the estimated interest rate for the new building would be 3.36%, including a 0.75% cushion to account for raising interest rates.

Just under week later, at Monday’s school board meeting where the school board approved plans for the new school, the district’s Raymond James financial advisor, Elizabeth Hennessy, pegged the projected rate at 3.55% with just a 0.5% cushion.

Obafemi says the last time the district issued bonds, in October 2021 to refund an existing bond issue, the new bonds, with a 10-year payback period, had an interest rate of 1.48%

Then on Wednesday the Federal Reserve approved its first interest rate hike in more than three years, of 0.25%, and indicated it plans a series of six more hikes over the rest of this year in an effort to address spiraling inflation without torpedoing economic growth.

The board Monday agreed to have Zions Bancorporation, a Salt Lake City, Utah, based bank, finance construction of the new school and lease it to the district with the lease certificates to be issued no later than this September, at an interest rate of no more than 5%.

Based on Monday’s projections from Raymond James, a new $40,000,000 school, funded with lease certificates, will drain $3.248 million from the district’s operating funds each year for 18 years starting in 2025, after the school is in operation.

The district expects to find $3 million of that cost from savings achieved by reducing the number of students who are bused once the new 5th Ward school is open.

The district now spends about $6.25 million a year on busing. It will still need to bus students who face traffic hazards on their route to school.

But with boundaries redrawn for the new school, fewer students will be bused under a state mandate that requires busing for students living more than 1.5 miles from their assigned school.

Hennessey, of Raymond James, told the board the district is far below its state-imposed debt limit cap of 6.9% of equalized assessed valuation.

With $64.7 million in bonds outstanding it could issue up to $196 million in additional general obligation bonds before hitting the cap — but it would have to seek voter approval to do that.

The lease certificates, while they count against the debt cap, do not require voter approval.

And given that voters rejected a bond referendum to build a new 5th Ward school in 2012, the board sought to avoid having to ask for voter approval this year.

Hennessey told the board the lease certificates “may have a slightly higher interest rate than general obligation bonds,” but that it would likely be no more than 0.10%, or a cost of no more than $465,000 spread over the 20 years of debt service.

She said at least seven other Chicago-area school districts have used lease certificates for new construction in recent years, with the closest example being Skokie-Morton Grove School District 69, which used it for a new middle school building.

Obafemi says that once the lease certificates are paid off the district will gain full title to the new school building.

The district has yet to develop a plan for how to address a consultant’s report that indicates its existing school buildings need $188 million in upgrades to address structural issues and aging building systems.