Next week will mark two years since voters on the central Kenai Peninsula overwhelmingly supported three large bond initiatives on the Oct. 4, 2022 municipal ballot.
In Soldotna, 67% of city voters approved a $15 million bond initiative to build the Soldotna Field House. Likewise, two-thirds of residents served by Central Emergency Services supported a $16.5 million bond for a new fire station. And, 58% of all borough residents supported a $65.5 million bond to address deferred maintenance at Kenai Peninsula Borough School District facilities.
Now, those projects are well under way, and millions of dollars in bond proceeds have been spent. But how does municipal bonding actually work? Both the borough and the City of Soldotna issued their bonds to the Alaska Bond Bank Authority. Ryan Williams is that bank’s executive director.
“The bond bank was created in 1975,” he said. “It's a state agency, and its mission is to provide lower cost of capital for credit-worthy, authorized borrowers to access the program to allow them to do their capital projects at a cost that they could probably not achieve on their own.”
When voters pass a local bond initiative, they give a municipality permission to incur debt to pay for a project. By using the Alaska Bond Bank, the entity taking on debt benefits from lower loan interest rates as well as the bank’s high credit rating and expertise.
It’s not a given, though, that a municipality wanting to work with the state bond bank will be able to do so. For initiatives like those passed in 2022, Williams says securing voter approval is just the first step in the process.
To work with the Alaska Bond Bank, the borough and City of Soldotna first had to apply. The bond bank’s financial advisor then does a credit review of the applicant before forwarding the request on to the bank’s board.
If the board approves the application, Williams bundles it with debt from projects around the state to sell on the national market.
“I am tasked with pooling together all of the approved applications into a larger bond issuance,” he said. “And so, all the communities involved in the bond issuance – it's better for issuing bonds, because there's more of an economies of scale when you combine a bunch of underlying loans into one larger issuance.”
Once an applicant receives money in the form of bond proceeds, it can start spending. Borrowers have to pay the lender back, although the repayment timeline varies. Williams says it often reflects the lifespan of what’s being built.
“It depends on the project,” he said. “So, like, if you're building a new building, maybe it's 20 to 30 years. If you're building a hydroelectric project, it's going to be a bit longer of a life.”
In some cases, a municipality may break up a large bond. Soldotna, for example, only sold $10 million worth of bonds to begin with. That’s even though they had permission to sell up to $15 million. The city still isn’t sure it needs all $15 million to build the field house, so it’s a way to avoid taking on more debt than is necessary.
Municipalities also sometimes take advantage of arbitrage while completing a bond project. Arbitrage refers to the difference between what a municipality is paying in interest on the debt it’s incurred and what it’s earning in interest from money that’s been reinvested, usually in federal assets.
“You have just funded a project fund with tax exempt bond proceeds, and while you're building your project, you would typically reinvest that project fund and earn interest on amounts that you haven't spent yet,” Williams said.
Last week, the Federal Reserve cut interest rates for the first time in four years. That means local debtors stand to make more money on their reinvestments.
The Kenai Peninsula Borough, for example, has reinvested some of the bond proceeds it received for the school maintenance projects.
Since reinvesting the money last year, the borough’s made about $800,000 in interest. There are strings attached, though. In order to keep making money, the borough has to spend 85% of its bond proceeds within three years. Otherwise, it has to pay back new interest profits to the Internal Revenue Service.
As of the end of last fiscal year, the Kenai Peninsula Borough still owed more than $120 million to the Alaska Bond Bank Authority across all debts. It was the bank’s second largest borrower behind the City and Borough of Sitka. The City of Soldotna still owed more than $10 million.