With indications that interest rates may start rising, Districts have been given the option of financing their projects through the Dormitory Authority of the State of New York (DASNY). Here are some considerations.
You have worked very carefully with your architect and municipal advisor to ensure that you have maximized the building aid on your project, and confidently submitted your plans to Facilities Planning. So, the question is, have you done everything you can to minimize your local share? The answer is no, you still have an important financing decision to make to manage your aidable interest costs.
Making this decision starts with an understanding of how building aid is paid. The formula is your selected building ratio times your assumed amortization. Assumed amortization is calculated by the State as the total aidable cost financed over 15 years at the statewide average interest rate. This is regardless of how you choose to finance your project, or how much of the cost is paid for through a capital reserve, or other source. Thus, the closer you are to having your actual debt service costs align with your building aid payments, the closer you are to minimizing the local share of the capital project.
Traditionally school districts have financed their capital projects by issuing bonds. The interest rate on those bonds is a function of the district’s credit rating and the prevailing interest rate market. If the interest rate is higher than the State prevailing interest rate, then the excess is not aided, increasing the local share.
In recent years, districts have been given the option of financing their projects through DASNY. Under this arrangement, DASNY creates bond pools through the issuance of their own bonds, and these pools are used to finance district projects. This arrangement has been advantageous to districts with low credit ratings, as they are able to obtain better interest rates as a pooled borrowing.
It also offers a potentially significant advantage as DASNY users are guaranteed that the statewide average interest rate will be replaced with their DASNY borrowing rate, thus eliminating the risk of non-aidable interest. This advantage is potentially offset by the DASNY fees generally being significantly larger than local bond issuance costs.
With our long period of low interest rates showing signs of coming to an end, the safe harbor of DASNY borrowings being at the DASNY rates and not the statewide interest rate may be sufficient to offset the higher fees. This is a good conversation to have with your municipal advisors as you prepare to move into the long term financing phase of your capital project.