Tight credit market is causing public bond conundrum

Public agencies are feeling the pinch caused by the nationwide credit crunch, according to a longtime financial advisor who specializes in public financial consulting.

Susan Musselman of Mount Vernon, Wash., a principle in the firm Dashen Musselman, said tight credit is making it hard for her clients to sell bonds for new buildings. Musselman's firm represents the state Treasurer's Office, most of the state-supported universities and several counties, including Yakima, along with smaller taxing districts.

Most are facing a decision to sell bonds now -- at higher interest rates -- or wait with the knowledge that the extra time will drive up costs with no guarantee the markets will be stable when they do decide to sell.

"You have a clear imbalance of supply and demand," Musselman said. "There are more bonds in the market than there are people willing to tie up their money."

Local school districts are no exception.

The Naches Valley School District, for example, was hoping to refinance $705,000 in bonds for next year. The money is a part of an $8.3 million bond approved by voters in 1992 to build a middle school and remodel a gym.

The interest rate initially fluctuated between 5 percent and 5.5 percent, but was lowered to roughly 4.6 percent when the bonds were refinanced in 1998, said Bic Hall, business manager for the school district.

She was hoping to refinance again to about 3.3 percent, but now believes her chances are slim.

"With a situation like this, it's tough," she said. "I haven't talked to our bond broker personally yet. Every week I get e-mail saying 'hang in there.'"

She said the nation's financial crisis "hit like a tornado." Keeping the district's existing interest rate may be a bargain, she said.

"We were planning this for months, and then the market crashed," she said. "I've never experienced anything like this before in my life. We'll cross our fingers and hope for the best. But we need to be realistic."

Musselman said a shortage of available funds is sending interest rates rising. Rates have risen from 4.25 percent this summer to 5 percent now. The difference in overall cost to the seller can be dramatic. A $40 million bond issue for 20 years at 4.25 percent will cost taxpayers slightly more than $3 million a year.

An interest rate at 5 percent increases the annual service on that debt to $3.2 million. Over the 20-year life, the additional cost is $4 million.

"The immediate impact will be government entities delaying capital projects," she said.

The economy is also a concern for the West Valley School District, which is asking voters to approve a $28 million bond levy in March to build two new elementary schools.

Superintendent Peter Ansingh is concerned about how the economy will affect voters' perceptions of the project, but said waiting will result in higher costs.

In terms of bond interest rates, he said a lot can happen between now and next summer -- when the bonds would be sold.

"We absolutely have to make our case with the public that this is something we need," he said.

Yakima County Treasurer Ilene Thomson said no local districts for which she invests funds have had trouble obtaining financing as yet. A private placement to a bank netted the Granger School District $730,000 to purchase property. That sale closed Monday.

A private placement occurs when the seller seeks bids from local banks to purchase bonds that are for relatively small amounts like the Granger project.

Not everyone has been stung, though. Yakima city officials said they got their needs in the bond market taken care of earlier this year, and don't expect much effect from the credit crunch.

"If we were going out today, it could be an interesting question," said Bill Cook, the city's community and economic development director.

Musselman, who has been advising local governments for 26 years, said she has never seen a situation like this.

"There is an expectation that even when we are back in balance the market will come out differently than when it started. When it does get back in balance, we don't know what it will look like," she said.

* Herald-Republic reporter Chris Bristol contributed to this report.

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