Local projects fall victim to high bond rates

The public school system in Round Rock, Texas, needs several portable classrooms and a new storage warehouse to meet the projected increase in students next fall.

"Otherwise, we will have to put the kids out under the trees," says Mrs. Gwen Selby, director of business affairs for the school district.

But raising the money is proving difficult. And Round Rock is not alone: State and local governments across the United States are having similar problems.

Municipal bonds, a major source of financing for schools, sewer projects, housing, and parks, are commanding record-high interest rates. These rates are forcing many would-be borrowers -- such as school districts, municipalities, and counties -- to cancel or postpone scheduled projects.

This is causing severe strain in many communities.

"We've never seen numbers like this," says S. E. Canaday, manager of municipal bond underwriting for John Nuveen & Co. Inc., a major New York marketer of bonds. General obligation bonds, he points out, are averaging a record 9.2 percent interest nationally, compared with a high of 6.6 percent last year. (Municipal bond interest rates tend to be lower than other financial market interest rates because these bonds are tax exempt, which gives them a built-in advantage over other investments.)

State and local governments, as well as other public entities, are reluctant to pay these high interest rates for several reasons. Some states have legal limits on bonds and interest rates that are already below the market rates. Also, one major type of municipal bond -- revenue bonds -- rely on the income from a project to pay off these debts. High interest rates can make these projects uneconomical.

But the major restraint, according to John Petersen of the Municipal Finance Officers Association, is public officials' reluctance to pay the high rates for fiscal as well as political reasons. "If you are used to borrowing at 6 percent , you are going to be afraid to provide the political ammunition to your opponents borrowing at 9 or 10 percent," he said.

In Round Rock, school construction bonds were offered at 7.9 percent earlier this month, and no bids were received. Because of the pressing need for the new facilities, the school district has decided to scale back its issue from $9 million to $4 million and try again next month with bonds that will pay as high as 9.3 percent. It will cost the school district much more over the 20-year life of the bonds, but officials say they feel they must begin to accommodate the growing student population.

Some other communities feeling the effects of higher interest rates:

* New Haven, Ind., needs to expand and improve its sewer system before the state will allow it to issue new building permits. But a bond issue of $1.12 million offered in mid-February did not sell at 8.5 percent and also failed at 9 percent earlier this month.

Local officials are not sure what the next step will be. Although the city needs the project, there is concern that borrowing money at a higher interest rate will raise sewer rates higher than local citizens can afford.

* Champlin, Minn., wants to buy more land for parks and improve existing recreational facilities but has been unable to raise $770,000 in bonds. By state law, interest on municipal bonds in Minnesota cannot exceed 7 percent, and this is well below prevailing market rates.

* The Alta Loma school district in California has voter approval to build a new elementary school, but has not been able to sell bonds at 8 percent.

"About 20 percent of our students are jammed into temporary facilities. We're holding classes on the stages of the auditoriums," complains Floyd Stork, personnel director for the school district. Until bond rates drop to 8 percent or lower, "we'll just have to cope," he says. Under state law, the school district cannot sell bonds above 8 percent.