Bond market upheaval could impact borrowing costs for Western Pa. schools, municipalities
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It’s all about timing.
School districts and municipal authorities that already floated bonds for major construction projects are counting their blessings for not being caught up in the bond market’s current chaos.
But those with pending projects not yet supported by money from bonds are watching the market closely, eyeing key interest rates that could make bonds more expensive for entities that rely on them.
“We have no immediate borrowing needs at this time, thank goodness,” said Eric Kocsis, business manager for Ligonier Valley School District.
Since President Donald Trump announced sweeping new tariffs, many of which he has delayed, the stock market has dropped dramatically and investors have been dumping U.S. Treasury bonds in big numbers.
Upheaval in the bond market can have widespread impact on everyday Americans.
“Basically, every long-term interest rate is tied to the 10-year Treasury bond yield,” said Gus Faucher, senior vice president and chief economist at PNC Financial Services Group.
When that yield goes up, interest rates go up on mortgages, credit cards, car loans and other types of borrowing — including bonds floated to help pay for critical capital projects.
The 10-year U.S. Treasury bond yield closed at 4.497% Friday, up nearly 13% from a week earlier when the yield closed at 3.991%.
“These higher bond yields are a significant drag on economic growth,” Faucher said.
Such an increase means schools or governments would have to pay significantly more interest on any new bonds.
That would be the case for school districts such as Plum, which is planning a multimillion-dollar school renovation project.
District officials did not return messages seeking comment for this story, but the district has plans to borrow up to $30 million over three years. The district’s plan called for floating three bonds at $10 million each. One is completed, but that leaves the district two more bonds, making it vulnerable to the current fluctuations in the bond market.
Higher interest rates on future bonds would mean greater debt for the district.
The same could be true for Freeport Area School District, which is contemplating major renovations to its high school.
The district was set to decide in May on one of two options for the work. One would require the district to borrow up to $55 million, and a scaled-back option would require the district to borrow a little more than $25 million.
Freeport administrators did not return calls for comment on how bond market volatility could affect those plans, but school board member John Haven said he was not concerned about the bond market in regard to the renovation plans.
Instead of taking out a loan from a bank, school districts, water and sanitary sewer authorities, and municipalities routinely borrow money for big projects by creating a bond. It’s a vehicle by which investors can put up the money a government entity needs for a project with a guaranteed return on investment backed up by the government’s taxing power.
Because of that guarantee, interest rates on bonds almost always are lower than a traditional loan and they don’t vary based on market conditions.
Hempfield took out a $28 million general obligation bond in 2022 to fund various infrastructure and public projects throughout the township, including its Weatherwood Community Park and Hempfield Municipal Complex — a $16 million project off Weatherwood Lane near Route 30 and Mt. Pleasant Road.
But because the township has a fixed repayment for this bond, it is not affected by a fluctuating market and interest rates, said Hempfield Township’s manager, Aaron Siko.
“The market volatility is something that we keep an eye on,” he said, “but our investments are planned investments of the long term, so we don’t rely on those investments to balance our budgets.
“The debt for us doesn’t change,” he said.
Ligonier Valley School District is looking forward in eight years to paying off the remainder of an $18.3 million bond issue from 2018.
“The rates are pretty good on it. It hasn’t been advantageous for us to refinance, even before this big mess,” Kocsis said, referring to the current bond market volatility.
Even before Trump’s push for tariffs, bond rates were creeping up.
Westmoreland County’s municipal authority has multiple sets of bonds it’s repaying for work to improve its water system.
The $184 million in bonds the authority floated in 2016 carries an interest rate of less than 3%. The $75 million worth of bonds the authority floated in March, however, carries an interest rate of 4.33%, according to authority Business Manager Brian Hohman.
“We didn’t borrow as much as we would have (this year) if the rates were favorable, but we have to do capital improvements,” Hohman said.
It isn’t only borrowing that affects public entities when it comes to the bond market.
It’s also used as an investment tool when the money needs to be safeguarded from fluctuations in the stock market for things like employee pension funds.
Declines in the stock and bond markets could have an impact on Westmoreland County’s pension fund, Finance Director Meghan McCandless said, but details won’t be released until the board’s next public meeting of the county’s retirement board on May 19.
The fund saw increases of more than $32 million in the third quarter of 2024 because of strong market conditions, and last October pension managers reported the fund was approaching its historical high-water level at nearly $690 million in assets.