Three quarters of a percentage point doesn’t sound like much until it is applied to millions of dollars and a 20-year repayment schedule.

In his five-year forecast issued in July, City Finance Director Peder Schaefer applied a 4.5% interest rate on school bonds including the $350 million bond to build new Pilgrim and Toll Gate High Schools.  Following the sale of $45 million in school bonds last week, of which $27 million will go toward paying for design and engineering costs of the new schools, Schaefer may need to revise his forecasts. The remaining $18 million is to be spent on ongoing renovation elementary and middle school projects.

Five institutions bid on the bonds that were sold through the Rhode Island Health and Education Building Corporation (RIHEBC) in order for the city to be eligible for state reimbursement. Bids ranged from a high of 3.898002% made by Janney Montgomery Scott LLC to a low of 3.813670% from KeyBanc Capital Markets.

The difference between the 4.5% projection made in the five-year forecast and what the bond sold for amounts to a reduction in costs to the city of $700,000 to $800,000 in interest payments a year for 20 years, Mayor Frank Picozzi said Monday.

While it doesn’t have a direct impact on budgets for school renovations or the new high schools, as Steve Gothberg, director of school construction, observed Monday, “It’s good news for the city, good news for schools and good news for taxpayers.”

School financial officer Brandon Bohl echoed Gothberg, adding that the lower than projected rate translates to “less financial stress on the city.”  What it means down the road, he explained, is less pressure on the taxpayer and the freeing up of funds for other things.

Even before going to the market for the sale, in view of recent financial trends Schaefer was optimistic the rate would drop below what he forecast earlier in the year. He was also optimistic that the overall forecast would be brighter. In particular he pointed to the growth in the tax levy resulting from new construction of homes and businesses and a forecast of $1.5 million in new revenues in Fiscal Year 2025 and $3 million in FY 2026 from speed and intersection cameras.

In a revised five-year forecast made Aug. 9 to the mayor and sent to the City Council, Schaefer writes “there has been a modest improvement on the inflation front since last year’s report, although interest rates remain high (especially short-term rates).”  He goes on to say the higher rates are a benefit to city interest earnings, “but works to our disadvantage with borrowing costs on long-term debt associated with school construction.” 

In preparing the five-year forecast, Schaefer offered best and worse case scenarios.  In the best case, he assumed a growth in revenues of 4% annually and modest payroll growth. The worst-case assumes revenue growth of 1% annually with lower increases in state aid and health insurance costs escalating to 4%.

In his report Schaefer points out because of the phasing in of new debt for the high schools the full impact of the $350 million school bond will not be felt until FY 2029.  He says under the best case scenario that assumes a 4% per annum growth in the tax levy resulting from new construction there would be a surplus of $9.4 million in FY2029. Under the worst case scenario “significant annual deficits reaching over $35 million would result in FY 2029 even after the benefit of state incentives.”

Mayor Picozzi remains hopeful of getting the state to increase its pay as you go reimbursement for school construction that would dramatically reduce city borrowing costs. While the state will reimburse up to 55% of Warwick school construction costs, only a small portion of those expenses are repaid when incurred. The bulk of the reimbursements come once the full project is completed. Since many municipalities are in the process of refurbishing or building new schools, Picozzi is hopeful of the Rhode Island League of Cities and Towns successfully lobbying for legislation to increase pay as you go reimbursements.

The mayor anticipates the schools would seek an additional bond sale for the new schools in March of next year once construction begins.

Who’s to say what interest rates may be then, but given how the market responded to the sale of $45 million in bonds last week, there’s hope that interest rates could be lower yet.