By Stefanie Jackson – The Northampton board of supervisors passed a resolution Tuesday night to borrow $42 million this fall for the Northampton High School renovation and construction project and school energy efficiency improvements, amid uncertainty over a possible interest rate increase.
“We don’t want to miss this,” said Supervisor John Coker of the opportunity to borrow money before interest rates could increase dramatically. “We need this, and we have to do this. This is something that we can’t not do,” he said.
Northampton supervisors borrowed about $24 million in 2019 for the high school project, but $20 million was repurposed for more immediate needs at Kiptopeke and Occohannock elementary schools, including the replacement of failing water pipes and outdated HVAC systems.
A new geothermal HVAC system was installed at Kiptopeke this summer, and a geothermal HVAC system will be installed at Occohannock next summer.
That left county supervisors with no choice but to borrow more money if the Northampton High School project – now estimated to cost $50 million – is expected to proceed without delay.
The designs for that project – which will transform the current high school into a middle and high school complex, complete with a new cafeteria, auditorium, and two separate gyms – are expected to reach the 75% completion phase this fall.
The high school project should be ready to go to bid later this winter, with a contract awarded by June 2022, followed by a two-year construction period.
Coker was concerned that the “national deficit crisis” could lead to “insane” interest rates.
Finance Director John Chandler noted that interest rates may increase but are still at “historic lows.”
“So basically, if we’re going to do this, we ought to do it now and not later,” remarked Supervisor Betsy Mapp.
Alex Hock, of Davenport Investors, Northampton County’s financial advising firm, showed supervisors a side-by-side comparison of two borrowing scenarios.
If Northampton borrowed $42 million at 1.78% interest, the loan would cost the county more than $50.8 million in debt service over the 20-year repayment period.
However, if Northampton borrowed $42 million at 2.26% interest, or about a half a percentage point higher, the county would pay about $53.4 million over a 20-year period – nearly $2.6 million more.
Coker observed that a small interest rate increase makes a huge difference when such a large amount of money is borrowed.
Supervisors discussed the proposed resolution, which stated the county would borrow no more than $43 million at an annual interest rate not to exceed 5.5%.
Chandler explained that the high interest rate included in the document was a default, and a 6% interest rate would not have been unusual 20 years ago.
He recommended changing the highest interest rate the county would accept to 3%, and supervisors agreed.
The loan repayment schedule includes paying only interest for the first year.
Under both borrowing scenarios, Northampton would follow its policy of committing less than 12% of its annual spending to debt payments.
Davenport’s analysis of Northampton’s ability to cover its debt service made several assumptions about the county’s cash flow, including:
- Northampton will receive $1.2 million in fiscal year 2022 from the additional 1% sales tax that took effect July 1, exclusively for public school capital projects. The additional sales tax revenue is expected to increase 2.5% every year thereafter.
- The county will save money on energy bills due to the energy efficiency projects being done in the county government buildings and schools.
- A capital reserve fund will hold $3 million to help pay the county’s debt service as needed.
The $42 million will be acquired through Northampton’s participation in the Virginia Public School Authority’s pooled financing program and upcoming Oct. 19 bond sale, which will make the needed cash available to the county by Nov. 9.