City, school district plans rely on bonds.

A few weeks ago it would have cost four pennies to borrow a dollar, now it could cost five or six.

It’s a small increase, but given the multimillion-dollar projects in the works by the City of Bainbridge Island and Bainbridge Island School District, those pennies add up to tens of thousands in additional debt payments.

The volatility in the markets has affected municipal bonds, making it hard to secure low-interest rates. A freezing of liquidity in the municipal bond market is making it harder to sell bonds off to investors as well, which is why interest rates are increasing to entice investment. The difficultly in the municipal bond market was highlighted in the week ending Sept. 26, when only three new bonds were sold – down from an average of more than 100 per week.

There are also concerns that the injection of money by the federal government into institutions will increase inflation, which can erode interest payments made by municipalities such as the city or school district. In the long term that makes bonds less attractive to investors who expect some return on their money.

That proposition is worrisome for local taxation districts that are relying on bonds to support future and ongoing projects.

“There were some articles in the New York Times and Bloomberg saying the availability of credit is frozen, mortgages, loans credit swaps all of those things and even the bond market was suffering,” said Councilor Chris Snow, chair of the Finance Committee. “Later I saw some stuff available for bonds but at a percentage point higher than what we paid at the last time… that was days ago, so things are moving fast.”

The city needs about $6.8 million to pay for the upgrade of its wastewater treatment plant – contracts for the project have already been approved. The city was expected to go out for the bonds to finish the project in January or February of 2009. In the city’s financial capacity analysis, a $4.5 million utility bond was expected in 2009.

“If you were out there today, you could still float a bond but it’s challenging and costly,” said city Finance Director Elray Konkel. “Our financial advisor is telling us, if you don’t have to do it this week, then don’t and prepare to be flexible. The market may return by then (early 2009) or we may have to pay dearly for borrowing money and should consider other options.”

City Council members and city administrators met with the financial advisor Steve Gaidos Tuesday afternoon to discuss other financing options. Gaidos, who has advised the city on previous bond measures, could not be reached for comment before deadline.

If the council and city push through with bonds that have higher interest rates, additional debt service on bonds would be leveraged on downtown utility users.

“The interest rate is important, that is, money we have to pay out of revenues, because if it is utilities it would be passed on to the rate payers,” Snow said. “If we went for councilmanic bonds (debt service) would come out of tax revenues – which is constrained. We will have to make a decision, how much more can we pay without taking on a debt burden that we wouldn’t be able to service.”

The Bainbridge Island School District is targeting a March election to bring a $40-to-$46 million capital bond proposal to voters.

The bonds would pay for the construction of a new Wilkes Elementary School, along with district-wide maintenance and improvement projects.

School board President Mary Curtis said the district is forging ahead with its planning, and expects the bond market to improve before the election. Waiting on the bond proposal would delay the reconstruction of Wilkes as well as Blakely Elementary, which would be next in line for rebuilding.

The district is projecting that the Wilkes bond proposal would result in a tax rate of $1.15 per $1,000 assessed property value for the district in 2010, when the district would otherwise collect $0.96 for existing debt.

If the bond market takes a serious turn for the worse, Curtis said the district’s backup plan would include putting a capital levy on the ballot to shoulder some of the burden for Wilkes reconstruction.

At a school board meeting last week, board members advised that the district’s Citizen Advisory Committee delay its survey regarding the bond by a month, in the hopes that the financial picture would be clearer.

“Everyone’s crystal ball is a little hazy right now,” Curtis said.