State economists raise interest rate projections for school construction bonds

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The increase in interest rates might not matter, however, as the Legislature has used PECO bonds in just one year since 2011.

State economists raised their estimates of interest rates on Public Education Capital Outlay (PECO) bonds for the next six fiscal years, until 2029.

For the 2024 fiscal year, PECO bond interest rates are projected to be 4%, up from the 3.5% estimate economists forecast in December. That is projected to rise to 4.25% in 2025 and remain at that rate through at least 2029.

In theory, the hike in rates would increase the cost to build schools and pay for maintenance on existing education structures. But since Rick Scott became Governor in 2011, the Legislature has opted not to use bonds to pay for PECO projects, with the exception of 2016, when it used $275 million in bonds.

Scott had an antipathy for any government debt, and the Legislature has continued that trend now that Gov. Ron DeSantis has taken over the executive branch.

Still, the change is reflecting the dour national economic environment when it comes to inflation and interest rates.

The Federal Reserve has increased its core interest rate from 0% at the start of the year to 2.5%, and could increase it further to suppress inflation, which has skyrocketed to 9% — a level not seen in 40 years. The rate could rise higher to control inflation, even as the U.S. enters a recession, as the economy shrank by 0.9% in the second quarter — the second straight quarter of negative growth.

“The adopted interest rates take into consideration current benchmark rates and market volatility. The long-term interest rate is used for bond issues with maturity structures of 20 years or more,” a summary of the estimates posted by the Office of Economic and Demographic Research on Friday reads.

The increased interest rates could make the Legislature even less likely to borrow PECO funds, even as the gross receipts tax, the revenue source for PECO funds, has dwindled. In the last fiscal year, the portion of gross receipts taxes that went to PECO was $243.7 million, far below the $478.6 million in 2008, before the Great Recession.

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