In a refunding, an issuer (for Kentucky school bonds, this is typically the local school district’s finance corporation) refinances outstanding bonds by issuing new bonds. Refundings are generally done to replace existing debt with debt at a lower interest rate (and thus to achieve a net present value savings), although there are other reasons an issuer might refund outstanding debt. Proceeds from the new bond issue are either (1) deposited in an escrow account to pay the debt service on the outstanding bonds when it becomes due, which is referred to as an advance refunding, or (2) used to retire the old debt (usually within 90 days), which is referred to as a current refunding. The type of refunding the issuer undertakes depends on whether or not the bonds are callable.
Pursuant to KRS 157.622(6), when a district refunds bonds with SFCC participation, any refunding savings to the commission generated over the life of the bond is placed in that district’s account. Any funds accumulated in the district’s account may be used toward the next priority on the district’s facility plan.
The SFCC typically only approves refundings that are expected to produce a 5% net present value savings. For bonds issued under the American Recovery and Reinvestment Act of 2009, that threshold is reduced to 2.5%.