In the face of the national credit crisis, some government officials in Skagit and Island counties are growing concerned that higher interest rates on bond issues will make it more expensive to finance construction projects like schools and fire stations.

The municipal bond market has slowed to a crawl over the past two weeks, making it difficult for some government agencies from New York to Montana to obtain money for upgrades and new construction. A shrinking pool of investors has bumped interest rates up and made it hard for some cities, such as New York City, to get financing.

“Yes, the bond market is still operating. Is it operating as efficiently as it was a month ago? No,” said Jon Gores, senior vice president of D.A. Davidson, the bonding agent for Anacortes and Burlington-Edison School districts. “If you don’t need the money right now, you probably want to wait, but it might be riskier to wait.”

The most measurable impact of the slow bond market on local governments is on decisions made by the Port of Anacortes and the Island County Commission. Port officials postponed refinancing an existing bond issuance, according to the port’s bond agent.

The Island County commissioners delayed bonding for a $5 million replacement of the county’s annex on Camano Island, but that decision was more because of the drop in real estate tax revenue that the county uses to repay such debts, said Elaine Marlow, Island county budget director.

“Our commissioners have historically been very conservative and averse to debt if they can avoid it,” Marlow said.

It’s the possibility of higher interest rates that worries local government officials planning municipal construction projects. Steve Hoglund, Anacortes finance director, was among municipal officials who addressed their concerns to U.S. Rep. Rick Larsen at a community meeting Wednesday in Mount Vernon.

“We have, currently, got a water treatment plan project in the design phase now,” Hoglund said of Anacortes’ proposed $36 million plant upgrade. “… Our intent was to issue municipal bonds for the funding of that. I am concerned what the availability of that funding will be and what the cost of that funding will be.”

In Skagit and Island counties the bond financing woes hitting other communities have not had a significant impact, although some local officials remain wary of what may be coming.

“I think it’s too soon to know,” said Patsy Nelson, Sedro-Woolley finance director. “A lot of people are buying bonds and gold now, as opposed to stocks. It’s just kind of a wait and see.”

If Sedro-Woolley voters in November approve a $2 million bond issue proposal to build a fire station and purchase fire equipment, the city could sell bonds next year. Nelson said that the city’s bond rating is very good for its size, which should produce a lower interest rate.

School districts, municipalities and county governments in Skagit and Island counties contacted Wednesday by the Skagit Valley Herald said they planned to sell bonds over the next two years. The soonest issuance could be for Anacortes’ water plant in nine months. Several municipalities said they weren’t expecting to be impacted by the problems in the bond market.

“As far as we have reviewed it, we don’t see an significant impact for us in Oak Harbor,” said Doug Merriman, Oak Harbor finance director.

In the case of Burlington-Edison and Mount Vernon School districts, board members have not even decided whether they want voters to consider construction bonds.

Bonds are sold by government officials to finance schools, upgrade utilities and roads, expand airports or for other public projects, and then tax revenues or utility fees are used to repay the bonds. Because a government’s future tax revenues are the sources of the repayment, bonds are considered a stable investment and have the advantage of some tax benefits for investors.

Problems in the bond market are an outgrowth of the national credit crisis and have jacked up the interest rates on bond sales.

What this means for the average government agency in Skagit and Island counties is a bump of half a percentage point from last year to today or an rise from a 4.75 percent interest rate to 5.25 percent, said Jon Gores, senior vice president of D.A. Davidson, the bonding agent for Anacortes and Burlington-Edison School districts.

“We are higher today than we were a year ago today, but not appreciably,” Gores said. “When you compare that to interest rates over 25 years, we really are in a low-interest-rate environment.”

In 1997, a school district in Skagit might have sold bonds at a 6 percent interest rate, in 1987 for 8 percent and in 1983, almost 11 percent, Gores said.

For government agencies considering selling bonds in the upcoming year, experts in bond sales can’t offer reassurances that the next few months will bring lower interest rates, the preferable time to issue bonds.

At present, there are more governments trying to sell bonds than people willing to invest in them, said Susan Musselman, a financial consultant with DashenMusselman Inc. Her company provides services such as bond issuance to government agencies, including Mount Vernon School District and the Port of Anacortes.

“Some people are optimistic this will clear up in a couple of weeks,” Musselman said. “Other people think it will be months.”

Anacortes’ Hoglund said that the city could issue bonds for the water treatment plant as early as next summer.

“Everyone is expecting things to settle down by end of first of next year,” Hoglund said.

Marta Murvosh can be reached at 360-416-2149 or .
Reporters Elliott Wilson and Kate Martin contributed to this report.