The Pittsburgh public schools this week are issuing $13 million in college-savings bonds in a sale that is believed to be the first of its kind by a school district.
In recent years, college-savings-bond programs have become increasingly popular among state finance officials and members of private investment organizations, who say such programs are a good way for parents to cope with fast-rising tuition costs.
Under such programs, parents are encouraged to buy bonds that mature when their children are ready to attend college.
According to a 1990 survey by the Education Commission of the States, 24 states have implemented such a plan, and four more may do so this year.
But organizers of the Pittsburgh sale and officials in the education community say they are not aware of any other district issuing such bonds.
“I wouldn’t make any claims that way, but I don’t know of any districts that have done this,” said Bob4Kreider, vice president in public finance for Kidder, Peabody & Company Inc., the investment firm handling the bond sale for the district.
“What a neat idea,” said Bruce Hunter, associate executive director of the American Association of School Administrators. “But I have not heard of anything similar.”
The college-savings bonds are part of a $23-million bond issue by the district that will be used to finance various school-improvement projects throughout the 60-school district. The sale was expected to start this Wednesday.
According to rules of the sale, the bonds, which are free of federal, state, and local taxes, can be purchased with maturity dates ranging from 9 to 19 years in the future.
Purchasers can buy as many bonds as they like in multiples of $5,000 at the date of maturity, with the smallest being worth $5,000 at its maturation.
Officials estimate that a mature bond worth $5,000 in 2000 will cost $2,801 at the sale and have an interest rate of 6.40 percent; a bond worth $5,000 in 2005 will cost $1,935 and have an interest rate of 6.8 percent; and a mature $5,000 bond in 2010 will cost $1,334 and have an interest rate of 7 percent.
Actual costs and interest rates will be determined by the market on the day of the sale.
Marketing the Idea
Purchasers are not required to use the mature bond to pay for a college education, but Pittsburgh school officials and Kidder, Peabody have marketed them that way in ads in three local newspapers and at a news conference to announce the sale.
“The school district has said there is a preference for retail sales in the Pittsburgh area,” Mr. Kreider said.
Added Pat Crawford, a spokesman for the district, “We want to make sure that the residents of the school district know that these bonds are available.”
The college-savings bonds, known as zero-coupon bonds because they pay interest and principal only on the date of maturation, differ from bonds the district usually issues, which are known as current-coupon bonds and which pay interest every six months.
Moreover, the district usually puts its bond sale up for a competitive bid, which is not available to small local investors.
But this alternative method of financing school improvements proved attractive to the district because it allows the district to limit its short-term indebtedness and spread that obligation out over the next 20 years, according to Aldo Colautti, executive director of business affairs for the Pittsburgh district.
“What drove the decision was to find a way to minimize our debt-service obligation over the next few years,” he said.
“The fact that this type of investment gives people this type of opportunity to invest for a college education or whatever is just a by-product of what we set out to accomplish,” Mr. Colautti said.
The district’s small debt obligation past 2003 made such a bond sale attractive, he added, and whether the district engages in another such sale will depend on the district’s financial situation over the coming years.
“It’s not a technique that could be used every year,” Mr. Colautti said.
Mr. Kreider warned that potential investors should make sure that zero-coupon bonds fit their investment needs.
If a purchaser wants to obtain cash for a bond before it matures, the bond must be sold on the market. Such sales typically require the payment of a brokerage commission.
In addition, the school district is not required to pay the principal or interest on any such bonds until they become due.
