5-19-06 To All Concerned About Our Schools
by Ron Bird /
I'm writing this to explain why I personally voted against extending our School District's debt. In 1998 and 1999 our district took out two loans to build temporary Vasquez and to finish Meadowlark. If left untouched one loan would be paid off in 2015 and the other in 2018. On May 9 the School Board voted 3-2 to refinance these loans and extend this debt. Payments will now continue until 2029 (another 11 years worth of payments).
Had we kept our original payment schedule our remaining payments would have totaled 4.57 million dollars. With refinance charges, prepayment penalties and a higher interest rate on the new loan versus the old loan, our remaining payments will now be 5.93 million dollars. In other words the total cost of these new loans is 1.36 million dollars more than the old loans. Although in the short term our payments will be reduced about $160,000 from $409,000 to $250,000 for the next ten years (until 2015) these $250,000 per year payments will continue another 11 years beyond the original term (until 2029).
Yes, historically our loan payments have affected our general fund, thus impacting the classroom. The proponents claim that this refinance and debt extension will put more money in the classroom over the next ten years. I believe raising our developer fees in February had already solved this encroachment problem.
Our district uses developer fees, which must be kept separate from the general fund, to pay not only our old loan payments, but also the buildings we lease ($759,000 per year in total payments). Recent history has shown developers fee income to be about $500,000 per year. Over the past year we have raised residential development fees from $2.05 per square foot to $3.21 per square foot (over a 50%) increase. If future development simply matches the pace of historic development, our general encroachment problem is really solved without extending our debt based on this fee increase.
I recommended to the Board that we not extend our debt, but instead budget no general fund encroachment next year with these assumptions. Should these assumptions prove wrong, I further recommended reconsidering the debt extension option in January 2007, giving us ample time to prevent any general fund encroachment in fiscal year 2006-7.
An additional viable alternative is also possible if the SunCal Mello Roos is approved, thus providing a one-time windfall to the district, which is more than enough to pay off our second COP loan outright. This option would save the district $175,000 instead of $160,000 per year in the short term.
If developer fees are in excess of what is needed to make the loan payments, this excess could be escrowed to go towards paying this new loan off early. With all of the facility needs in the district, I don't think this will happen and the monies will go towards facilities - that would not be a bad thing, but it makes me extremely doubtful that this loan will ever be paid off early.
Some discussion was made regarding how the additional $160,000 could be spent. If developer fees with the fee increases keep with historical trends, then by law the only items that this money can be used for are facility improvements. If not, the difference can be used for non-facility improvements. The Board has made no specific decisions on the uses.
It is kind of like me going to my wife and saying: “You know, we don't have the cash for the things we'd like to have. Gee, the kids could use some tutoring lessons; we might want to trade that gas-guzzler for a small car; football is coming up and I just need that plasma TV, etc. We only have 12 years of payments left on our second mortgage; why don't we refinance it to a new 30-year term, even with the new interest rate being a percentage point higher our payments will be $160 less per month. After we do this we can then decide what to actually do with the money.
Oh, you know if we decide we don't really need any of that stuff, we can just bank the $160 difference each month, so we can pay off the new loan early”. If it were up to me, I'd go for the plasma TV, but would regret it twenty years later, when we are still making payments on that old worn-out screen.
Short-term desires should never drive the need to incur long-term debt. What disturbs me most regarding our district's debt extension action is how this actuarial issue became a controversial topic. This item first appeared on the April 25 agenda, when the Board instructed the Superintendent to conduct further research on this matter with RBC Bank.
The actual 3-2 decision was made at the next Board meeting on May 9. Rather than arguing their positions before the community in the media before this final vote, Board members now are finding it necessary to justify their decision afterwards.
What little public comment was made at the two Board meetings reflected a consensus to look further into the issues before making any snap judgments. Although this may not be the worst decision the Board has ever made, it certainly is not the brightest nor did it undergo the scrutiny that it deserves. This letter reflects my own personal opinions.
Respectfully submitted by Ron Bird - AADUSD Board Member writing as a private citizen.