School Board Determines Modernization Overrides Bond Debt Repayment
School Board Acts on Outstanding School Bonds –
Repayment options for Bond Anticipation Notes (BANs) were considered by the School Board at its May 8 meeting, and use of funds for modernization needs was deemed to be the best option.
Superintendent Hubbard explained that the Bond Appreciation Notes (BANs) held by the District must be converted to bonds by 2015, and now is the earliest opportunity to do this; furthermore, it is the best time to convert while interest rates are low. She noted the need to determine whether to set aside any modernization funds to pay down interest on the notes prior to the issuance of the bonds so the total amount to be financed can be determined.
Assistant Superintendent Brady noted $56 million in bond debt was approved by voters under the Seismic Safety Bond Program. The District structured the debt very carefully, working with Kelling, Northcross and Nobriga (KNN) on how to secure the money while remaining compliant with the law. The money was borrowed in “pieces” as it was needed.
Ruth Alahydoian of KNN explained that the $12 million in BANs have a five-year term and must be repaid in 2015, but can be repaid now. She presented a chart showing the bonds issued and their maturity and repayment ratio (the ratio of debt service vs. principal borrowed). She showed that without counting the BANs, the repayment ratio is 1.82:1, which according to her was favorable; by comparison the repayment ratio for a 30-year mortgage is 2.0:1.
According to the draft May 8 School Board minutes:
Bond repayment needs to be payable based on the tax rate and cannot exceed $60 per $100,000 A.V. (assessed property value). The State Senate is reviewing Assembly Bill 182, which has passed the House. This legislation was written in response to some school bonds that had extreme repayment ratios and repayment periods as long as 40 years. The key provisions of AB 182 are to limit bond repayment to 25 years and maximum interest rates to 8%, to limit the ratio of debt service to principle for each series of bonds to 4:1, and to make CABs (Capital Interest Bonds) callable in 10 years. If it passes the Senate, AB 182 will not go into effect until December, 2013, and will provide waivers for districts such as Piedmont, which issued CABs under a different set of circumstances.
Ms. Alahydoian reviewed the options for the district.
Option 1 is to issue CABs at current interest rates. Interest on these CABs is paid as older bonds are paid off; the sooner a CAB is paid off, the less interest is owed. Although they would mature in 25 to 40 years, chances are they would be refinanced. At current rates, the repayment ratio under this option would be 5.6:1.
Option 2 is to use approximately $1.7M of the modernization funds on hand to cover accrued interest and reduce the overall cost of the
CABs. This would result in a repayment ratio of 4.04:1.Option 3 is more complicated, though it could be a very viable alternative: to restructure already issued bonds (Series A & B) along with the BAN replacement (Series E). This is not a perfect scenario as the repayment period is more than 25 years and the District would have to reissue some CABS, but it would reduce the repayment ratio to 4.26:1 and might help the District over the long term. This only makes sense if it would result in lower interest rates for Series A & B bonds.
Ms. Alahydoian does not anticipate any issue exceeding debt capacity, which is 2.5% of total assessed property value. The District is well within its debt capacity. As debt is paid down, capacity grows even if assessed value does not. The assumption is also that property values will grow over time at a 5% average, due to approximately 2% in annual increases and additional property being taxed. Resolutions are scheduled to be brought back to the Board at the next meeting (or subsequent meeting) to approve issuance of Series E Bonds for replacement of the BANs and to approve refunding (for the purpose of restructuring) of Series A & B bonds.
Board Member Ray Gadbois noted that if some of the modernization money is used to pay down the interest, it will not result in a substantial reduction to taxpayers for 20-25 years and will reduce the District’s ability to perform modernization projects currently under consideration. He summed up the Board’s opinions by stating converting the BANs to bonds as quickly as possible since interest rates are likely to rise and in the event interest rates go down, they can be refinanced. In regard to Option 2 (paying down the debt with the $1.7M), taxpayers would see no benefit for a long time because of the bond structure; we are unlikely to get more modernization money from the State, and we have modernization needs that will benefit students and the community now and in the long term; therefore it makes sense to use the $1.7M on modernization projects.
Superintendent Hubbard will ask Ruth Alahydoian to prepare two resolutions: one for sale of the BANs as soon as possible and one to structure the sale to include refinancing of Series A and B bonds. The sale will not include any use of the modernization funds, which will be retained for identified school modernization projects, rather than repaying existing bonds.
