General Obligation Bonds for High School Renovation Project: RESOLVED, That the Board authorizes Tim Frenz of Janney Capital Markets and Jim Webster of Houston Harbaugh to begin preparation of financial documents and legal opinions to issue General Obligation Bonds to complete funding of the High School Renovation Project.I uploaded the podcast from last night's meeting and it is available here. While the presentation was long, here are the highlights, as best as I understand. There were two options, both involving wrapping bonds.
Option 1
Using the $1.7 million in the asbestos fund and taking nothing out of reserves, the board would consider financing a $32.9 million bond resulting in $35 million. (5 year phase in). This wraparound option would phase in a .56 mill increase. It reduces the annual payment and wrapping keeps the millage rate lower for the community.
Option 2
Using the $1.7 million in the asbestos fund and using $3 million in reserves, the board would finance a $30 million bond, resulting in a .5 mill increase for this wraparound option. (3 year phase in)
Dale Ostergaard pointed out that the reserves would need to fund five things.
1. PlanCon reimbursement, which won't happen this year either.
2. OPEB (Other Post-Employment Benefits) reimbursement
3. Maintain the annual capital fund which amounts to $5 or $6 million, to allow for purchasing books, computers, etc.
4. Rifle range funding?
5. The MLEA Grievance
At this point, Ostergaard, Cooper, Birks, Lebowitz, Remely, and Posti opted for Option 1. Scott Goldman, the only fiscally responsible school board member opted for Option 2, based on further clarification from Jan Klein. She has set aside $1 million for the grievance. It could be plus or minus $1 million, but she decided to set aside $1 million. According to Klein, there is approximately $8.5 million available total in all the funds. She felt comfortable taking $3 million from those funds and applying them to the second bond issue. Since Goldman was relying on Klein's expertise, he opted for Option 2.
Posti and Cappucci opted for Option 1.
In the end, it was a unanimous vote to go with Option 1 with the vote scheduled for August 19.
A few observations from last night's meeting:
Thanks goes to Mary Birks for trying to eliminate that one dollar for the wall padding. Good work, Mary! You tried.
Larry Lebowitz gave his usual Rah Rah speech for Klein's excellent work.
Tim Frenz only had enough handouts for the board and had no PowerPoint presentation. He balanced his papers on his chest, pointing to his papers to make his presentation. A resident asked for a copy of his presentation and Mr. Frenz didn't have extra. The same resident asked Jan Klein for a copy and she responded with that she didn't have any extra copies and to File a Right To Know. So much for transparency.
There was no third option presented for level funding, only wraparound options.
We can refinance again starting in 2015 or 2016.
Frenz is a hero for not taking all the money out in 2009.
These bonds will not be an exception for Act 1. The Act 1 Index is getting tighter and tighter.
The drop dead date for the second bond is October - November. Berkabile says October. Jan Klein's sleep is important to her and would sleep better if this was done in August.
This will cost us $3.5-4.5 million to finance.
In addition to Mr. Frenz' presentation, a RTK is needed for Jan Klein's July 1 presentation to the board.
54 comments:
Unfortunately, this is not even the whole story.
My recollection is that floating the bonds will involve capitalizing interest which is the worst of all worlds because you defer even the interest payments, not just the principal.
To put it another way, the board is so broke and unwilling to go to referendum that they would instead choose to defer both capital (based on wrapping the bonds) and interest (in the form of capitalized interest) in order to have the smallest possible tax hike in the next few years.
In order to do this kind of financing it will cost the taxpayers literally millions of dollars more over the life of the bonds.
To this board, this last point does not matter. Nothing will get in its way of finishing this high school project.
It's funny because this board must STILL think this project will not pass a referendum after all this time. Otherwise, why not just save the taxpayers money and go the less costly level-payment route?
12:17 PM, you are correct. They did mention capitalizing interest.
Elaine
There is NO FREE LUNCH!
Second, didn't we learn that a .50+ mill increase is [uh.....not] like a zero mill increase?
The fiscal crowd on the board is going to yell that this will result in the lowest possible millage increase for the high school.
While some of that is true, the overall cost of wrapping bonds and capitalizing interest is far greater than level payments.
Back when there was an actual fiscal conservative on the board, he likened the wrapping and capitalizing of interest to interest only home loans that were so popular heading into the financial crisis.
What is the boards role? To give us the lowest possible millage or to give taxpayers the lowest cost? In this case, they are very different alternatives.
How often is the interest capitalized during the repayment period?
Is it recourse or nonrecourse debt?
What needs to be done is a 30 year capital plan. When will the next renovations be done? How will those projects impact the way we are floating these bonds?
This board and klein keep looking at day to day stuff when they should be looking 5, 10, 20 years out. That's how long these bonds last. Plan that long.
Klein told a resident to file an RTK!
Didn't anyone on the board remind her that they've been bitchin' about the high cost of fulfilling RTKs for years?
If she's going to have to fork over the information anyway, why wouldn't she just bring copies with her for pennies a page and save the district and taxpayers the labor/expense of filling an RTK?
Time is money, Ms. Klein.
But this is so typical. They bitch and moan about the uncinate pensions. So what do they do to alleviate the crisis, you got it, raise salaries, grant bonuses that increase the pension obligations further.
So here we are, they drag out and wrap the HS bonds, so that just as the HS is nearing completion, i'll be time to start wrapping bonds around bonds for the upcoming elementary school maintenance. Roofs, boilers, plumbing, sidewalks, fields etc.
Mr. Frenz compared the wrap to the nonwrap, like a 30 year fee simple mortgage to a 15 year fee simple mortgage.
He couldn't be more wrong.
The wrap converts unpaid interest into capital, then the next payment period interest is applied to the previously capitalized interest as well as the principal.
It's more similar to making the $20 minimum monthly payment on a credit card when you owe $1000.
It can actually spiral out of control to the point of no return, when there is no hope of ever paying off the loan.
If it was a fee simple loan, all interest owed would be paid every period, and there would be some principal paid every period. Fee simple loans do not have capitalized interest.
Experts... In which scenario does Mr. Frenz $ Co. make more money? Or does it not matter?
I'm confused, probably because I'm not a CPA, financial advisor like Ms. Klein or Mr. Frenz. I try to follow the board discussions as closely as possible since it's success and cost impact our family.
So here's my confusion.
Several months ago the board during budget discussion made a lot of claims. Someone said all the fat had been cut and with out a millage increase programs and teachers were the next ace to go. It was dire straits, the governor was shorting us, we needed to find big donors, it was so desperate we had to raise student parking permits from $50 to $75. The MLFE had to donate $20,000 to fund the PK study because things were so tight. A Student advisor was going to be furloughed in 2012 (until the kids protested) to save money.
Now not even 6 months later, the district has millions laying around to give bonuses, pay raises, cover grievances and OK change orders , which they'll pay attorneys huge fees to recover - maybe - 3 years down the road.
Somebody please educate me, Ms. Klein, Dr. Steinhauer, President Cappucci, how do you cry poor mouth while you're sitting on millions? Did you really need those kids' $25? Do you really need another .56 mill increase.
I know the above topics were discussed, I saw and heard them. You're educators, professionals the school board president, please educate me.
"The government is like a baby's alimentary canal, with a happy appetite at one end and no responsibility at the other."
-- Ronald Reagan
I didn't know Reagan was that familiar with life in the bubble.
Did anyone catch in Option 1 that a $32.9 bond issue would net $35 million to the District ? This sounds like that in addition to wrapping and capitalizing interest, the District is also considering premium (interest) bonds like they did in the initial 2009 $69 million bond issue. By issuing higher than market interest rate bonds that commanded an initial price premium, they netted $75 million.
Sooooo, in order to flim-flam the public with a "low" initial millage increase, they will require that we pay the piper extra for wrapping, capitalized interest AND HIGHER INTEREST RATES per-se over the entire life of the bonds ?
Sooooo, who's organizing the tar & feather party ?
I think the Frenz fee for the 2009 bond boondoggle, where he erred big time on the state reimbursement number and financial effect and we borrowed two years too soon and not at the lowest interest rates over that time period, was $40,000.
Kind of brings tears to your eyes doesn't it.
There is something that has been gnawing at me all day. When Dale Ostergaard gave us his list of five, why didn't Jan correct him before five school board members opted for Option 1 and say that she already set aside a million for the grievance? Why didn't she say that she approved of using $3 million from the reserve fund? Why did it come out only after Scott asked her point blank?
Elaine
Jan has never and will never provide one iota more information voluntarily than is absolutely necessary and required. She will answer, if she chooses or is required to answer, a question that is posed in terms of the precise wording of the question. In other words, if you don't know the appropriate terminology or cannot articulate a question in clear and concise terms, the answer you receive from Jan will be to a question you really did not mean to ask.
She's a tax & spender, supports all staff program proposals and always "finds" unbudgeted money hiding somewhere to fund pet projects.
Didn't she last night that she hid extra money under utilities?
Elaine
Didn't she [say] last night that she hid extra money under utilities?
Elaine
Houston Harbaugh now?
How many millions of our hard earned money is pissed-away on these millionaire law firms?
I filed a RTK for Mr. Frenz' presentation. This is what we were given for the first bond. http://www.mtlsd.org/highschoolrenovation/projectfinancing.asp
Now, we must file RTKs for the same information.
I think I heard 2035 is when the high school renovation will be paid. Frenz said, "Look how quickly four years have passed."
Elaine
In my 5:33 PM comment, I wondered why Jan did not correct Dale about the grievance. I am watching the meeting again and Jan DID tell Dale that she set aside $1 million for the grievance.
Jan also said that she has been underspending in the utility accounts.
Somehow we went from Dale and Scott asking for level funding numbers to Elaine saying that they only have two options to vote on.
Elaine
Upper St. Clair did a four year phase-in of millage and it cost the district several million dollars. Dr. Steinhauer was employed there then and should remember it well.
The State is gradually squeezing school districts to cut back on their excess fund balances, restricting reimbursement of building projects, and putting some PSERS increases under the Act 1 limit.
If you listened to Mr. Frenz last night he started his presentation by telling the board they saved $4,000,000 by not issuing more than $69,000,000 of bonds in 2009. The board saved nothing. Frenz later admitted the board had no other choice because of a $69,000,000 borrowing limit they voted earlier. He did not admit they cheated by borrowing $75,000,000 instead od $69,000,000 by selling premium bonds - no doubt this was Mr. Frenz advice.
Other bad advice was the capitalized interest option. How many residents would consider borrowing the first two years interest to buy their home? In this case you are paying interest on the extra interest borrowed and the interest on your mortgage too.
Wrapping bonds is similar to buying two cars and only paying only the interest on the second car for 6 years before paying off the interest and the loan for the second car. Does anyone drive a car for twelve years before paying it off?
So capitalized interest and wrapping bonds both cost you more money over the life of your loan than a straight interest and principal payment each month. But this is what the board voted to do.
My prediction is we will all look back at some future date and ask ourselves what happened to the good financial position of the Mount Lebanon School District. By then all the school directors and administrators that endorsed this snake oil will be gone and the financial description of the school district will remain unexplained to our kids and their families. What a tragedy!
Why wasn't this put to the voters of Mt. Lebanon? Should there be lawsuit brewing?
It WAS put to the voters. How do you think we got the current board members?
A case of Bait and Switch. Not what Dan and Dale promised.
10:30 PM, didn't Tim Frenz define capitalized interest as borrowing interest?
Why does it feel like we are listening to used car salesmen?
Elaine
Elaine,
In the case of this bond deal, saying you are listening to a used car salesman is doing an injustice to the used car salesman. I've seen one worse municipal bond deal, it went into default a few years after the bonds were sold.
I'm really glad I'm not the buyer of these bonds because wrapping bonds lengthens their maturity. The longer the maturity, the bigger the loss of market value when interest rates go up.
Hmm! I wonder how many bonds the school directors will buy.
John Ewing
The thing is that this is a complicated discussion. The mass of uninformed or underinformed voters will see a small tax increase. 20 years from now a future school board will have to deal with the balloon payments.
The crazy fiscal nuts on the board will see no ramifications of their decisions until they have happily moved along.
In the Almanac today-
"“When you look at the numbers, the .06 difference in millage is insignificant,” said board vice-president Larry Lebowitz. “No one likes to pay more in taxes, but I think we would all sleep better at night knowing we have more of a cushion.”
We'd all sleep a lot better at night if the school board appealed ALL the grossly underassessed properties that everyone knows exist. There might be a million dollars in missing revenue there which would give cushion to tapping deeper into reserves.
Won't do that though will you Mr. Lenience?
Or at least protested to the county executive how flawed the numbers were in the reassessment rather than blaming the governor for cutting school funding.
Correction: mr. Lenience????
How does auto correct pull that out of Lebowitz?
http://www.nytimes.com/2012/08/17/business/schools-pass-debt-to-the-next-generation.html?_r=0
Interesting article above titled
"Schools Pass Debt to the Next Generation"
Perhaps in the interest of honesty and transparency our board should change the districts mission statement.
"To provide the best - and most expensive - education possible for each and every student because we sure as hell won't be paying for it-- they will!"
It's a little long winded true, doesn't mention that the administrators, union, bond dealers, architects and CMs are getting theirs now or will have long been retired when the impact of today's decisions hit home, but hey who cares... Its for the kids!
Thank you for an excellent comment submission 10:30 PM. Regarding the Frenz $4 million remark - the 2009 bonds were in fact were floated 2 years before the money was required on the grossly mistaken advice from Frenz that interest rates had reached their lowest level in over 20 years and were heading upwards. They in fact remained at that and even lower levels until just a few months ago.
By borrowing over 2 years too early we current taxpayers have been improperly burdened with taxes for debt service payments of some $6 million or so that should have been deferred for 2 years.
7:45 AM, in this case, it IS for the children...to deal with it when they are adults.
Elaine
I wonder if Mr. Frenz or Ms. Klein would allow us to dribble out their commission or paycheck over 30 years to keep today's millage rate low?
The IRS frowns on arbitrage abuse:
26 CFR § 1.148–10 (a)(4)
Overburdening the tax-exempt market.
An action overburdens the tax-exempt
bond market under paragraph
(a)(2)(ii) of this section if it results in
issuing more bonds, issuing bonds earlier,
or allowing bonds to remain outstanding
longer than is otherwise reasonably
necessary to accomplish the
governmental purposes of the bonds,
based on all the facts and circumstances.
9:26, the IRS frowns on arbitrage abuse... OK?
What do we do-- send them Happy Face mask?
*10:30 PM, didn't Tim Frenz define capitalized interest as borrowing interest PAYMENTS?
Elaine
11:31 not what Dan and Dale promised!
While I'm no big fan of these two guys, what about the other 7 directors?
What about the superintendent and finance director?
What about the commissioners that supported the district building plans that have their own spend, spend, spend dog and pony show up and running?
Do you realize how close this community came to being sold a $150 million HS project?
Yet, there are people that hang on every word and every plan these spendthrifts spew.
10:31, That's the straw man arguement.
They're all at fault, every one of them, including Dan and Dale.
So close to $150 million it is going to be at least $150 million now.
11:06 it is not a straw man argument, "They're all at fault" is what I was saying.
Only questioning why single out Dale and Dan.
On any of these issues at the board, commission it doesn't come down to one individual or two.
It takes 9 at the school board, 5 at the commission.
As for the $150 million, I agree. The elementary schools were to be $45 million and went to around $57 million.
Just wondering out loud if everyone forgot the idenities of the people that wanted to start at $150 million.
One point has been left out of the discussion. Mr. Franz explained the option the board chose would reduce the millage slightly but cost $4,400,000 more over the life of the bonds than a regular mortgage payment.
Too bad we did not hire an Algebra ll teacher that can do bond math instead of just grievance math. With the State slowly tightening the noose around school expenditures it won't be long before all the teachers will have to take a salary cut, or a low raise, to make up for sloppy bond arithmetic.
Are you listening Peter B.? Mrs. Klein won't be around to blame when the reality of these mistakes set in.
We should all remember Mrs Klein got a 6.9% raise last year and a $1,000 bonus this year. Mrs. Klein's job performance is well below her ability level.
The overspending now totals:
$4,400,000 second bond issue.
$5,000,000 first bond issue (2 years early).
$28,800,000 Dirk taylor found
$2,000,000 Change orders
Total Overspending:
$40,200,000 wasted by the School Board Members
J
$40,200,000 wasted by the School Board Members...Sorry, not wasted - the $40,200,000 was absolutely pissed away!
Notice the overspending on the two High School floats is:
$4,400,000 second bond issue.
$5,000,000 first bond issue (2 years early).
$9,400,000 overspending advised on by Mr. Frenz of Janney Montgomery.
This is more than 50% over the fund raising the school board paid an $870,000 fee to PK to raise.
Why doesn't the school board save the $9,400,000 in bond overspending and forget the fund raising effort. If they can get back just $800,000 of the PK fee they could afford a new rifle range or new tennis courts and be $9,400,000 ahead over the life of the bond issue.
Seriously, guys, is this charade really for the kids or for the benefit of school Directors' egos?
Frenz and Janney need to be terminated immediately!
Just for the record...
According to the definition of spendthrift at wiki:
"A spendthrift (also called profligate) is someone who spends money prodigiously and who is extravagant and recklessly wasteful, often to a point where the spending climbs well beyond his or her means. The word derives from an obsolete sense of the word "thrift" to mean prosperity rather than frugality,[1] so that a "spendthrift" is one who has spent his prosperity"
Didn't someone tell us very early on that the high school project was only going to cost us a couple of lattes a month?
Looking at my SD tax bill, these Meal Deals (2 pizzas, 2 lattes) are breaking our family budget and the indigestion is keeping me awake all night, Mr. Lebowitz.
Couldn't Janney Capital, Houston Harbaugh have at least bought one lousy sports field sign?
3:23, Mr. Lebowitz has $8,000,000 in reserves hidden in the budget and wants $6,000,000 more.
4:52, so they actually did NEED an extra $25 on those student parking fees. Hahahahahahahahahahahahahahahaha
Yes. If you listen to Pursuing Ketchup, Tim Frenz, and the YSA, people are just lining up with their checkbooks ready to sign.
Sure they are.
Elaine
6:03, We needed the $5,000 in extra parking fees from the kids but Ms. Klein was comfortable giving up reserves totaling $3,000,000 in a bare bones budget.
Who is not telling the truth, the district Treasurer/Finance Officer or the school board members?
Larry, you better get your story straight before you try to solicit $6,000,000.
We all heard Mr. Frenz tell us we were wrapping the bonds so more of them would be outstanding for a longer period of time.
We also heard him tell us the refunding dates on the High School bond issues. Yummy! Another $100,000,000 of bonds for brokers to sell.
The first bond issue cost $45,000 in Janney fees, the second is a bit smaller so let's estimate $40,000 more in fees. Now we are up to $85,000 in fees for their Mr. Franz advice and we haven't paid to refinance the $100,000,000 High School bonds that will be outstanding yet. When we are finished we could end up with $150,000 in Janney fees to set up the bond deals and the refinancings plus the brokerage commissions, rating fees, Solicitors fees, and Bond Counsel fees to sell the High School bonds.
Does anyone think we can raise the parking fees high enough to cover the selling costs of these bond deals? Maybe we should quit paying Other Post Employment Benefits (OPEB) for healthcare instead.
Ah, there it is. OPEB. I had no idea what that meant. Thanks!
Elaine
I am learning so much about bond financing this week. A Lebo Citizens reader sent me this link. The school board should read it.
Debt Management, Accounting And Reporting It comes from the State "Manual of Accounting and Financial Reporting for Pennsylvania Public Schools."
Elaine
This statement comes from the manuel sent to Elaine by a blog reader:
"Some entities issue “super-premium” debt. In such cases, the entity receives proceeds from a debt issuance far in excess of the face value of the debt (for example, $10,000.00 in proceeds on debt with a face value of $6,000.00). Super premium debt should be reported at the amount of the proceeds received (i.e.$10,000.00), rather than at the debt’s face value (i.e. $6,000.00). The division of debt service payments between principal and interest should be based on the proceeds received, rather than on the amounts listed on principal and interest in the legal documentation of the debt issue."
I gather from that statement that the $69,000,000 bond issue should be referred to as a $75,000,000 bond issue but that is not what our Board usually does.
11:11, could the $6,000,000 difference push the District beyond the referendum limit?
Holy crap! You don't need to do a right to know!
They posted the bond information here:
http://www.mtlsd.org/District/Stuff/MTLSD_bond_information.pdf
Capitalized interest the first three years. Yup. So if you don't have enough money to make your minimum payments, no problem, will just add those "missed" payments onto the end of your loan.
Perhaps an update...or even a new blog post is due to fully grasp the math on this one.
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