February 5, 2010--Cost of the High School Project
One of the most frequently asked questions from residents has been, “What is the High School project going to cost me?”
The School Board voted to set the maximum cost of the High School project at $113, 274,765. To help give homeowners an idea of how much the debt on the project will cost them, the District Business Office prepared a list of assessed home prices in $25,000 increments ranging from $50,000 to $500,000 to show the tax impact on homes for each year of the High School debt implementation. The chart focuses only on debt related to the High School project. Keep in mind that the final bond issue is projected and estimated at the maximum cost of the project and does not include potential savings in building operations, asbestos removal, contingencies, bids or use of other funds. Click here for the chart.
January 19, 2010-- In an effort to clarify the percentage of reimbursement from the State for the High School project, it is important to understand that there are two reimbursable percentages: one architectural and one financial.
Purpose of Percentage Reimbursement: The State agrees to help schools finance building construction based on use of facilities formulas and relative wealth of the schools in the Commonwealth.
Architectural Project Percentage Reimbursement: The architectural project percentage reimbursement is different for each project type and size. New construction and renovation carry different percentage rates as do instructional space use compared to non-instructional space. These percentages can only be set once a type and size of project is chosen. Our architects estimated early that the State would reimburse us about 11% of the cost of the high school project. They prepared their calculations based on complex formulas of reimbursable space for various uses of the new and renovated portions of the building. That number changed as the space within the facility was allocated and reallocated. It is currently estimated at 16.3%.
Financial Project Percentage Reimbursement from the State: The way the State provides funding to the District is through the PlanCon process. This process begins with the architectural reimbursable percentage (16.3%) and multiplies it by actual debt payments for the project and then by the District’s market value aid ratio. The District’s aid ratio for this purpose is .4900% in 2009-10. When the two ratios are merged, we calculate our financial reimbursable percentage at 8%. Note that the District’s aid ratio changes every year. It has been rising, thus increasing this financial reimbursable percentage in recent years.
How the money is provided to the District: As the District makes its annual debt service payments on the High School, the State rebates 8% of the cost back to the District. The percentage is applied both to the principal and interest of the bond payment. So the architectural dollar cost reimbursement is never a completely accurate accounting for the State’s share of the project. The total funds rebated to the District are paid over the life of the bonds issued, not in a lump sum.
According to the financial advisors, the total cost of both the 2009 Series A bonds and the estimated future bonds for the project including principal and interest could be $180,681,924. If the District’s aid ratio does not change, and the architectural percentage reimbursement does not change, then the District will receive 8% of these principal and interest payments totaling $14,431,065 over the life of the bonds. If the District’s aid ratio continues to rise, then the District will receive more money than that from the State.
PlanCon Process: The setting of the Architectural Project Percentage Reimbursement begins in PlanCon Part D and is revised and finalized through PlanCon Part J. So before PlanCon Part D begins, this number is very fluid and difficult to forecast. As the architects reported, they have been working to increase this percentage in their work with the project.
Prior Projects’ Reimbursable Percentages: The elementary project architectural percentage reimbursement is final at 40.63%. The middle school projects are final at 48.57% and 61.75% on two different bond issues. (Compare to High School 16.3%).
These architectural percentages are applied to the appropriate debt service payments for earlier bonds and then multiplied by our aid ratio. In 2009-10, the actual financial percentage reimbursement on all our outstanding reimbursable bonds averaged 22%. (Compare to high school 8%)
In early forecasts of financial reimbursement, we looked at our elementary and middle school financial percentage reimbursement of 22% and estimated that the high school would be lower. As a result early financial bond models used a financial reimbursable rate of 15-16%. We received the first detailed reimbursement estimates from the architects in the form of a draft of PlanCon Part D on September 2, 2009, and the financial summaries changed at that time to reflect the 8.35% financial reimbursable ratio at that time. This percentage was used in a presentation made to the Board on September 14, 2009 and in the summaries made during the pricing of the 2009 Series A General Obligation Bonds in October 2009. Since that time, the percentage has been revised to be the 8% currently being projected by revised draft PlanCon Part D project calculations.
October 19, 2009-The $69 million bonds for the high school were sold on Thursday, October 1, 2009 at interest rates of 3.5974%. This is a historically low rate for a tax-exempt bond issue which resulted in favorable debt service payments for the community. The District will receive just over $75 million due to the fact that these were premium bonds and sold higher than their face value. The District is reviewing investment options for the proceeds with financial advisors. The funds will be available to be invested on Wednesday, October 21, 2009. Interest earnings on unused proceeds will be used to pay for costs of the project and will reduce the additional money needed to be borrowed in the next couple years to complete the project.
High School Bond Schedule General Obligation Bonds Series 2009 A
September 16, 2009 --At the Board meeting on Monday, September 14, the Board heard from financial advisor, Tim Frenz from Janney Montgomery Scott, concerning the option of issuing the first debt of $69 million to begin funding the High School Project. This is only the first bond issue as the project is expected to cost over $100 million. A second bond issue can be sized and sold once the total cost of the project is known. Mr. Frenz reported that interest rates were near historically low levels and that this is a good time for the Board to consider issuance of the first bonds for the project. He reported that even though this is a few months before the Board will need the bulk of the money, the historically low interest rates will offset the additional interest cost from the early issuance. He reported that if interest rates rise only .07% to .1% over the next few months, the District will pay as much total interest over the life of the bonds as will be incurred by this early issuance at these low rates. Additionally, issuance now will allow the current costs for architects and construction manager services to be paid from these bonds rather than from capital projects money set aside for projects around the District.
An additional issue discussed was whether or not the bonds should be issued tax-exempt or taxable under a new federal program called “Build America Bonds” (BABs). He pointed out that rates under the BABs structure would result in slightly less interest over the twenty five years of the bond life, but would result in fewer funds for the construction project by just under $4 million. The Board discussed the relative merits of borrowing the additional money now with interest rates so low under the tax exempt process compared to borrowing less money under the BABs process risking higher interest rates on the next bond issue which would have to be about $4 million higher.
The Board will be reviewing the information presented and any additional information available before they make a decision on Monday, September 21, about whether or not to give approval to proceed with the bond sale. Once the Board approves issuance of the bonds, the financial advisor, bond counsel, solicitor and administration will work with the underwriter, Merrill Lynch, to complete the sale over the next month or two assuming rates remain at or near these low levels.
High School Projected Financing Summary
August 10, 2009 – The School Board authorized the issuance of $69 million in bonds for the High School Renovation Project in 2006. Those bonds must be issued by February, 2010 or we begin to lose part of the $69 million in principal. As a result, those bonds will likely be issued late in 2009 or early in 2010. We will then have the ability to wait until the project is bid and final costs are known before we issue the remaining bonds for the project. If we are able to obtain construction bids below current estimates, we would be able to float a bond issue smaller than the $46 million currently being discussed. In any case, when the size of a second bond issue is discussed, the Board at that time can decide to issue bonds with either a flat amount of payment each year or bonds which wrap around current debt to minimize the millage increase to the community at that time.
To Wrap or not to Wrap – By state law, we can issue two types of bonds. One type is like a mortgage where each year’s payment is essentially the same as the year before. This type of bond structure, known as level debt, results in low interest payments over the life of the bonds, but a fixed annual payment which does not look at other debt payments already committed by the school district.
The other type of bonds permitted under law is wrapped debt which looks at the current payments due on all other bond issues and makes the combination of old and new payments level. It would be as if we already had a car payment and wanted lower mortgage payments for the years we had to pay off the car and then bigger mortgage payments after the car was paid off. By wrapping the new bonds around the old bond payments we can level the total payments for all debt service creating lower millage costs in each of the years of the new bonds. The downside is that we hold off paying part of the principal until the annual payments grow and that involves paying more interest over the life of the new bonds.
The $69 million of bonds already approved must be level debt. The Board will decide on the structure of the second bond schedule when that issue is discussed in a few years.
August 10, 2009
High School Project Financing Discussion
Mt. Lebanon School District
Janney Montgomery Scott LLC