Bond Information

This is in response to Eliot Singer’s post. Here is a basic summary of my understanding of the funding. Please feel free to add and/or correct.

Current Financial Plan

Issue a $53M bond using the School Bond Loan Fund (SBLF) and spend $6.43M from sinking fund for a total of $59.43M. An overview of the SBLF can be found at http://michigan.gov/treasury/0,1607,7-121-1753_56435---,00.html – go to the Qualified Bonds Overview link. It has a pretty clear explanation regarding bonding capacity.

East Lansing bonding capacity using the SBLF will decrease to $34.6M if the current bond does not pass and a bond is passed in August 2011, November 2011 or February 2012. Therefore, if we use the SBLF, we will have a minimum of $34.6M+$6.43M= $41.03M.

The amount we qualify for from the SBLF depends on the interest rate. Based on ELPS’s bond application (http://school.elps.k12.mi.us/bond_2012/bond_application.pdf ), it appears the $53M and $34.6M are based on a 5.5% effective interest rate. ELPS’s financial advisor has also done a more recent analysis with a lower effective interest rate. This will obviously increase the bonding capacity – all else equal (the repayment scheme I looked at did not hold all else equal).

Obviously, less capital would be required if ELPS does not build total capacity for 3,919 total students when the projected 2016 resident student number is 2,519 and total enrollment (including SOC) is 3,272.

There are two other sources of capital for ELPS. One is to obtain a market rate bond (see below for advantages and disadvantages) which you could also do in combination with a SBLF bond. Another is borrow against future sinking fund tax revenue –could increase the amount able to borrow by voting to extend sinking fund.

In the end, I think the proponents of the bond are making the capital constraint associated with delaying the passage of a bond appear more onerous than it actually is.

Funding Options for Renovating/Building East Lansing Public Schools

Goal: Raise the funds the “cheapest” way possible with the least restrictions.

Three Main Ways to Raise Funds:

1. School Bond Loan Fund (SBLF) (http://michigan.gov/documents/3160_2815_7.pdf).
2. Market Rate Bonds
3. Sinking Fund


Advantages and Disadvantages of SBLF over Market Rate Bonds

Advantages of SBLF over Market Rate Bonds:
a) Access to State’s credit rating.
This is not a significant benefit to ELPSs because State’s SBLF S&P credit rating is AA- and ELPS states that their S&P credit rating is AA.
b) Ability to borrow for the principal and interest requirements of outstanding qualified bonds
This allows district to maintain a consistent millage rate by borrowing from the SBLF at a rate of 5%. It is difficult to do this with a Market Rate Bond because Michigan prohibits school districts from issuing what are called Capital Appreciation Bonds (CAB). A CAB is a bond that pays no interest on a periodic basis, but increases in value from the date of issuance (delivery date) to the date of maturity. The main question is whether ELPSs can issue a qualified bond along with a market rate bond and use the $6.4M from the sinking fund to pay the initial interest on a market bond so that the millage rate can remain relatively constant.
c) Insured

Disadvantages of SBLF:

a) Restricts how much you can borrow based on assuming future growth rate of tax base is a function of last 5 years of growth in tax base.
b) Insurance provided by SBLF is not free. It is difficult to determine exactly how much this is but appears to be costing ELPS about half a million dollars for the current bond proposal.
c) Restricts the set of contractors to those paying prevailing wage. (http://www.masb.org/Portals/0/pdf/VIPFocus.pdf)

Sinking Funds:

Can use existing balance in sinking fund as well as borrow against future sinking fund tax revenue. See Niles Community School District http://www.nilesstar.com/2011/06/27/niles-district-to-borrow-2-million-for-new-tech-other-projects/ . Niles took advantage of QZAB program as well. A number of MI school districts have done this recently – often because of their inability to pass a bond (at least that is what the Niles Director of Finance indicated to me).