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We try to break down some of the budget discussion to separate, smaller topics – tonight’s topic is debt service and funding for construction; we often field questions about how we have built the recent elementary school projects and how that relates to the current budget challenges; overall we know that construction has helped the budget, this evening we will provide information on how/why that is the case Debt Service is a fancy term – what is it? Similar to a home mortgage – when the district builds a building, we borrow money to pay the bills; for your home it would be called a mortgage – for the district, we borrow using Tax Exempt bonds Just like your home mortgage, we repay principal and interest on a regular basis – what we pay is set by the terms of the bonds that are issued Funds that are borrowed using this Tax Exempt Bond structure can only be used to fund construction / renovation / major capital purchases or projects (cannot be used to pay normal operational costs); this is set forth as a legal restriction in the bond documents 2
Constantly monitor the debt we have outstanding – recent markets have made savings possible through refinancing older bond issues Since 2009, we have refinanced or restructured all outstanding debt During early discussions of potential construction projects, we set the goal to move forward with construction without higher taxes related to the construction projects The good news is that we accomplished that goal!! 3
Combined strategy to accomplish that goal – we have taken advantage of all-time historic lows in the bond markets When we refinance debt, we save money because of lower interest rates – most of those savings have gone into recent budget years to help balance budgets without drastically cutting programs - Total saved with all refinanced bonds from 2009 till now: over $4.1 million on a present value basis on fixed rate bonds (remember that present value is a term used a lot in corporate America – a dollar is worth more today than it will it be worth in the future) When we restructure debt, we extend the time we will make payments; technically that costs a bit more in the long term, but makes annual payments easier to manage for the budget. Because of the lower interest rates we have achieved, the Net Present Value of those costs is relatively small - Total present value cost of restructured debt: less than $300,000 to restructure almost $20 million of bonds Most of our construction costs also happened during the economic downturn, so all three elementary school projects stayed substantially under budget; using the prototype design also provided substantial savings, so we accomplished 3 of the lowest cost-per-square-foot buildings in the state 4
In December 2011, we issued variable rate debt; combination of refinancing existing variable rate debt and borrowing for the construction projects; this variable rate issue was just renewed with even lower terms for almost five (5) years Historically have done very well with variable rates; this variable rate bond issue has worked extremely well since inception in 2011 23% of overall amount we have in bonds outstanding is in the variable rate bond issue Rate we pay on the variable rate bonds has not gone above 1% (December 2011 through the most recent invoice); we had been paying less than 80 basis points for an extended period of time, and with the recent update will pay even less; first month was below 60 basis points (from date of closing through month end – blended rate) The bonds with 5% interest rates sold at a substantial premium; we issued $30 million of debt and only took on $27.3 million of debt; that $2.7 million premium means the effective interest rate on those bonds are 3.2 – 3.55% 5
Total amount we have in outstanding bonds as of today: $108.665 million Official documents also show our obligations for LCCTC debt for their construction / renovation projects, that is an additional $4,655,528 Compare that to the legal limit of our “borrowing capacity” to put that number in perspective; many of us know that the bank would consider us for a larger mortgage than we are willing to pay for! We utilize about half of the capacity they would legally allow us to borrow The variable rate issue is about $25.5 million; fixed rate bonds about $83.2 million 6
Ongoing repair and maintenance costs of older buildings were escalating; roof leaks, HVAC system repairs and potential replacement needs, those potential costs have been eliminated because of new construction Newer buildings are more energy efficient so utility costs are lower – in some cases, even though we have larger buildings now, the utility costs are lower than the older/smaller buildings Because of historic low interest rates and what we have been able to accomplish on managing our debt service, the annual budget costs are anticipated to be lower than they were in 2008-09 and 2009-10 budgets; the budget in those years was about $9.3 million for the principal and interest expenses. After the 2015-16 budget year, we project the annual expenses to be lower (less than $9 million for three years, then $9.1 million in 2019-20; totals decline from that point on) Rates are positively affected by our good bond rating – Aa2 from Moody’s, AA from Standard and Poor’s; both affirmed at those levels on most recent updates in our ratings, very positive rating reports 7
As we budget, we need to be sure we have adequate budgets for the ongoing costs We have the expense we pay each year for principal and interest and must plan to pay those costs In 2014-15 and 2015-16, we will need about $1.2 million from reserves to help pay the higher principal and interest costs, then budgets return to levels consistent with normal budgets – we have funds set aside to pay the higher bills Because our variable rate bond issue is working so well, we were able to reduce our budgets from the anticipated 4% rate, and now budget for 1.6% expense on this line item (and actual expenses still stay under budget); if interest rates increase, we could make up part of higher costs from higher interest income on our investments, and we have “rate stabilization” funds available in our Debt Service Reserve as well There is a subsidy that comes from the state to help pay that bill – as reported recently, we have received most of our backlogged PlanCon funds in the subsidy payment that came in late December; generally we get between 10-15% of the costs of these bond payments back in state subsidy payments 8
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