Saturday, May 23, 2009

Our New $10 Million Mortgage

According to the agenda for next Tuesday's Board of Education meeting (8/26 7pm, at the Admin building), the School Board will consider a resolution to take on $10 million in long-term debt "for the purpose of improving, constructing, reconstructing, renovating, remodeling, enlarging, furnishing and equipping buildings and facilities and improving sites for school purposes."

We gave the Board the authority to do this when we voted to approve the $75 million bond levy issue in May 2, 2006.

In actuality, the indebtedness has already occurred. Ohio law gives a school district the option to issue "Bond Anticipation Notes" in advance of the sale of the actual bonds. The School Board authorized the sale of such notes on May 12, 2008, with a maturity date of July 1, 2009. Since the Board and Administration is apparently not prepared to sell the long-term bonds yet, they are going to issue a new set of short-term Bond Anticipation Notes. These notes will be paid off via the issuance of long-term bonds, which they plan to issue by Sept 1, 2009. Note the gap – this $10 million, which has likely already been spent – was financed via short term notes which mature July 1, 2009. However, the $10 million long-term bond issue designed to replace these short term notes aren't expected to be issued until Sept 1, 2009. What happens in that three month gap?

Most folks haven't been walked through the mechanics of the sale of these kinds of debt offerings. It's not hard to understand – most folks just never have reason to think it through.

The first consideration is that the school district doesn't have on staff any folks with the skills and licenses to directly sell notes/bonds to the general public. Instead, the school district will make an arrangement with one buyer – the underwriter (called the "Primary Purchaser" in this resolution) – to buy the whole issue in one transaction. At the end of that transaction, the school district has a big check from the underwriter, and the underwriter has possession of a whole bunch of notes/bonds, which they turn around and sell to the public (in actuality, they will have pre-sold most of the issue prior to the transaction with the school district).

How does the underwriter get paid for their services? The bulk of it comes from the fact that they get to buy the notes/bonds at a discount off face value. In the case of these Bond Anticipation Notes, the underwriter gets to buy $10 million worth of notes for $9,700,000. They'll turn around and sell them for $10 million, netting a gross profit of $300,000 – often within days since they pre-sell most of the offering. This is all described in Section 6 (a) of the resolution before the Board.

Section 3 says that we may pay up to 5%/yr interest on the money borrowed, which is the full $10 million. We'll likely not be told what interest rate the notes are actually sell at – it just can't exceed 5% without a new resolution. I'd be surprised if it's much less however. The underwriter wants the interest rate to be as high as possible after all – it makes the notes easier to sell. These days 5% is very much a premium interest rate, and these notes should sell like hotcakes. My guess is that they have all been spoken for already – common folk like us never get a shot at these kinds of deals.

But the 5% interest is the small potatoes. It's the 3% discount the underwriter gets in the price of the notes which is expensive. The math works out like this: The school district gets $9.7 million from the underwriter when the deal is closed, and in 90 days we will have to pay out to the note holders the full $10 million in face value plus $125,000 in interest ($10 million x ((5%/12) x 3 months).

So for the privilege of borrowing $9.7 million for 90 days, we will pay $425,000 – the $300,000 discount we gave the underwriter plus the $125,000 interest at 5% APR. That works out to a little more than 13% APR.

And guess what. When these notes mature in 90 days, and the actual bonds are issued, the same kind of thing will happen again. The underwriter will buy the $10 million in bonds for $9.7 million or so. The district (meaning we the taxpayers) will then be on the hook to repay the full $10 million of face value to the bond holders, plus interest, over the life of the bonds.

My question is: Why are we spending the $425,000 in financing costs for the 90 day notes?

Is it because the Treasurer did a market analysis and decided that we would be able to issue the long-term bonds at a lower interest rate if we wait 90 days? After all, we want to have to pay as little interest as possible. But does anyone really think investment-grade interest rates are still headed down? After all, the interest rate on Treasury Bills is pretty much zero these days. And even if the Treasurer does think interest rates will drop further, will it be enough to offset the $425,000 in financing costs on the short term notes?

Here's what I guess: There's a lot of details that have to be taken care of when an entity is going to issue long-term bonds. You have to find an underwriter. Then you have to negotiate the discount with the underwriter. Then you have to set the interest rate on the bonds, which brings about a discussion with the bond rating agencies, whose job is it to tell investors how risky they think the bonds will be (the more risky, the higher the interest rate we'll have to pay). Then you have to register the offering with appropriate state and federal regulatory agencies.

All that takes time. My guess is that the Treasurer or someone else in the Treasurer's office figured out that they had $10 million in short term notes coming due on July 1, and not enough time to get all the legwork done to sell the long-term bonds. If that's the case, it's as pure an example of waste as I could think of. It certainly would buy a lot of diesel fuel.

Not to worry though – the bond levy we passed and state law gives the Board the power to sell another set of short term notes and stick us taxpayers with the financing cost.

This is the kind of thing the Audit & Accountability Committee should be digging into. They're supposed to make a report at Tuesday's meeting. I intend to be there to hear it. Hope you are as well.


  1. Paul, I'm processing.

    I have 2 questions that may help...

    1) How is the sale/payment of these notes typically handled? Is it usually the treasurer of the school district that does this or is it standard practice to "outsource" this effort? Just trying to figure out if this is a "cost of business" situation. Not agreeing or disagreeing, just processing. If other district's do it the way Hilliard is doing it, as wasteful as it is, it may not be the "surpise" it appears to be. If not, then Mr Wilson should fin a new career

    2) What is the anticiapated cost of the second round of reissue you spoke of? What's the cost of paying off the $10 million?



  2. KJ:

    1) This is absolutely the normal way of selling securities, whether by a small school district or a global corporation. The 'discount' is the way the underwriter is paid for doing all the legwork to sell the offering on behalf of the issuer.

    2) This new $10 million set of short-term bond anticipation notes will be paid off via the sale of the long-term bonds. Once again, the bonds will be sold to an underwriter for a discount, and then the school district will be on the hook to pay off the full face value plus interest.

    My beef isn't about the long-term bonds - that's what we voted for. It's that the district is taking out what can be thought of as a 'payday loan' at high interest rates rather than just selling the bonds now.

    The major cost, as I said, isn't the interest we'll have to pay, as we would be paying interest on the long-term bonds as well. Rather the cost is the fact that they'll sell $10 million worth of notes for $9.7 million, and then in 90 days, sell $10 million in bonds for $9.7 million again.

    That extra $300,000 we'll have to pay to redeem the $10 million worth of short-term notes is, I think, the consequence of not getting the long-term bond offering ready in time to pay off the current short-term notes.

    If that is the case, then we're blowing $300,000 as a sort of 'late fee' on the financing arrangements.

    By the way, it will be interesting to see who the underwriter is for these notes, as well as for the long-term bonds to be issued in Sept. As I reported last year, the huge $60 million bond issue that was the primary funding for the construction of Washington Elementary and Bradley High was underwritten by Fifth Third Band, who was also a large contributor to the bond levy campaign fund. I find that to be concerning.


  3. $10 says that your treasurer uses Baird as a consultant for bond issues. Securities is a finance specialty that most treasurers only have a pedestrian knowledge of, so most have consultants to turn to for guidance. Fair enough.

    Regardless of who your treasurer uses as a bond consultant, the Big Question is why did it have to come to this? Who was asleep at the wheel? Your treasurer, or your bond consultant? And if it was your consultant, did s/he have a financial stake in it? If your treasurer does not employ a bond consultant--and he is not an expert in securities--then why does he not have one?

    It's the obscure stuff like this that is never noticed by the general public, so it quietly happens all the time. Keep up the good work, Paul.

  4. Thanks Paul, that was helpful...

    you said .. That extra $300,000 we'll have to pay to redeem the $10 million worth of short-term notes is, I think, the consequence of not getting the long-term bond offering ready in time to pay off the current short-term notes.

    If that is the case, then we're blowing $300,000 as a sort of 'late fee' on the financing arrangements.
    Is Mr Wilson the responsible party for getting the long-term bond offering ready in time? I assume he is. If so, was he asleep at the wheel or might there be reasons beyond his control that cause this?

    Again, I'm just trying to understand all of this. Seems the fundamental questions to the BOE (to whom Mr Wilson reports, is "why did this happen"

    If Mr Wilson cost the district close to $500K due to lack of job performance, then he needs to find another line of work.

    To be fair, we don't know, so we can't call for that. However, the BOE should question it... the community should queston it... and frankly Mr McVey should question it.

  5. Anon: Thanks for the info re Baird. Note that no one is really motivated to keep this kind of thing from happening. Certainly not the underwriter, who pockets $300,000 in commission for selling low-risk, high-return investments. Nor would someone like Baird care. The Board should care, but I doubt that any of them other than Dave Lundregan understand what's going on.

    The Audit & Accountability should be looking into this kind of stuff. That's why I want to hear what they have to say tomorrow night.

    KJ: Your position and mine is in alignment. We have to ask two questions: 1) was this financing deal handled in a timely and business-like manner so as to minimize cost; and, 2) if not, who is responsible for wasting $300K of the taxpayers' money?

    I have a sense that complex financial matters like this are rubber-stamped by the Board because they don't understand it. They have a great resource in the form of the Audit & Accountability Committee to get independent outside counsel, but my guess is that they've never even thought to ask them.


  6. Why are we spending the $425,000 in financing costs for the 90 day notes?I suspect that it's because nobody cares about money unless it's their own money. Public money is never subject to the same scrutiny as private money.

    This all reminds me of Yogi Berra's sigh about the '62 Mets: "can't anyone here play this game?" Can't anybody in this district lead, communicate or execute?

  7. My comments to the Board last night:

    In reading the agenda for tonight’s meeting, I noticed that you will be voting on a resolution to sell $10 million in short term Bond Anticipation notes.

    The purpose for selling these notes is to redeem the $10 million in short-term Bond Anticipation Notes that you sold last year, which are scheduled to mature on July 1 of this year.

    Tonight’s resolution states that these new notes will mature in no more than nine months, and will be redeemed using the proceeds of the sale of the long term bonds the taxpayers approved via the bond levy passed in May 2006.

    To put this in layman’s terms, you are taking out a payday loan at a high interest rate to cover your near-term cash needs while you get the long-term bond offering put together and ready for market.

    This short-term loan will cost the taxpayers the $300,000 discount you have given the underwriter to handle this note offering. Add to that the 5% interest that will have to be paid, and this short term financing vehicle will be like a 13% loan if the bond issue really takes place in Sept. Not really a very good deal it seems to me.

    The final paragraph of the resolution in your agenda reads:

    “All formal actions of this Board and of any of its committees concerning and relating to the adoption of this Resolution were taken in an open meeting of this Board, and that ALL DELIBERATIONS of this Board and any of its committees that resulted in those formal actions were in meetings open to the public in compliance with the law.”

    I’ve not seen mention of such a deliberation in any prior minutes of the Board, and therefore expect to witness a thorough discussion of this rather substantial matter tonight, before you vote on the resolution. I would appreciate if you include in that deliberation a discussion of the reasons why yet another set of short term notes are being issued rather than proceeding directly to the issuance of the long-term bonds.

    And to the members of the Audit & Accountability Committee here tonight, I suggest that this is the kind of thing you need to dig into if your mission is to assure the people of the community that our financial resources are being used in the way we expect.

  8. ...

    The immediate response from President Denise Bobbitt was that I am welcome to take such questions directly to Treasurer Brian Wilson. She missed the point entirely of course. The question is whether The Board asked such questions of the Treasurer, rather than just rubber-stamping whatever is put in front of them.

    Mr. Wilson came to me after the meeting and said that the true financing costs will be more like $10,000, not $300,000. Maybe so, but that seems low. He also said that the interest rate will likely be closer to 2%, not the large numbers in the resolution, which he said was pretty much boilerplate. I'll ask for a copy of the final agreement with the underwriter after it is executed.

    He then said that the short term issue was necessary because he intended to restructure other debt issues which wouldn't mature until this fall.

    I asked what that had to do with delaying the sale of the long-term bonds. He said that Ohio law designed to keep school boards out of the arbitrage game prevented selling bonds too far in advance of the use of the proceeds. Of course, this wasn't mentioned in the resolution or in his briefing to the Board.

    I asked whether the resolution could preclude such misuse by requiring that the proceeds of the bond sale be used exclusively for redeeming maturing notes and refinancing maturing bonds. He said he wasn't an expert in bond law - I'll see what I can find independently.

    I told Mr. Wilson that the only bad answer to my question was the short term notes were needed because they failed to get the bond issued prepared in time.

    He walked away with no further comment.

  9. "He said that Ohio law designed to keep school boards out of the arbitrage game prevented selling bonds too far in advance of the use of the proceeds."

    I'd challenge Wilson to produce the ORC that supports that statement. That doesn't sound right.

  10. The immediate response from President Denise Bobbitt was that I am welcome to take such questions directly to Treasurer Brian Wilson. She missed the point entirely of course. The question is whether The Board asked such questions of the Treasurer, rather than just rubber-stamping whatever is put in front of them.
    Oh my. I don't even know what to say to that. Either she is openly defiant, unable to understand direct requests, or simply doesn't understand that you were calling her out. None of the three options are flattering for our Board President... who is in her last term.

    Makes one just shake their head. In their minds, you were out of line to ask such a question... that's the sad thing.

  11. I personally would have been a fan of Paul posting on this blog AFTER he did the investigating, as it seems a lot of his "assumptions" now appear to be unfounded. Now there are people throwing around numbers in the community like $300,000 and 5% interest, when those numbers are not accurate.

    Paul, you have earned the role (like it or not!) of watchdog that people look to for TRUTH. It may be time to put your assumptions aside, as you have become "The News" for many people. In those regards, this was irresponsible journalism.

  12. I appreciate the feedback.

    By objective with this blog has always been twofold: 1) to reach past the meager and biased disclosure of information by the school leadership; and, 2) to motivate the people of the community pay attention to this stuff, and get involved in the governance of our school district.

    In the case of this issuance of short term notes, it is still an open investigation. Here's what we know:

    a) The language in the resolution is standard boilerplate, and the numbers are not necessarily reflective of what will actually occur. It was clear to me that the Board didn't understand this, and was prepared to rubber stamp this resolution without the slightest bit of questioning or deliberation. It was my questions which stimulated what dialog there was - the Treasurer started his comments with "Paul brought up some good points..."

    b) It is not customary for the Treasurer to later update the public what the numbers turn out to be. While the President of the Board will be required to sign the certificate of issuance, I'm not confident that the rest of the Board will ever hear the final numbers either, or even think it is important to ask. This resolution gives the Treasurer and the President a great deal of latitude with no need for additional approval or follow-up. The Treasurer didn't give me the final numbers - he just said this deal would be a lot less expensive that the boilerplate language inferred.

    We're going to have to ask if we want to know how this financing arrangement works out.

    So I won't apologize for writing about this subject before all the facts are in, because a big part of my agenda is to get others to care about this stuff too, and to do their own questioning and research. This step has to be performed before the resolution is on the table - otherwise it's quickly a done deal and we have no recourse.

    The Board is supposed to act on our behalf on these matters, but the evidence is that they simply rubber-stamp this stuff without understanding or (public) deliberation.

    That's what has to change.

  13. Paul,
    Interesting article in today's Dispatch about the Columbus city school board policy regarding its relationship with the administration -- sounds like the policy Hilliard has adopted (and Olentangy, among others), though I didn't know it had a name! No wonder we have all been frustrated by their actions (or should I say apparent inaction, in most cases). If you haven't seen it, you should take a look.

    I'm wondering, when new members are elected, is there another vote on continuing this policy, or is conformity just expected? In lieu of your upcoming candidacy, what is your position on this if you are elected? Thanks!

  14. Mom:

    Yes, I've been much interested in this 'Carver approach' to Board policy. It has been the center of the argument between Jennifer Smith and the rest of the Olentangy school board. Dimon McFerson, the retired CEO of Nationwide Insurance, uses this policy for his justification for shutting down any discussion of matters Ms. Smith brings up in regard to questionionable actions.

    I've been spending hunks of time going through the sizable Policy Manual enacted by the Hilliard School Board, which is available to the public at the Hilliard Branch of the Columbus Metro Library.

    I don't see how any newly elected Board member could be required to somehow legally pledge allegiance to those policies, but it wouldn't surprise me if this is asked of a new member. I certainly wouldn't do so if elected.

    That's not to say policies aren't helpful. For example, there is a policies which deals with the grounds and procedures for expulsion from school. You don't want to be making that stuff up for every case, but rather have clearly communicated expectations and processes that can be followed the same way every time.

    In regard to the relationship between the Board and the Administration, such policies usually state that the Board delegates the executive duties to the Superintendent. I think the problem is that some Superintendents use that a license to assume a degree of power the policy never intended. Unfortunately, some Boards are weak and naive - or just lazy - and will cave in to a strong Superintendent.

    We need a strong Board in Hilliard. I hope I can fill one of the three seats that will be up for a vote this November. But we need to fill the other two with strong leaders as well. Watch for further news!