Saturday, January 12, 2013

Supplemental Materials for the January 14 School Board Meeting, and Some Important Stuff about Bond Refinancing

Here are the supplemental documents for the School Board meetings to be held on Monday, January 14, 2013 at Washington Elementary School. The annual Organizational Meeting will start at 6:45pm, followed by the regular Board meeting at 7pm.

The Organizational meeting is used to elect the Board's officers for the year, as well as to pass pass resolutions setting the dates for the Board meetings in 2013, to authorize the Superintendent and Treasurer to take certain actions, and to appoint Board members to various committees of the Board.

This meeting is typically very brief, as Lisa, Andy and Doug have already decided who the officers will be, and since they constitute a majority, it's a done deal. Same for the committee appointments.

As was the case last year, I will be making a motion to amend Item 11J to remove the National School Boards Association (NSBA) from the substantial list of organizations to which our school district belongs.

It's not that I don't believe any of these associations have value. Our state and national governments are constantly tinkering with the laws, regulations, and policies governing the ways in which we must operate our schools, so an organization like the Ohio School Boards Association provides value by doing analysis of these requirements and figuring out what it means to a local school district. One of the items on the regular meeting agenda is the adoption of changes to our district's body of policies, taken mostly from recommendations we received from OSBA. It would be challenging and time-consuming to do all this work inhouse, and expensive to use independent legal counsel.

Of course, OSBA is also a lobbying organization, focused on the Ohio General Assembly. OSBA has a substantial legislative platform, ratified by the member school districts (including Hilliard City Schools), which is used to guide its lobbyists in their efforts. I don't personally agree with every plank in the platform, but it is developed via a democratic process, with each member school board allowed one vote.

I asked our Treasurer for a list of all associations to which we belong, what our membership fees are for each, and how much we spend to send people to their conferences. He provided this:

That's a lot of associations, and a fair chunk of money - about $55,000 in total for membership and conference fees. But it's also important that the leaders of our school district have access to a community of professionals in their specific field. This was certainly true in my profession - computing and telecommunications - and we would regularly attend certain professional conferences to learn about new things taking place in both the academic and commercial development centers, and to see what our colleagues (and competitors!) were up to.

So while I see the Ohio School Boards Association as being a valuable provider of information and training for our district, the National School Boards Association seems redundant. Virtually everything that happens at the national level that affects the way we run our school district filters down to us through state agencies, which are well-monitored by OSBA. A few respected school districts in our area agree with that perspective - Worthington, Olentangy, Marysville and South-Western are four that I know of. Upper Arlington remains an NSBA member, but decided this year to not send anyone to the annual conference.

You may also note that more than half of the cost associated with our NSBA membership is connected with this annual conference. This year the annual conference is being held in San Diego, the second time it has been there in the four years I've been on the school board. Last year it was in Boston, as I recall, and Chicago before that.

While the other board member have chosen to attend these conferences every year, I have declined each time. I haven't seen any value in spending the taxpayers' money or my time: I have not perceived one thing that has been added to our agenda or our discussions as a result of having people attend this particular conference.

It just seems to me that there are many better ways to spend $20,000.

Also of note are items F2 and F3 on the regular meeting agenda, which authorize the issue of $74 million of bonds. The items as they appear in the agenda are severely abridged versions of the full resolutions. I've posted the full text of the resolutions with the other supplemental materials, should you wish to read them.

You might ask why we're authorizing the Treasurer to issue these bonds when there hasn't been a bond levy passed for a while. The answer is that these issues will be used to refinance bonds that have already been issued and sold, but carry an interest rate which is well above current market rates. In other words, we're refinancing our mortgage while rates are at historic lows.

There's a right way to do this, and a wrong way. The folks over at New Albany Schools decided to refinance their bonds with an exotic financial technique called 'synthetic refunding' which involved the use of derivatives. Essentially they bet that interest rates would go higher, and when they didn't, it cost them a fair amount of money to get out of the deal.

So I want to be sure I understand what Mr. Wilson is proposing before I vote on the resolutions, and have had a detailed dialog with him about it. I'm satisfied that his approach adds no risk. Here's how it works:

The bonds we issued in 2005 and 2006 are 'callable,' meaning that at our option, we can redeem those bonds early. Think of it as paying off your mortgage early. However, we can't redeem them just any time we want - the bonds were sold with specified 'call dates,' so that buyers would know how much investment return they could count on even if the bonds are called in early. These bonds are callable in 2015 and 2016, ten years after their original issue.

So what we're going to do is borrow money at today's rates, and hold the proceeds until the 2005 and 2006 bonds can be called. However, the IRS has rules which prevent state and local governments from engaging in what could be called arbitrage, but there is a way around that: the US Treasury sells a special kind of bond called "State and Local Government Series" (SLGS). We will be using the proceeds of this bond sale to buy short-term SLGSs, and when the SLGSs mature, they will be used to redeem the 2005/2006 bonds. Because the SLGSs are 'risk free' securities issued by the federal government, we are allowed to zero both the 2005/2006 bonds and the SLGSs from our balance sheet, essentially pretending that they don't exist.

Nothing tricky here, and we aren't betting that interest rates will go up, down or sideways. The only question is whether the legal and consulting fees we'll incur are more than offset by the future interest payment savings. That is determined by what interest rate we'll have to agree to pay on the new bonds in order to find buyers. If that rate isn't low enough to actually save money, we won't do the deal. But those rates do appear to be low enough, and it doesn't matter what happens to interest rates after that - our savings would be locked in.

Okay, so what's in it for you and me - the taxpayers of our school district?  Will our property taxes go down?  Yes, a little now, more later. Here is a chart Mr. Wilson provided to me, showing our projected debt service requirements for the next eight years, given our current debt structure:
click to enlarge
The column labeled "Current Debt Service" is the amount of money the district will have to pay out each year to fund the principal and interest payments on all of our outstanding bonds, and the "Gross Requirement Millage" is the amount of property tax millage that will be collected from all of us in order to make those payments. Note that one mill collects a little more than $2.3 million/yr, whether for a bond levy (ie debt service) or for an operating levy.

If this refinancing works out as planned, and other assumptions hold true, we could see the millage necessary in 2014 to 2019 be closer to 7 mills, saving us each about $15/yr for each $100,000 of home valuation.

The big news is that in 2020, a substantial portion of our bonds will have been paid off, and the millage necessary will drop by another 2 mills, or about $60/yr per $100,000 of value. And if we don't decide to build more school buildings or do any big renovations, the portion of our tax bill associated with bond levies could by 2029 drop to 0.4 mills - nearly 7 mills less than now, or around $200/yr per $100,000 of value.

Key to that of course is keeping new home development in our school district in check, or at least offset by new commercial development (with judicious use of TIFs!). Remember, the new residents in those homes don't bear the most of the cost of new buildings, new teachers and new buses - we who are already here carry most of that burden. If you don't want to see that happen, you need to talk to Mayor Schonhardt and the Hilliard City Council.

Happy New Year!


  1. "This meeting is typically very brief, as Lisa, Andy and Doug have already decided who the officers will be, and since they constitute a majority, it's a done deal. Same for the committee appointments."

    It's nice to see that cooperation is alive and well on the school board. :-/

    Thanks for standing up for a wise use of our money. $20K is a lot to spend on membership in a professional organization, especially if you cannot point to specific benefits to the district.


    My support for the HCSD is over. Never will I ever support a schoole levy. The board has never responded in action on one request I have made. When I asked mid year about an annual evaluation of Dale they said yes then failed to meed the deadline the board president set. At the last meeting of the year I asked if she would get it done under her term she said yes. Yet I have yet to learn if one was done.

    I know I have addressed this several times, but there is a connection. Last year they kept all the memberships. One suggests an annual evaluation and have a process and forms. Another service they pay for but do not use. To go on a trip yet fail to complete the annual evaluation which is part of the board policy shows how poor a board we have.

    The end result is no more money, period. The group of 3 aided by Dale will soon make HCSD number 1 in the race to the bottom.


  3. I made the following motion at tonight's organizational meeting:

    According to the information provided to me by the Treasurer’s office, our district spends on the order of $55,000 each year for various association memberships and the cost of attending the conferences associated with several of them.

    I understand the value of such memberships – the public education world is one of constantly shifting sands, and it is important that our leaders have access to the experts in their various disciplines, as well as opportunities to interact with colleagues. In my career, I also occasionally attended conferences relating to my industry in order to keep up with new developments, and to see what the competition was up to.

    A third of our total spending in this category is related to the National School Boards Association – about $19,000 in the last year. Half of that was spent on fees and travel costs associated with the NSBA annual conference, which will be held in San Diego this year.

    I’m not proposing that our NSBA membership and the participation by members of this Board in the annual conference has no value, only that I don’t feel there is sufficient return on investment to warrant spending that kind of money. The Ohio School Boards Association and other channels keep us well informed of matters originating at the national level, and so the NSBA membership seems redundant, in my opinion.

    Note that our colleagues in other districts have come to that same conclusion: Worthington, South-Western, Olentangy, Marysville and Springboro are ones I know of who have withdrawn from NSBA. Upper Arlington retains its NSBA membership, but will not be sending anyone to the national conference this year.

    I recommend that we do the same.

    My motion was defeated 1 yea (me) and 4 nays (everyone else)

  4. The resolutions to do the bond refinancing passed unanimously.

  5. Paul,

    I missed the organizational meeting at 6:45. Besides Andy Teater becomming board president for this year, who now is VP and how were the representative positions assigned?

    Steve B.

    1. Lisa Whiting will serve as VP this year. I didn't record all the committee assignments. Andy changed a few from last year: I remain on the Superintendent's Advisory Committee, the Insurance Committee, and have been returned to the Audit & Accountability Committee.

  6. Paul, thanks for the update. These funds add up to possible savings of over 60,000 dollars over the last
    5 years. These type of figures are often blown off as miniscule, but add these to the other so called miniscule
    expenditures add up into the millions when you take a hard look at it.

    The supplementals only could have been save to the tune of
    over 2 million over five years easy. Sadly the electorate here seems in denial, and only reacts when the gang of four
    trots out the sob story over lack of funds and that we dont care about our kids. They are supported by the district and its associates and unless the board changes, there can be no change.

    After all, this is the same group who allowed our children to be harrassed and subject to contract negotiations in the classroom that certainly was not about the kids.

    The scary part is the supplemental contracts that equal months of social security income for some in our district.
    But of course those folks should just move (sic) (sic)

    What happenend to our newest board member who said she would look at supplementals ?

    Not that any of this should suprise even the most uninformed

  7. A friend of mine is the President of the School Board for Springboro City Schools. She asked their Treasurer for the detail on how much their district spends on these association memberships. Here's the answer:

    -National School Boards Association $0
    -Ohio School Boards Association $0
    -Association of School Business Officials $211
    -Ohio Association of School Business Officials ($560 + 912.6 for yearly conference)
    -Alliance for High Quality Education $0
    -Ohio Association of Secondary School Administrators $1,020
    -National School Public Relations Association $0
    -Buckeye Association of School Administrators $1,040
    -Ohio Government Finance Officers Association $0
    -American Association of School Personnel Administrators $0
    -Association of Government Accountants $0
    -Association for Supervision and Curriculum Development $0
    -Government Finance Officers Association $280
    -National Council of Teachers of Mathematics $0
    -Ohio Association of Elementary School Administrators $720
    -Ohio Middle Level Association $0
    -Safety Council of Greater Columbus $0
    -Wellness Council of America $0

    In other words, Springboro - a suburban district much like ours - spends about 10% of what we do on these association memberships. Notably, they are members of neither OSBA or NSBA.

  8. "The question is whether the legal and consulting fees we'll incur are more than offset by the future interest payment savings."

    Shouldn't this read "the legal and consulting fees PLUS the net interest on the new bonds from when they are issued to when the old bonds are called"?

    Just thinking out loud here:
    1) What is the rate on the old ones vs what we expect on the new?
    2) Are these bonds trading on a secondary market? Do we have the option of just buying them back?
    3) Why now? We have almost three years before we can begin calling bonds (No, I dont think rates will go up.)
    4) Given the staggered maturities, how much would we need to begin puttin in a 'savings account' in order to call the bonds with our own cash?
    5) Where is PRISM's analysis and what is their cut? Where is Dale's analysis?

    1. I think I phrased the question correctly - the immediate costs we incur by issuing new bonds has to be more than offset by future interest payment savings.

      While these bonds might have been callable in the near future, we don't have the cash on hand to make the calls, meaning we'd have to issue new debt to retire the old debt. Not knowing what the interest rates might be on the call dates, this is a mechanism for locking in the definite savings we'll get at today's rate. We do have to issue new debt, but by buying SLGSs with it, we can erase the old debt from the balance sheet (and won't be recording the asset value of the SLGSs), and substitute the new debt.

      This 'defeasance' process is something new to me, but it is pretty standard stuff in the municipal bond world apparently.

      I wondered the same thing about just buying up the bonds on the secondary market, but as you may know, there is no 'exchange' for bonds, so we'd have to deal with the whole raft of current bond holders directly. Besides, with the coupon rate on these bonds, the premium to buy them back would likely be so high to not make it worth it, even if we had the cash on hand.

      After all, if you paid face value for bonds yielding those kinds of interest rates, why would you want to sell them? Where else do you put the money to make that kind of return for such low levels of risk. The call option gives the issuer the right to redeem a bond even when the holder would rather keep the bond. I've had every since one of my municipal bond holdings called in the past couple of years, and it pissed me off every time. But I had no choice - I bought the bonds knowing they had a call option, and my yield might be limited to the 'yield-to-call'

      I haven't seen the Prism analysis. I trust the Treasurer on this one.

      This Superintendent pretty much stays out of this kind of financial stuff. The Treasurer reports directly to the Board.

  9. This comment has been removed by a blog administrator.

    1. Name-calling gets a comment deleted every time.

  10. Regarding the debt service graph:

    My point is that you mention that perhaps we could be looking at closer to 7.00 mills from 2014-2019. But since the calls dont begin until Dec 1, 2015, wont we have to wait until 2016 to see the savings?

    And in the meantime, our debt service requirements will increase by the spread between what we are paying on the new bonds and what we are earning on the treasuries.

    ^I cant see how cancelling out the old debt with the treasuries for balance sheet presentation helps us at all on the income or cash flow statement...

    Just seems like a curious way of presenting things. I'll be interested to read that footnote disclosure:
    "We have XX Million bonds at X.XX% rate. But those of you who calculate these sorts of things will realize that our income statement contains more interest than would correspond to the bonds stated above. That's because we're still paying interest on bonds we no longer disclose because we offest them by buying treasuries."

  11. Here's the mechanics:

    1. Issue new long-term bonds at an interest rate well below the current bonds, with the total cash generated by the sale being enough to pay the remaining 6 semiannual interest payments on the current bonds, as well as to redeem the principal on the call date.

    These show up on our balance sheet as a new liability, added to the liability associated with the current bonds

    2. Use the proceeds of the new bonds to buy sets of SLGSs with maturities which line up with the semiannual interest payments on the existing bonds, as well last the last principal payment (on the call date). The interest rate earned on these instruments is near zero, but are backed by the full faith and credit of the US Treasury.

    These would normally show up on our balance sheet as assets, but we place them into the care of an escrow agent, so that...

    3. ...through the IRS defeasance rules, we can remove both the SLGSs and the current bonds from the balance sheet. There will be no cash flow in the future associated with these securities. It is as through they cease to exist.

    4. We do debt service on the new bonds, at the lower interest rate.

    The only detail that makes this a little more complicated is that some of the bonds being retired, and some of the bonds being purchased, are so-called "Capital Appreciation Bonds," also known as zero coupon bonds. These bonds generate no interest payments, but are sold at a discount to face value in order to provide an appropriate yield to maturity.

    The Net Present Value calculations tell us the effective savings, regardless of whether the bonds issued are interest bearing, or zero coupon.

    1. Thanks for restating that one more time Paul. Sometimes the obvious seems to elude me...

      What I was trying to get at was that we will be paying interest on our interest. Or as you state it, "the total cash generated by the sale being enough to pay the remaining 6 semiannual interest payments". So we do take an initial hit on cash flow..

      Regarding your comment on not adding any risk: So if we give the greenlight to our underwriter to shop our offering around and we dont like the price the investors give us, we can cancel the offering?

    2. Indeed, we can't diminish the interest costs of the current bonds prior to the call date. This is just a slick mechanism to capture current interest rates, so that they will apply for the remainder of the term of the current bonds.

      I asked exactly the question you asked, and was assured that the underwriter would not go through with the sale unless buyer were found at an acceptable interest rate. I asked the Treasurer to report back to the Board when/if the sale is completed, and will post here what he reports.

  12. If you agree with Pauls topics then run for the board and help support the idea of saving our schools. We have seen what happens when Dale McLevy and the gang of four run the show.

    If you think our taxes will go down when the bonds are paid off think again. They think money = good education. They have their ideas and have no desire to hear or act on anything other than the way they want it.

    Where would we be today if we had just added to the other two high schools. Less staff one less football facility to keep up. We would have 2 updated high school building and could focus on the others. As the bonds come closer to final payment here is what you will hear. The high schools need to be updated, and other issues. The question is how much will be needed for the damage done because of money being diverted to the ILC?

    Read the website Andy Teater talkes about Hilliard Schools conservative financial management. What you will not see in print is the real cost of the next contract. All the did was a refinance of loan. Look at the loan numbers. Taxes are where they are because of over spending in the first place.

    Once the gang of four (sorry Paul) pick their person what change do you think there will be!!

  13. As noted before, the only way to change the future here is to change the players at the table. The gang of four have basically ignored any questions about spending, witness supplementals as a start, and are only interested in continuing to raise revenue to accomodate the district

    The challenge for any candidate(S) are $$$$$$$$$$$$$$$$$$$$$$$$. With a purposful campaign, post card direct mailings,door to door,and meeting with various groups of citizens from all walks of life, not just those who benefit from the revenue, can make a difference. Candidates also must be recruited now, as the time to pound away has begun.

    It is shameful that the usual gang of four REFUSE to do their duty, and not question the spending of 800,000 dollars in supplemental spending is reckless, self serving, and an abandonment of their responsibilities.

    With people struggling economically, seniors on fixed incomes, rising medical costs, people making 10 to 15.00 hour struggling to make ends meet, it is shameful to pay 4,000 out over multiple supplemental contracts
    There is no way that this can be done properly ? with all the other duties, and this for an 8 month period.


    And before this is interpreted as an anti after school activity point of view it is not. There is absolutely no logical or purposful monetary reason that we have contracted ourselves into greedy pay outs to monitor
    activities. In the private sector if you asked for any extra compensation, you would be laughed at right out the door.

    And dont bother with the "sponsored candidate foruns"
    The questions are soft ball and the sponsors are in the back pocket of the established group.

    On another subject it was refreshing to see a letter published by the rag HIlliard Northwest News, another propoganda greed machine. How the letter on remedial
    challenges our colleges are facing due to the ineptness and everything is wonderful crowd, got through the editorial board is indeed a miracle.

    We have a serious remedial issue in OHio schools that no
    one whether it be at the State Board, the Gov, the legislature, and certainly not superintednets or school boards.

    Same stuff, different day, contract rights over student rights and parental rights. More dollars, more spending.
    No effort to cure or address our remdition issue and reckless spending issues.

    Will the next contract spill into the classroom as before or we bury our heads in the sand as residents, and taxpayers. Or WILL WE DEMAND OUR SCHOOL BOARD TAKJE A PUBLIC STAND AGAINST ANY NEGATIVE ACTIVITY INVOLVING OUR KIDS DURING CONTRACT TIME>

    Does our board have any courage, other that Paul, doubt it.

    And this is a serious legal issue, exposing our children to such nonsense as before. Is it about the kids or NOT ???? The response will ring volumes on how the HIlliard City School District wishes to operate.

  14. Interesting to see SERS an Ohio public employees retirement fund with over $10 billion in assets catch heat for spending $11,000 to send 3 people to a conference in Hawaii.

  15. The Dispatch continues to criticize SERS on this point.