Dixon School District Facilities Debt Issues On Agenda for Thursday, August 7

Dixon School District Facilities Debt Issues On Agenda for ThursdayLike almost every school district in California, the Dixon Unified School District (DUSD) has had to go into debt to pay for the costs of building or maintaining facilities. Unlike most other places, over the last six years DUSD has paid the majority of this debt from our General Fund. At this time, those payments are a significant obstacle for us to overcome and we are exploring alternative ways to pay them.

DUSD created a Mello Roos District in 1989 to collect monies from the residents of the district for school construction. This district covered part of town, primarily the areas served by Tremont and, eventually, Gretchen Higgins Elementary Schools.

From 1989 through 2001, DUSD incurred debt through the sale of bonds through the Mello-Roos District and through the issuance of Certificates of Participation – another form of debt which is more similar to a loan but which was still the responsibility of the tax payers in the Mello-Roos District to pay. The majority of this debt was tied specifically to the construction of Tremont and Gretchen Higgins.

Beginning in 2000, members of the community approached the District with concerns about their Mello-Roos obligations. After several months and many public meetings, the Governing Board passed a resolution to end the Mello-Roos District earlier than had been planned. This decision accounted for the payment of most of the Mello-Roos debt, but just under $6,000,000 of Certificate of Participation debt from the Gretchen Higgins project was specifically exempted.

So, in 2001, the District assumed responsibility for $6,000,000 in debt that was originally going to be paid by taxpayers through the Mello-Roos district. The plan for payment of this debt was to use Developer Fees, which had been a steady source of income for the District. These fees had been put to a variety of uses related to facilities, including construction, modernization, and maintenance.

In January 2007, the Governing Board approved another $5,700,000 in Certificates of participation related to the construction of the new Dixon High campus. At this time the Gretchen Higgins Certificates of Participation were also refinanced to a lower interest rate.

After 2007, new housing development in Dixon slowed down to a trickle and came to a virtual halt at the peak of the economic downturn. Since then, there has been very little development in most years. The result of this situation is that revenue from Developer Fees received by the District have plummeted while the annual obligation for the payment exempted from the Mello-Roos obligation and the 2007 Certificates of Participation has stayed constant at $735,000.

From 2008-09 through 2013-14 the total of the annual debt payments was just over $4,400,000. During the same period, the Developer Fees collected came to $596,000. The difference of $3,800,000 was paid from the General Fund. This fund is our annual operating budget for general purposes. In other words, we spent almost $4,000,000 on debt rather than on programs and services for students during this period of time.

The large General Fund expenditure on debt could not have come at a worse time for the District. The period of these payments has matched the worst economic crisis the state has faced since the Great Depression and was a period with historically large budget cuts from the State. So, we took two big blows simultaneously – large cuts in funding from Sacramento and the need to use General Fund revenue to pay debt.

Our debt situation is a real cause for concern. The dedication of dollars that should be spent on programs and services for students to pay for long-term facilities debt threatens to interfere with actually meeting the needs of our students. As a result, the District has been exploring the possibility of restructuring our debt to relieve all or part of the General Fund payments.

The period beginning in 2007 through 2013 was the most challenging time the District has ever faced in terms of its financial health.

In 2007 it became apparent that the District’s finances had not been adequately monitored and managed.

The Superintendent and Chief Business Official both left the District in the fall of 2007 and Dee Alarcon and Lettie Allen from the Solano County Office of Education served as our acting Superintendent and Chief Business Official most of that school year. We began budget cuts that year, including the closing of Silveyville Elementary School.

By 2008 the economic crisis had begun and funding from Sacramento began to be reduced significantly. Federal stimulus money helped to replace some of the lost revenue, but we continued to make substantial reductions in programs and services to remain solvent. The increases in class sizes and loss of support services negatively impacted our academic performance and added stress to students, staff, and parents.

Over this entire period of fiscal trouble we monitored and limited spending. With the addition of the one-time stimulus funds we were able to build a significant reserve – some said too large actually – and have been spending that down over the course of the last two years. It is important to note that this was planned deficit spending, not a lack of monitoring or oversight. Last December, at the time we had to file a budget update with the County, we were able to certify a positive budget status for the first time since 2006. This certification was an official statement of fiscal health.

It is a reasonable question to ask how we can move from being fiscally healthy in December, and again in March when we filed another update with the County, to discussing big concerns over our finances today. As is always the case, many things changed from then to now, and most of them were things out of the District’s control.

As of March, we projected to end the 2013-14 school year with an ending balance of $2,966,244. In late June as we adopted our 2014-15 budget, the projected ending fund balance had changed by less than $85,000 to $3,049,679. I cite these figures as evidence that the challenges we face are not about over spending or not monitoring our current year budget effectively.

At budget adoption we were responsible to complete a multi-year projection showing the 2014-15 budget that we were adopting, but also the 2015-16 and 2016-17 years. It is in these projections that we see the urgency of our situation.

From March to June the projected unrestricted ending fund balance for 2014-15 decreased from $1,763,839 to $1,252,865, a decline of $510,974.

From March to June the projected ending fund balance for 2015-16 decreased from $1,965,718 to a negative balance of $2412, a decline of $1,968,130.

With the new budget adoption we were required to add an ending fund balance projection for 2016-17 for the first time. This projection is a negative balance of $1,748,299.

The decline in the projected ending fund balance is highly alarming and not a path that we are not legally allowed to walk down. As a result, we have identified the need to make $1,000,000 of on-going adjustments in the 2015-16 school year and another $800,000 of on-going adjustments in 2016-17. This is a total of $2,800,000 of on-going adjustments in the two year period of 2015-16 and 2016-17.

An adjustment is a term that has been used in recent years to soften what they have really meant – cuts. Adjustments can also mean revenue increases, although those are much harder to identify and even harder to enact.

So, why this big change for the worse? Is the District mismanaging its budget as was seen in the past? Our answer is no, we are not. A number of factors contribute to this swing and deserve careful explanation.

First, in a last minute surprise from Sacramento, the Governor and Legislature decided to address funding issues for the retirement systems for teachers and classified employees. While individual employees and the state will have increases in what they must contribute, school districts are getting battered. Beginning in 2014-15 and for the two subsequent years we will pay an increased amount of $174,000, $493,000, and $757,000. That is a total of $1,424,000.

Second, due to changes in funding for the Solano County Office of Education we will lose $150,000 in annual funding for Career technical Education purposes. That is a total of $300,000 is our multi-year projection.

Third, many people are aware of the new funding formula called the Local Control Funding Formula (LCFF) and the required plan to accompany it called the Local Control Accountability Plan (LCAP). Under these new systems, each district in the state is required to develop a plan to serve all students, with a focus on poor children, English Learners, and Foster Youth. As required, we have developed our plan and from it generated about $520,000 in new expenditures. This is a total of $1,560,000 over the three year period.

These new expenditures or loss of revenue total $3,284,000 or $484,000 more than the $2,800,000 in adjustments that we need to plan for. Again, we are responding to factors beyond our control in paying for the pension increases, seeing revenue end, and completing the requirements of the LCFF and LCAP.

This great challenge we now face is real, and while we know that projections can and will change over time, it is clear that we must consider all options to address our financial health. One of these options is to eliminate or reduce the $735,000 in annual debt payments we are making from our General fund.

The first two articles in this series were intended to describe the District’s situation with regard to our facilities debt and the overall budget picture for us. To summarize 2,000 words of writing into one or two sentences is difficult, but here is the effort. The District has debt which we have had to pay out of our General Fund at the rate of almost $735,000 per year. Over the next several years we are being hit by outside factors that threaten our fiscal health and, as of today, would require us to make $2,800,000 in budget adjustments. I encourage you to read both of the prior articles to get all of the details of those descriptions.

We have been aggressively working on a restructuring of our debt for about a month now. We have been asked why we waited until now and why are we rushing so much. These are fair questions and should be answered directly. Half of our $2.8 million problem emerged at the end of the budget process in Sacramento when the Governor and Legislature agreed to increase our contributions to the pension funds for teachers and classified employees. This was in mid-June.

Adoption of the budget by the Solano County Office of Education confirmed that we would be losing $150,000 in revenue beginning in 2015-16. This was also in mid-June.

Finally, we adopted our own budget on June 26th, increasing spending on student groups as specified and required under the new Local Control Funding Formula.

As explained in the last article, as recently as March when we had to make a formal update to the County office, we did not show the current level of financial strain.

With the assistance of our interim Chief Business Official we began to work with a consulting firm, Capitol Public Financing Group (CPFG), to explore options for restructuring or refinancing our debt, an amount just below $10,000,000. We held a Special Meeting on July 7th with an extensive presentation from CPFG and had an update on their work on July 17th at our regular meeting.

Some options to address our situation were discussed and dismissed quickly. One, A General Obligation Bond, would have extremely rushed and not properly planned due to time constraints. A second, a Public Offering in which we would essentially put our debt on the market for sale to obtain a restructured payment schedule was also rejected. The reason for the dismissal of this option was the cost. CPFG’s estimate of costs was approximately $365,000 to do a public offering.

Our work with CPFG has since focused on trying to obtain a Direct Placement. This amounts to a negotiated purchase and restructuring of our debt with one specific lender. There are advantages to this model that are attractive to us. First, the costs of a direct placement are approximately $182,000, half the cost of the public offering. Second, the terms of the deal are negotiated in advance with a single lender and can be locked in. This ensures no surprises in costs or other financial impacts over the course of repayment. Finally, this is the least risky option for the District in terms of compliance with stringent regulations regarding creating or selling public debt.

As of right now, we will be bringing forward a proposal for the Board’s consideration on Thursday, August 7th to proceed with a direct placement with Western Alliance Bank. Our consultants have engaged in extensive negotiations with them and other firms and have obtained terms that are acceptable to me and which I am confident in bringing to the Board.

Again, to be very clear, the proposed direct placement will involve approximately $182,000 in fees and costs related to the transaction. This is a one-time expense. The majority of the fees go to our consultant CPFG, legal fees, and the underwriters. A specific breakdown of the fees will be presented on the 7th.

The proposed interest rate for the first five years of the 42 year loan period is approximately 2.9%. Our current rate is 4.24%. From 2019 through 2024 the proposed interest rate is 4.65 %.

In 2024 the interest rate will be reset. Based on a formula used by the lender, the rate is currently projected to drop to 3.45% but cannot exceed 7%. This wide variance is tied directly to the changes in the market that may occur during this time period. The cap on rates was important to the District as rates have been as high as 21% in our lifetimes.

The lender has the option to call for the full payment of the loan in 2029 should it want to. Again, this would be dependent on market conditions and we would have the option to restructure or refinance if we determined that was prudent.

Finally, there is no prepayment penalty in the proposal, meaning that we can pay off this debt at any point in time should we choose without any additional costs.

What does this deal get us and why should we consider approving it? The restructured debt would reduce our payments in 2014-15 from $735,000 to $135,000, in 2015-16 to $274,000, and in 2016-17 to $274,000. Over the three year period this is a total reduction of $1,518,000.

As we look at the prospect of $2,800,000 in budget adjustments, the figure of $1,518,000 in reduced payments for our debt service is very compelling. It is important to acknowledge that this is merely a shift of the debt burden to later years and not an actual savings. Nevertheless, it is my recommendation that we approve this transaction.

The real question here is why should we spend the $182,000 or so to shift our debt burden? The answer, for me, is simple. If we cannot make this shift, I will be responsible to propose a plan to the Governing Board which accounts for the $2,800,000 in budget adjustments over the next three years. The majority of these adjustments will need to be cuts to programs and services for students, reduction of staffing, and other things which are harmful to the learning of the kids of Dixon.

We have seen what severe cuts do to our schools and our students. I see this option as a way to avoid the kind of limits that we lived under from 2008 to 2014 in the interests of our children. This restructure also gives us time to create a long-term plan for the management of our facilities debt, as well as to plan for addressing our facilities needs and how to finance them.

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