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Geneva School Board Seeks Ways to Reduce Millions in Debt as EAV Continues to Drop

Bonds issued before the economy crashed could weigh heavily on taxpayers in the next 10 years, advisers warn.

School District 304 officials are seeking new ways to reduce the cost of paying off the district’s bond issues between now and 2025, when the principal and interest payments could exceed $20 million per year.

“We are open to looking at any options,” said board member Kelly Nowak after the Board of Education heard a presentation of several different tactics, including debt restructuring, extending the payment schedule and using reserve funds to abate the debt service levy. “We are trying to look for immediate relief for taxpayers.”

The district has issued 20-year bonds four times between 2001 and 2008, both to build three new elementary schools and a second middle school and to finance startup operations for those new schools.

At the time, the district’s equalized assessed valuation—the combined value of all taxable properties in its borders—was growing 10 percent or more per year, and financial experts expected that boom to continue far into the future, explained Elizabeth Hennessey of William Blair & Co. investment firm of Chicago.

“The district’s repayment schedule is increasing based on referendums that were passed when big EAV increases were projected. Those would have supported the increased debt service costs,” Hennessey said. “Now we’re looking at options to reduce that debt service during the next few years when the EAV is projected to keep decreasing.”

One option would be to buy U.S. Treasury bonds, then place them in an escrow account. The would use the income from escrow account to repay some district bonds as they come due instead of levying taxes to raise the money, Hennessey explained. Called defeasance, the gambit would save about $3.7 million in the short term, but could cost the district millions of dollars in lost interest income in the long term, she noted.

Defeasance would spread bond payments over an extra 10 years, lowering the annual payments but piling on an extra 10 years’ worth of interest. “While defeasance is on the table, we’re reluctant to pursue it right now,” Nowak said.

Officials could use $10 million of the district’s operation fund reserves to abate the debt service levy now, in the hopes that the economy will improve before the annual debt service bill jumps in 2016. Or they could invest that $10 million to earn another $500,000 or more, then use the augmented amount to abate the levy after 2016, when it’s projected to become a heavier burden on taxpayers.

Hennessey also presented a plan that would combine these options.

“If we get into the combination thing, would that prohibit us from restructuring if we get into positive arbitrage?” asked board member Mike McCormick.

Arbitrage is a situation in which the district could make more money from investing reserves than it could save by paying down debt.

“The abatement would not take place until 2013 or 2014, so we have the flexibility to restructure because until then it’s not written in stone,” Hennessey replied.

While several spectators protested that board President Tim Moran would not let them question Hennessey about her proposals, longtime district critic Bob McQuillan suggested that both sides take time to study the options before debating them.

“It might be a little ironic that I say this, but I think everyone has to take a breath and relax,” McQuillan said. “The Board of Education is not what got us into this mess. The voters who voted to build these buildings got us into it. I would suggest that the board hold public forums explaining the situation and asking the community what they feel are the best options. You have the final vote, but this is such an important issue that the community needs to have some input.”

District Supt. Kent Mutchler assured the audience that staff will post Hennessey’s presentation on the district’s website, www.geneva304.org, by the end of the week.

The board will discuss it at its next meeting on Nov. 14, Moran added.

dana October 26, 2011 at 02:53 PM
the comment "we are trying to look for immediate relief for tax payers" strikes me as odd because other than restructuring the debt there seems to be no clear action plan summarizing measures being taken to reduce current costs. taxes have only gone up and now that we have been reassessed perhaps they will go down, but quick frankly to me a few hundred dollars taxes savings will not make a difference to me personally when i would rather see the debt paid down. i would also like to see some creative ideas as to how we may be able to potentially utilize the buildings or land associated with mismanaged planning to generate revenue. i also encourage the public to take the time to get educated about what is going on and get involved. there must be some other solutions for us other than to simply wallow in debt and try to put off paying for it hoping for a better economy.

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