Prospecting for School Districts with Debt Capacity

As Iowa City Community School District’s (ICCSD’s) stakeholders watch to determine whether its bond ballot referendum for $191.525 million (plus interest) will pass or fail on September 12th, there is an interesting discussion in some of the comments sections of posts on Chris Liebig’s Another Blog About School about whether school districts across the country have been targeted by those with a profit motive for these districts’ ability to borrow money to finance infrastructure plans. Certainly there is money to be made, and alongside the money to be made potential and real conflicts of interest exist so voters should carefully scrutinize what is in (and as importantly what has been left out of) ICCSD’s September 12th bond ballot referendum.

Question: How easy is it for business development professionals to prospect or mine for school district customers that have the capacity to borrow money via debt financing/bonds?

Answer: Very easy.

To test how easy it is to identify and target school district prospects such as ICCSD, one only has look at page 46 of ICCSD’s yearly audit, which is publicly filed and found here.

ICCSD's Debt Capacity

Iowa City Community School District Information About Its Debt Capacity From Its Latest Financial Audit

A school district like ICCSD that has the capacity to borrow hundreds of millions of dollars using bond financing is a “hot” prospect, especially considering it is an area where there is a low unemployment rate and a good property tax base. Of course voters will pay property taxes they would not otherwise pay to support repayment of these bonds.

ICCSD’s  $191.525 million dollar bond referendum could be followed by another bond referendum, and/or there is widespread support across Iowa for extending the penny sales tax for schools known as SAVE (Secure an Advanced Vision for Education) from the year 2029 through 2049.

ICCSD’s financial advisor is reported to have stated “that if 100 percent of the sales tax remains for Iowa school use out to [the year] 2049, ICCSD would ha[ve] access to roughly $440 million.” (see page 2 here, and for more information about ICCSD and SAVE, see here and here). ICCSD could then, as could potentially other Iowa school districts, issue additional bonds (more debt) in anticipation of receiving sales tax revenues, which would then be used to repay the bonds.

20170722_155217

From ICCSD’s Facility Master Plan (FMP) Proposed General Obligation Bond Funding  Key Facts and Details 1/10/2017

Lest one think ICCSD is unique with regard the ease of locating its debt capacity, the most recent audit for the Cedar Rapids Community School District (CRCSD) found here also makes its capacity for additional debt easy to find. CRCSD has also seen its bond rating improve within the last couple of years (see here) helping to make it a “hot” sales prospect for taking on additional debt.

Cedar Rapids Debt Capacity

Cedar Rapids Community School District Information from Latest Financial Audit  about Debt Limit

In addition to financial audits, credit rating agencies and EMMA (Electronic Municipal Market Access) are among the sources of information available to business development professionals and others.

To see see exactly what you are voting on in ICCSD’s upcoming bond referendum, see here and note, the ballot language does NOT mimic ICCSD’s facilities master plan (nor will voters vote on ICCSD’s facilities master plan).

Objectively, borrowing money using debt financing needs to make sense not just for one’s school district and all of the outsiders who might financially benefit, but also make sense for a voter’s individual circumstances. Please mark your calendars and vote on September 12th.

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This entry was posted in Bond, Bond vote, Budget, Conflict of Interest, Debt Levy, Facilities Master Plan, FMP, General Obligation Bond, ICCSD, Iowa City Schools, Uncategorized. Bookmark the permalink.

2 Responses to Prospecting for School Districts with Debt Capacity

  1. amy says:

    Mary, another interesting aspect here is the question of what’s going on in the muni bonds derivatives markets. Given how reminiscent of the McMansion liar-loan years this sudden nationwide ramp-up in school megabonds has been, I spent a while thinking about how people make money off bonds, and then realized that was dumb: the much bigger market’s in the derivatives. Before you can have a muni bond derivative sausage to sell, though, you need beaucoup muni bonds, meaning you have to entice cities and school districts and the like to borrow, and borrow big. Borrow giant, in fact. As big as possible. And yes, the muni bond derivatives markets seem to have been quite exciting in the last several years.

    There’s a twist, though, that you didn’t see with the McMansion derivatives games, and it’s been the focus of a spate of lawsuits, districts and municipalities suing banks. When a district sells bonds for projects, it has to park the proceeds before it spends them. And it hires a bank to collect yield bids and find the best place to park that money. It appears rigging games are endemic, here, though: collusion to offer low yields to districts, meaning the banks walk away with a big spread.

    There’s also a world of fleecing that goes on in refinancing bonds, but I think you’ve already mentioned some of those — were you the one talking about the trouble CPS got into with its interest-rate swaps?

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    • Mary says:

      I was not “the one talking about the trouble CPS got into….” I have noticed, however, that there does not seem to be a lot of effective regulations (if any?) governing the marketing of selling a school bond referendum. You’ve raised some important points on Another Blog About School. Thank you for commenting Amy.

      Like

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