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Commentary

With CABs, Itís All About the Cost of Money

By Dr. Barry Schimmel - June 20, 2013

In recent months, school boards and administrators have been critiqued for not fully understanding the use of the bond sale as a financial instrument. Capital Appreciation Bonds (CAB) have come to the forefront as a discussion item because of the large, and in general inappropriate amount of interest charged to the public. I would suggest school board members and executives are in need of much more than a few tips to provide for prudent use of taxpayer money.

First of all, the selling of bonds is big business. Money is a commodity in a very competitive market. School executives are generally not skilled in the language terminology used to create fees. After all, most chief business officials sell bonds no more than once every five years. Many CBO’s sell only one bond in their entire career. Compare selling a bond to financing an individual home. Most people who buy a home know the price, interest rate, and repayment amount. What about all those other fees in a closing statement for a home? Generally, a home transaction will have 5-10 lines of cost items. A bond sale is no different. Yet, all of those fees are negotiable and are part of the cost of the transaction.

So let’s start at the beginning. A district wants to build or improve facilities. Funding is required. School folks generally are not experienced in arena of selling school bonds. With reduction in administrative staff, infrequency of bond sales within a single district, both board members and administrative staff look to outside professionals for help. A thousand providers are ready to jump in and provide that service. Lots of money to be made.

Step one is to develop a clear and tightly-written master facility plan that is much more than a collection of good ideas, before asking a community to support a bond. The plan needs to be specific with what will be done at each school, when, at what estimated cost. Of course, community involvement, “buy in,” and support will be necessary to pass a bond with a sufficiently large majority of votes to obtain the money.

Here’s where it begins to get complicated. Bond campaigns cannot be funded with district funds, and they are expensive. Typically, around $100,000 to $200,000 must be raised to pass a bond in a mid-sized district. This is “Hurdle Number One”. Who in the community has the time or interest to fund raise that kind of money?

Now comes the “knight on the white horse”… or should I say “Trojan Horse”? Several bond firms will come to the district offer to pay for the campaign, run the campaign, and almost assuredly guarantee passage, and if the ballot measure doesn’t pass you don’t owe them a thing. Wow! Almost full proof, someone else is going to do the work and pay for it.

Anyone still believe in a free lunch or the tooth fairy? Nothing is free. Look out for the catch: if the bond passes you are obligated to sell it with firm X. The district is not likely to get to negotiate the fee or competitively bid for the service. Remember, you are just borrowing money. The same money any firm can get you.

Suggestion One:  Always state that the district will competitively bid the sale of bonds. Remember whose money is it anyway: the tax payers. School district board members and executives have a responsibility to monitor the cost of issuing bonds. It varies greatly and can cost the taxpayers much more from one firm to another.

Suggestion Two:  Share with the board and administration they will be wined and dined by many firms wanting their business. Expensive dinners, trips, sporting events, or even gifts have been known to be provided by vendors wanting district business. Work with the board and superintendent to develop an attitude we can’t be bought or lobbied to get district business. Why, all of a sudden, does a firm come courting? To make money. There is nothing wrong with that. How it is handled sets the tone for the integrity of the district. News spreads fast about whether district officials can be “handled.”

Suggestion Three:  Construction documents must be tight. They must be reviewed by several parties, including the architect, construction manager, the responsible district official and legal counsel. Keep everyone informed and post everything on the district web page. Knowing when you will need the money is key to avoid paying for funds before they are needed.

Suggestion Four:  Select an independent financial advisor that does not sell bonds to review your financial financing plan. The firm’s fee in relation to potential savings for the taxpayers can be large. Those few dollars can save the district taxpayers millions, and avoid being on the newspaper front page for using bonds at rates way above the norm. Remember, a small difference in a rate on millions of dollars can make a huge difference in the amount of interest the community pays to build their schools.

Summary

It is likely local districts will become more actively involved in raising funds for school construction, as statewide funding is becoming limited. School board members and administrators can assure their constituents that prudent financial actions are being implemented in their district by learning and comparing various offers from several vendors. Just like when buying a home or car, review the bond sale documents, ask questions, and know what you are paying for.

Editor's Note:  Dr. Barry Schimmel is a former school district superintendent and chief business official. He now works with Vanir Construction Management as a Certified Construction Manager.