The Rhinelander Daily News - Online news and information for the Rhinelander, Wisconsin region

As the School District of Rhinelander (SDR) enters the final week of its campaign of public meetings to promote a “yes” vote on the upcoming Sept. 9 referendum, some local taxpayers are still asking what will happen to the district’s debt levy should interest rates rise steeply in the future.

Carol Wirth, a financial analyst employed by the school district, has been present at many of the community meetings to answer that question, but the structuring of school district debt can be confusing and attendance at those meetings has varied.

Wirth’s company has been responsible for creating a financial plan that would accomplish the goals of the district should the referendum pass, a job she has also undertaken for other school districts around Wisconsin.

According to Wirth’s plan, the SDR will borrow $23,350,000 with a 25-year repayment at 5.25 percent, figures that will amount to a tax rate of $.68 per $1,000 of equalized value. The district will also levy $225,000 annually for operating costs, which will result in a tax rate of $.09 per $1,000 of equalized value. The projected referendum tax rate is a combined $.77 per $1,000 of equalized value, a number that is equal to the current debt levy tax rate for the district.

While the numbers listed above are not exact figures, the plan is based on assumptions grounded in historic patterns. In order to bolster the relevance of the figures in the above plan, Wirth explained in detail how the district’s debt issue will work, should voters approve the upcoming referendum.

According to Wirth, one of the variables that deters the district from offering concrete figures in relation to future debt projections prior to a referendum vote is that the district cannot lock in exact numbers on its debt issue until it receives and approves bids from contractors to do the work proposed in its capital spending plans. State and federal statutes strictly regulate the ways in which debt can be issued by a tax-exempt school district and some of those statutory regulations are responsive to the exact numbers formulated in the construction scheduling process.

For instance, if a school district issues more than $15 million of tax-exempt debt in a calendar year, the district must spend the borrowed funds in accordance with the federal regulations, which require 10 percent of the borrowed funds and any investment income thereon to be spend within six months of receiving the funds, 45 percent in one year, 75 percent in 18 months and 100 percent in two years. The district must calculate and meet these six month benchmarks or the arbitrage profit must be returned to the U.S. Treasury in the form of a rebate check.

The ability of the district to meet these benchmarks is based on the construction drawdown schedule prepared by the architects and construction managers after the project bids are received. Working drawings for a project are prepared after a referendum is passed. The working drawings are used to bid the project. This process could take several months after the passage of a referendum. The dollar amount and timing of when the district may borrow is based upon the need for funds in accordance with the construction draw schedule and the ability to meet the federal arbitrage regulations spenddown requirements.

To achieve an accurate representation of the numbers involved in the construction process, Wirth has worked extensively with district administrators and with contractors and architects from Miron and DLR, the companies that are expected to win bids for the building projects.

When a school district is contemplating going to referendum, or, if any other municipal issuer is considering the undertaking of a project, certain basic assumptions must be made to determine the potential cost impact. Those assumptions are the basis for the financial plan that a district uses to project the costs associated with a debt issue.

According to Wirth, the assumptions for municipal debt must include the state and federal laws, the useful life of the project, tax base, existing debt, and interest rates based on historical markets. Assumptions used should be conservative and reasonably achievable when the project is actually financed.

Debt is also managed throughout its term of issue, not just up front. Prepayment features are included with various debt instruments to allow for either prepayment of debt from unknown revenue sources at the time of issuance, or, to allow the issuer to refinance the debt for either interest savings or restructuring. But debt management is an on-going process and, according to Wirth, has been used by the SDR many times in the past, saving taxpayers hundreds of thousands of dollars while improving its credit rating.

Should SDR voters approve the referendum to authorize the district to issue general authorization bonds in the amount of $23,350,000, the next step will be to receive bids for the work and award contracts for the design and building process. Once a construction schedule has been finalized, the debt can be issued in accordance with the federal lending regulations outlined above.

Only then will the district be able to quote its interest rates, and those rates will depend on the specifics of how it is able to manage its debt in an on-going fashion. To illustrate how the financial plan relates to the actual debt issue in the case of a school district, Wirth provided information on a recent project undertaken in Janesville.

As it relates to the details of the School District of Janesville:

1. Referendum projections were prepared for a $70,795,000 referendum in August 2006 based on a 22-year amortization at 5.25 percent. Total interest cost of the borrowing was estimated at $40,467,656.

2. Referendum was approved in November, 2006.

3. Based on bids received for the construction of the project following referendum approval, a test was performed on the anticipated construction draw schedule and how the funds would be spent. This schedule indicated that the district could borrow $33 million as the first phase in order to be in compliance with federal arbitrage regulations which dictate how fast the funds must be spent in order for the district to retain the positive arbitrage earned in the construction account.

4. The first phase of borrowing occurred in April 2007 for $33 million. Actual net interest rate was 4.36 percent and the cost over the life of the bond issue was $16,280,719.

5. The second phase of borrowing occurred in July 2008 for $37,795,000. Actual net interest rate was 4.35 percent and the cost over the life of the bond issue was $18,685,836.

6. The combined interest costs of both phases of the $70,795,000 was $5.5 million of less interest cost than projected cost. The process to prepare for referendum included the projections made in August 2006 with a completion date of July 2008.

In the case of Janesville, the assumed interest rate of 5.25 percent ended up exceeding the actual interest rates that the district was able to obtain. Wirth said she expects that to hold true for Rhinelander, but much depends on how quickly the process can move through its initial phases.

School districts, as tax-exempt municipal bodies, are afforded much lower interest rates than private borrowers. According to district business director Marta Kwiatkowski, the SDR’s interest rate has not exceeded 6 percent over the past ten years. So while interest rates are rising as a result of the current lending crisis affecting the economy broadly, it’s not likely the interest rate afforded to the SDR will rise above 5.25 percent, the assumed rate in Wirth’s debt retirement model, by the time the debt is issued.

Should the interest rates rise at an historic rate and exceed the rate quoted in the model, the district could and would employ strategies to mitigate the rise by borrowing over a shorter term. Short term bond issues are offer at lower interest rates and would allow the district to manage its debt without raising its levy until a more attractive long-term rate could be negotiated.

Wirth also reiterated that while nothing is ever certain with regards to financial markets, the borrowing model followed by the SDR is the rule for school districts throughout Wisconsin, and the SDR has historically managed its debt responsibly, as evidenced by its high bond rating.

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John Reinthaler wrote on Sep 2, 2008 1:04 PM:

" If only you people would have attended the town hall meetings - all your questions would have been addressed - like where did the money go from the sale of the schools - its in a account earning interest or the current school board ransacking - the school would not have a high bond rating if they have managed the school poorly. I feel angry and sorry for you people, you continue to stay uniformed and refuse to get educated. You would rather spread false information and bash the people (school board)that are trying to help "

Kevin wrote on Aug 29, 2008 9:43 AM:

" Kevin again, Vote yes!!!! For all that vote no, think in the future about your kids, your kids children and etc. I hope it doesn’t come back to haunt you with the fact that they don't have a school that has all the needs to make there education the best it can be, or that they can't play sports or have a competitive chance like the other schools have with the lack of facilities. Just because your mad that the school in your opinion hasn’t used money to the best of there judgment, doesn't mean you should hurt the youth (possibly your children, grandchildren), which in fact is the reason this referendum is going. "

Mark B wrote on Aug 29, 2008 12:30 AM:

" VOTE NO

When will the people who keep bringing this stuff to the polls going to learn. LISTEN
Get rid of the debt which was supposed to be gone with the sale of various buildings, but geuss what they lied. So not now not ever, VOTE NO. If you really need the money make the teachers take a pay cut and a cut in thier benefits. That should pay all your bills. AND YES I HAVE TAKEN A VAST PAY AND BENEFIT CUT so that I could stay here. "

angela wrote on Aug 28, 2008 9:22 PM:

" DOES ANYONE IN THE SDL DISTRICT REALIZE THAT THIS CONTRACT DOES NOT BENEFIT OUR COMMUNITY AS A WHOLE? CONSULTING ONLY WITH MIRON ON THE ARCHITECTUAL AND BUILDING COSTS OF THIS HAS VIRTUALLY EXCLUDED THE ENTIRE CONSTRUCTION INDUSTRY IN RHINELANDER, THAT CURRENTLY HAS 35% UNEMPLOYMENT. HAVE ANY LOCAL BUSINESSES EVER BEEN HIRED BY MIRON? IF SO WHO? HAS IT BEEN PRE-DETERMINED THAT HE WILL GET THIS CONTRACT , AS WORD ON THE STREET HAS IT? BEING THAT THE COMPANY IS FROM NEENEH, AND HAS BUILT 4 MAJOR PROJECTS HERE AND NEVER HIRED A LOCAL, SOMETHING SMELLS FOR ALL OF US LOCALS TRYING TO FIND EMPLOYMENT. GOD BLESS OUR KIDS, BUT FOR THOSE OF US WHO CARE ABOUT THE COMMUNITY AS A WHOLE, SOMETHING IS AMISS! "

Harvey wrote on Aug 28, 2008 5:54 PM:

" If the good people of Oneida County let the school board and a few people that have tried to pull the wool over the eyes of the taxpayers in this county then you deserve what you get. It is hard to believe that the total cost will even come close to what they say it is. How many government projects do you know have ever come in under budget? Sounds like this is another thing trying to be jammed down our throats. Let's give the kids a valuable lesson in finance; plan accordingly and properly finance projects that you know are needed. "

William wrote on Aug 28, 2008 4:18 PM:

" I say "VOTE NO"....The current school board and superintendent have ransacked our district. What happened to the money from the sale of all of our schools? When you replace the current superintendent, come up with a REALISTIC plan and present it, then we'll see. And about working for our kids.... It does no good to send them to a school if I (parent) cannot afford to keep them fed, housed and clothed because of ever rising taxes..A penny here and a penny there add up. "

Bob wrote on Aug 28, 2008 1:23 PM:

" Like Kevin said vote yes for goodness sake Oneida County it's the kids that you work for isn't it lets do it right. Soit will cost a little more so what give up your cigarettes and some of your booze it's not good for you anyway and it will improve your health some I know you don't like to hear that but never-the-less it's true. "

Lisa wrote on Aug 28, 2008 1:20 PM:

" I am asking all those in the community to please take the time and vote Yes on September 9th. The businesses will benefit, the community will benefit but most of all the kids will benefit. This is a tax-neutral proposal and will not cost anymore than you are paying already but will do a great deal for those around you. Please vote Yes, you will feel good inside knowing you have made a huge difference. Thank you. "

Kevin wrote on Aug 28, 2008 10:54 AM:

" Vote yes!!!! "

The comments above are from readers. In no way do they represent the views of the Rhinelander Daily News.