MVHS Funding

Ok, time to get started on this. One more piece of information. The bond principal and interest amortization schedule

winsome.cnchost.com/MAC/BONDRETIREMENTSCHEDULE_Final.xls

The easiest way to explain this is to follow the money. Looking at the BondRetirementSchedule file, you can see at H21 $23.5 million was levied in 2008 to be paid in our current years tax bill. This amount shows up in the Budget as revenue (see the MVHS_FundingExplanation file above-p 7 of the pdf column E, line 5 "Designated Levies"...$27.6 million. Not sure why the two don't agree, but that is how it works. Remember, the Budget is only a proforma document, not actual.

Your tax bill under D204 is really two amounts.

First the Debt service levy noted above which originates by referendum in most cases. Rem that $124.6 million 06 referendum? When you pass a referendum, you agree to pay the capital cost, which is the $124m, but you also agree to pay the interest expense from financing the project.

Second, the operating levy which is the amount subject to the tax cap. Your portion of those two components make up your D204 line item.

The funds above are then used to pay the bond holders a portion of their principal and interest on the outstanding debt. In the FY09, D204 is scheduled to pay $10.7 million in interest on the debt per page 8 of the budget column H, line 155 (Debt service-Interest on long term debt.

Finally, since the bonds for MV were issued well in advance of construction, the bonds were put in the bank and earned interest. In FY09, it is projected the bonds will earn about $2 million (see p9 pdf, col H line 65 "interest on investments."

So you can see that you are both paying interest on those bond proceeds for MV and at the same time you are earning interest on them as well.

So this portion of the funding for MVHS (call it accumulated interest portion), about $10.5 million (this is accumulated over several years) of the $20 million (see page 3 of the pdf 10.5+2+.9+8.18=$20 million) is illusory in that while the investment income is allowed to accumulate in fund 60 "Construction or Capital Projects, you are in fact paying a portion of that $27.6 million levied above to retire bond principal and pay current interest expense on the MVHS bond proceeds.

Next, funding also includes funds generated from issuing bonds at a rate above the prevailing rate of interest in the market place (we call this bond premium). A premium was generated in in the form of an up front payment of $8.18 million). On the expense side, higher interest payments will result over the life of the bond reflecting the higher interest rate that is being charged. So with a bond premium you receive the money up front and pay it back over time.

Either way, while the District calls this a funding source that fills the gap between the MV bond proceeds ($124.66 million) and the current budget for MV ($144 million), in the case of the accumulated interest portion, you are currently paying taxes which should be being used to pay debt principal and interest but are, rather, being diverted to further fund MVHS construction.

In the case of the Bond Premium portion, you will be paying higher interest in the future than you normally would to further divert taxes you are paying to be used to fund MVHS construction.

Bottom line, taxes you are paying that should be used to reduce bond principal and interest, are being used instead to create more funding for MVHS construction. This, in effect, is a referendum for $17 million that you were never allowed to vote on.

Update on MVHS:

The most recent actual to budget is through 6/1/09 winsome.cnchost.com/MAC/MVHSBudgetasof060109.pdf Obviously three more months have passed since then.

I requested an update from Dave Holm

In addition to the construction, I have always tried to figure out why the 06 bonds were issued so early since it was pretty obvious we wouldn't need them for quite some time because of the condemnation case, which was just getting started. In addition, I questioned why issue the 07 bonds above prevailing rates and thereby obtain a premium>

Well a document has surfaced that helps shed light on the 07 bond premium. A memo from the bond broker, EHLERS to Dave Holm. winsome.cnchost.com/MAC/Memo_to_Dave_Holm_June_22,_2007%5B1%5D.pdf

The language to key in on is as follows:

We have chosen the June 28th and backup July 9th because of our need
to have additional bond proceeds for land acquisition and to earn additional
investment earnings for the project.
1. Planning for the bond premium to have more dollars available for the
project – The bond premium feature is still in the bond structure. The par amount
of bonds to be issued will be about $55,850,000. The net amount for the project
will be about $62,330,000. The difference between the $55,850,000 and the
$62,330,000 will be about $6,480,000 which will be produced by having higher
interest rate coupons. This will leave some remaining authority, approximately
$6,480,000 plus $1,605,000 (from the previous issue) for a total remaining
authority of about $8,085,000. The estimated $8,085,000 amount can be issued
next year and used for the project if costs are higher than originally anticipated.
If the District receives construction bids and land acquisition costs that are closer
to original estimates, the District does not have to issue the unused authority and
the bond levies will be lower.

So if the referendum to cover the project was $124.660 million, ie the funds needed just 3 months before the 06 issue and 15 months before the 07 issue, why the necessity to issue the 06 bonds so early and just 15 months after the referendum passed, why was there also a need to get a premium as well?

It seems to me there is only two alternatives: 1--They knew the project was going to cost more than $124.660 million, or 2--They spend guite a bit of money pursuing BB and were already exhausting funds to build MVHS without having a shovel in the ground...

Perhaps there is also another reason as well, they were anticipating the additional cost of MVHS land purchase should the jury come in higher than budgeted.