Suburbs' stimulus rebates costing you?

Two local governments have squirreled away loan rebates from a federal stimulus program in a way financial experts say has put taxpayers at risk.

Warren Township High School in Gurnee and the village of Itasca each borrowed millions through Build America Bonds, a federal program designed to stimulate the construction industry and encourage public-sector borrowing with rebates to help with loan repayment.

The program, which expired Dec. 31, offered local governments a rebate of up to 35 percent of their interest payments, effectively lowering the cost of borrowing even below the rate for tax-exempt municipal bonds.

But instead of using the rebates to pay down the debt, Warren and Itasca put the money to other uses, arguing the cash was needed to cover for inconsistent state aid and to bolster the current budget, respectively.

Governments that choose to spend the rebate money elsewhere or just keep it forego those low-interest benefits, and in some instances they end up paying more for the loans than taxpayers were told to expect, financial analysts say.

While not prohibited, a U.S. Treasury Department spokeswoman said it's rare for public agencies to use rebates for something other than paying down debt.

Gurnee's Warren Township High School District 121 became the first Illinois school district to use the Build America Bonds program in April 2009, when it took a 20-year, $24 million loan to fund part of a $30 million building project at both its freshman-sophomore and junior-senior campuses.

Although a similar loan could have been obtained through traditional means at 4.48 percent interest, officials deemed Build America a better option because its slightly higher initial interest rate would drop to the equivalent of 3.82 percent after the district got the rebates.

But in October 2010, a majority of school board members decided to set aside the $560,000 rebate Warren got last year in case it was needed to replace state aid payments that may not arrive this year.

Itasca, meanwhile, used its $490,770 in Build America Bonds rebates last year to help balance its current budget, instead of pay down the bonds. The village got a $24 million loan in November 2009 for sewer and water utility improvements and projected about $1 million in savings overall from the stimulus program.

Anne Noble, senior vice president of public finance at Stifel, Nicolaus Co. Inc., a St. Louis-based investment banking firm, said diverting rebate money away from bond repayment is not sound policy.

“I think for a public entity it is a bad idea because it will cause an automatic increase in their tax rate,” said Noble, who has set up Build America loans for several Illinois school districts. She said she'd prefer her clients use the rebates only for paying down debt.

Thomas G. Doe, founder and CEO of Municipal Market Advisors in Concord, Mass., said taxpayers around the country should not be providing Warren and Itasca with money for other purposes if the federal stimulus program was meant to spur construction of publicly owned facilities. Doe's company is a leading independent strategy, research and advisory firm in the municipal bond industry.

John Kennard, a Standard & Poor's senior bond analyst in the company's Chicago office, said he doesn't have an ethical problem with a government keeping the rebates.

Kennard said it won't affect credit worthiness and allows financial flexibility. But he also admits it may not please taxpayers.

“It's legal, but maybe politically awkward,” Kennard said.

What's ethical

Whether diverting stimulus money from bond repayment has already cost Itasca and District 121 taxpayers is unclear. Representatives of both governments say no, but financial analysts say there are so many variables it's hard to know.

Both Warren and Itasca officials defend their actions, saying putting the rebate money elsewhere was the proper move for now.

Warren board President John Anderson said while it increases the cost of borrowing, the rebate dollars might be needed to stem a “financially disastrous situation.”

“I'm not saying we should take this money and spend it,” Anderson said. “But I'm not saying we should definitely pay down the debt right this minute, either.”

Carol Rogers, assistant superintendent for business services and operations, disputes any claim that holding the $560,000 rebate can trigger a tax hike. She said the money is in a separate bank account.

“There is no significant cost to waiting a reasonable period of time,” Rogers said. “With the state of Illinois delaying or not even paying Warren the millions of dollars we are owed, taking time to make a well-thought-out decision is a good idea.”

However, Warren's situation may change Tuesday. The agenda for the school board meeting indicates the board will discuss and possibly vote on a proposal to redirect its Build America rebates toward paying down construction debt.

School board member Richard Conley has criticized District 121's current path, saying it amounts to a hidden or “backdoor” tax on property owners. Conley argues the district will end up keeping an extra $2.5 million if it continues to hold the rebates — and pay higher interest on the $24 million loan.

By not applying the rebates toward erasing construction debt, he said, the district would also violate a November 2008 referendum in which voters approved the borrowing of a maximum $30 million for the construction.

“Just because something isn't illegal doesn't make it unethical,” Conley said.

In Itasca, Village President Jeff Pruyn said officials agreed to use the rebates in a one-shot deal to bolster their budget.

He acknowledged Itasca would have to charge more for water and sewer service if the village continued using the interest rebates for something other than paying down the $24 million debt, but pledged that would not occur.

“The (Build America) program is great as long as it's used in the proper context,” he said.

Itasca Village Administrator Evan Teich said the town's annual sales tax revenue has declined about $2.5 million since 2008. Plugging the Build America rebate into the budget for one year, he said, was a better option than seeking other revenue sources or immediate tax increases.

Only governments that borrowed in the first year of Build America Bonds in 2009 got rebates in 2010, which could be one reason Warren and Itasca are rare cases.

Northwest Suburban High School District 214 and the village of Barrington received Build America Bonds rebates of $325,495 and $95,000, respectively, in 2010. In both cases, the money was used to pay down debt on construction projects.

“The village will use the (rebate) money for its intended purpose, which is to lower the amount of interest paid by the village,” Barrington Treasurer Jason Hayden said.

Palatine went further and tied itself to a promise to repay the bonds with its stimulus funds.

Palatine Village Manager Reid Ottesen said elected officials specified in the bond ordinance that the projected $1 million rebate from a 20-year, $18 million loan obtained in 2009 must be used to repay the bonds that built a new police headquarters and did other projects.

The prohibition on spending the money elsewhere, he said, is in the best interest of taxpayers.

Those that struck deals in 2010 will start getting rebates this year. About 20 governments in the Northwest, West and North suburbs got loans through Build America Bonds in 2010, according to the Treasury Department.

Suburbs using federal stimulus borrowing

Suburban governments that took advantage of the Build America Bonds federal stimulus program from 2009 through Dec. 31, 2010. In all, 217 loans were issued in Illinois, totaling more than $10.6 billion.

Ÿ state of Illinois: $500 million for highway improvements.

Ÿ Barrington: $11 million for water utility and sewer work.

Ÿ Carpentersville: $18 million for public improvements.

Ÿ College of DuPage: $62 million for school improvements.

Ÿ Elk Grove Village: $13 million for sewer improvements.

Ÿ Fox River Grove: $3 million for public improvements.

Ÿ Grayslake Fire Protection District: $1 million for public improvements.

Ÿ Hanover Park: $10 million for public improvements.

Ÿ Itasca: $24 million for sewer and water utility upgrades.

Ÿ Kane County: $40 million for public improvements.

Ÿ Mount Prospect: $3 million for public improvements.

Ÿ Naperville: $21 million for public improvements.

Ÿ Northwest Suburban High School District 214: $2 million for school improvements.

Ÿ Palatine: $18 million for public improvements and parking by village of Palatine.

Ÿ Roselle: $4 million for public improvements.

Ÿ Warren Twp. High School District 121, Gurnee: $24 million for work at both campuses.

Source: U.S. Treasury Department