Palatine schools' bond sale divides board, community

Bond issues are a common tool by school districts and municipalities to raise funds, especially for capital projects.

But Palatine Township Elementary District 15 intends to borrow $27 million over 20 years for more than just roof replacements and repairs. It also intends to replenish its nearly empty working cash fund.

The $27 million loan, narrowly approved by the school board, is facing a growing wave of criticism from residents.

Knowing it's a longshot, opponents are clamoring to force the bond sale to a referendum in November. They're circulating petitions, trying to get signatures of 10 percent of registered voters - about 6,300 - by April 12, or else District 15 will move ahead.

The crux of the objection isn't District 15's plan to use $17 million of the bond sale proceeds to fix the schools. Instead, it's with the $10 million that will be used to replenish the working cash fund, now with a balance of $108,000.

A working cash fund - different from a district's cash reserves - is an internal savings account. It's used, in theory, to make short-term loans to other district funds, and is repaid when payments come in from the state and county.

For a district with a $150 million budget, a $10 million working cash fund isn't much, says Merilee McCracken, interim assistant superintendent for business auxiliary services.

McCracken said District 15 needs the money because Illinois, facing its own $13 billion deficit, is $5 million in arrears to District 15. Also, Cook County's semiannual payments for property tax collections are months late.

District 15, which owes about $11 million each month in payroll and to vendors, nearly had to borrow short-term in December because Cook County was so tardy.

At its peak in 2001, there was $33.8 million in District 15's working cash fund, but in 2005 the board mostly depleted it in light of $25 million in budget cuts after a failed referendum request.

Board member Sue Quinn, who along with Tim Millar and Mark Bloom voted against the bond sale, fears District 15 will spend the $10 million raised for working cash on operating expenses.

In fact, she says it's inevitable given the board majority in favor of the bond sale and the district's projected deficit, which is expected to be about $5.5 million in 2010-11 if nothing changes.

Superintendent Dan Lukich says the $10 million won't be used to pay day-to-day bills and says he's frustrated at what he calls misrepresentation of the facts over how the working cash will be used.

"It's almost shameful the rumors I've heard," Lukich said.

To settle everybody down, Lukich said, the school board could pass a resolution prohibiting the use of working cash for operating expenses.

He pointed out that the board must approve any money transfer anyway.

"We can't move a dime without a board resolution," he said.

Refunding bondsOpponents to the bond sale are also skeptical over how the bonds will be obtained.Under the tax cap, school districts can borrow only so much money without voter approval, so District 15 has to refund a portion of bonds that have yet to be paid off in order to make room to borrow more.Without refunding, District 15 has the capacity to borrow only between $4 million and $7 million.But its outstanding bonds are capital appreciation bonds, considered especially costly because interest is compounded. Also, interest has to be paid on the entire life of the bonds, even when they're paid off early.The loss for refunding the bonds, according to the proposal by consultants William Blair Co., would be about $5.2 million."There's a significant price to pay to get out of old debt," said Eric Anderson, a District 15 parent who works in the municipal bond industry and is opposed to the proposal. "I think the district should evaluate other options."Despite the cost, McCracken said, it's a good time to buy bonds because interest rates are low, and the district will earn interest as rates rise. District 15 would also benefit from Build America Bonds, which are loans for capital projects in which the federal government rebates 35 percent of interest.But the district could choose to funnel the rebate back into the educational fund, so opponents want to make sure the money goes toward paying off the bonds."If they direct those subsidies to the operating balance, now you've got a backdoor referendum to increase the educational fund," Anderson said.Challenges aheadThe bond consultant couldn't be reached for this story, and neither Lukich nor McCracken had the figure immediately available, but all three debt structure options show District 15 will pay at least $51 million in combined principal and interest on the $27 million bond sale.That's about $1.89 for every $1 borrowed.Without the bond sale, Lukich said, the future is bleak. Though financially better off than most right now because of the cuts made in 2005, "we only have one more year of reprieve."If revenues and expenditures stay about the same, the district's reserves will drop from $46.7 million now to $16 million by 2014-15.Other districts have laid off droves of teachers, but District 15 will reduce its staff through attrition by only 12 positions next year.Lukich said substantial cuts to programs and staff are likely in a couple years, and more than $2 million in cuts will be outlined at the April 14 board meeting.Other optionsTrustee Quinn will propose a modified bond sale that would, among other things, eliminate the bond refunding and seek other bids for the bond sale.She said the board has a policy to bid out on anything more than $10,000, but McCracken said the state doesn't require bidding on services. William Blair is a reputable company that worked with a former administrator, she said.Another critique is that District 15 didn't release the capital projects until Thursday, and Quinn believes that list should have come first, before the bond sale approval."By borrowing the maximum money we can, and then finding things to spend it on, we are only encouraging wasteful spending on unnecessary projects," she said.Lukich disputes that, holding up a health life safety study several hundred pages long filled with projects deferred by budget cuts.A better solution to dealing with low cash flow due to delayed tax collection payments, opponents say, is to do short-term borrowing known as tax anticipation warrants.Anderson, the municipal bond expert, recently helped arrange warrants for Dundee Unit District 300, which will borrow about $11 million for three months at 0.45 percent interest.Many believe tax anticipation warrants are a better way to bridge a cash flow gap, but McCracken said the interest and fees - though far less - come out of the operating fund, whereas interest payments for bonds are paid with a separate debt service fund, which has a separate tax levy."Any expenditure you can keep out of the educational fund helps the district's overall financial picture," McCracken said.But even if District 15 had to turn to tax anticipation warrants every year, the total cost in interest in fees would prove to be a fraction of a bond sale.bull; To read more about the petition drive, visit district15schoolboard.wordpress.com. To read a QA prepared by District 15, go to ccsd15.net.