Avoiding Risky Business

Sound business practices are based on forethought and research.

• By Richard Weeks
• 12/01/13

School business officials (SBOS) are a thoughtful, ethical, well-educated and experienced group of professionals who often find themselves embroiled in situations that involve outright foolish business decisions. Let’s review two disparate matters that can be “risky business,” yet are completely preventable.

1. Faustian school borrowing practices

When local referenda to incur debt for school construction projects are on the ballot, voters are often enticed into purchasing capital appreciation bonds (CABs) because such borrowing does not contribute to increases in their near-future property taxes.

Unlike the conventional current interest bonds that most districts purchase, CABs don’t require immediate and regular principal and interest payments to the bondholders. With CABs, debt payments can be deferred for decades, with interest compounding to as much as six, 12 or more times the principal on the original amount borrowed.

CABs are popular in California, Florida and Texas. In a Nov. 29, 2012, Los Angeles Times article, California Treasurer Bill Lockyer, stated that the Patterson Joint Unified School District borrowed $9.6 million in 2009, which will not have to be repaid until 2049; the final payment will be $96.6 million. The Poway Unified School District, near San Diego, borrowed $105 million in 2011 and will eventually have to repay approximately $1 billion.

SBOs and underwriters familiar with funding projects have a general rule of thumb: expect total debt, including principal and interest, to be only 1.5 to 2.5 times the principal borrowed. Conventional school construction bonds are commonly issued for 10 to 20 years, with the first annual payment due immediately. Districts that issue longer maturing bonds can anticipate paying more in interest payments. These school districts must eventually pay the bondholder with the principal and interest in one lump sum on the bond’s maturity date.

Your district’s contracted financial advisers and underwriters must be up front and transparent with local officials and the public, because the terms and conditions of long-term debt borrowing can be very complicated.

2. Revenue expectations from school closures

When schools are closed, the public often expects financial windfalls. It’s best not to hold out for this pie in the sky.

According to the National Center for Education Statistics, 1,069 public schools were closed in 2011. The reasons for closure are varied and include; (1) a sharp decline in the number of school-age children, (2) districts’ lack of interest in repairing worn-out facilities, (3) competition from charter schools, and (4) the U.S. Department of Education’s mandates to shutter underperforming schools.

Yet, a recent study by the PEW Charitable Trusts (pewtrusts.org) exposes that the closure of more than 200 schools in Philadelphia, and six other large cities, garnered very little savings. What’s more, many closed schools are still vacant, often-vandalized eyesores contributing to the blight of their neighborhoods.

Suburban districts don’t fare much better. Anoka-Hennepin School District, in Minnesota, established a facilities task force to review potential school shuttering in the 30-school district. According to the final report, the average school closure would yield a one-time saving of approximately $565,600. With an annual school budget of $393 million, the average saving would be a paltry 1.4 percent.

In most school districts, whenever a school is closed and sold, the proceeds revert to the taxpayers of the municipality in which the school is located. However, the real beneficiaries of suburban school closures may be real estate developers, who can acquire the school site at bid and flip it into a high-end residential or commercial property.

According to a Jan. 29, 2009, Seattle Times interview with Seattle Public School administrators, Seattle Public Schools actually lost approximately $800,000 a year in Washington State school aid when it closed schools in 2006, because 20 percent of the students from those schools left for charter, parochial and private schools.

Districts contemplating school closures should commission economic impact studies to determine the effects such closures may have on their urban neighborhoods or small-town centers. City schools also serve as community meeting and gathering places, as well as polling sites.

In a small town, the school may be its biggest employer and may serve as its cultural and economic hub. “Customer traffic” to local merchants and services depends on that school’s remaining open. When the school is shuttered, everybody loses.

Wherever you work, sound business practices should always prevail over risky business.

This article is excerpted from the October 2013 issue of School Business Affairs, published by the Association of School Business Officials International, www.asbointl.org.

This article originally appeared in the School Planning & Management December 2013 issue of Spaces4Learning.