Financial crisis now striking home for school districtsDocument Transcript
Financial Crisis Now Striking Home for School Districts
. Wall Street Impact
. MUNICIPAL BONDS:
. TAX ANTICIPATION NOTES:
. LOCAL GOVERNMENT INVESTMENT POOLS:
. BOND RATING:
. Keeping Watch
Project Delays, Worries About Cash Flow Result of Tight Credit Markets
The crisis besetting U.S. and world financial markets is hitting school
districts hard, as they struggle to float the bonds needed for capital
projects, borrow money to ensure cash flow, and get access to investment
funds locked up in troubled institutions.
In Cumberland County, N.C., school officials froze plans to build a $20 million
elementary school in the 53,000-student district after a neighboring county
failed to find buyers for $454 million of its own construction bonds.
The state of Maine has delayed 12 major school construction projects totaling
$348 million in 11 school districts. In other states, even districts able to
borrow money are paying higher interest rates while bracing for yet another
drop in property-tax revenue.
And in San Mateo County, Calif., officials in some two dozen districts are unable
to get hold of millions of dollars invested with Lehman Brothers, the now-
bankrupt Wall Street investment firm. They face the prospect of recovering just a
fraction of that money through the bankruptcy process.
"It's just plain unhappiness all over the place," said Lee Buffington, the
treasurer of San Mateo County, which lost $155 million in local money —
about 40 percent of it from the county's 26 school districts — invested
with Lehman Brothers.
Some schools districts depend heavily on borrowed money to pay for
capital projects such as new schools and even to tide them over while
waiting for property-tax revenues to roll in.
But the various investment instruments used to borrow that money are
under pressure from the global freeze in the credit markets that drove the
$700 billion financial-rescue package approved by Congress and signed
into law by President Bush on Oct. 3.
The impact of that plan remained unclear last week, even as the stock
market continued to seesaw and the Federal Reserve — working with
central banks worldwide — cut interest rates in the hope of forestalling a
deeper economic decline.
The situation leaves school district finance officials with a basket of
worries — both short-term and long-term.
High on the list is the overall economic outlook and the effect a recession
could have on already-slack tax receipts, which have led to budget
shortfalls in at least 31 states. ("Hard Times Hit Schools," Aug. 27, 2008.)
"Will creditors use those types of falling receipts as a factor of credit-
worthiness? What will happen to bond ratings? Are there going to be new
guidelines for public entities?" asked Deborah Rigsby, the director of
federal legislation for the National School Boards Association, based in
In the short term, some districts already are being squeezed when it
comes to borrowing the money they need for day-to-day operations, such
as meeting their payrolls.
For example, the 2,000-student Cold Spring Harbor, N.Y., district
borrows money for relatively short periods of time while it awaits
property-tax money, which it receives once a year in a lump sum in
December or January.
Last week, the district closed a sale on $7 million in what are known as
tax anticipation notes to come up with that short-term cash. The district
got an interest rate of 3.23 percent, said William Bernhard, the district's
interim assistant superintendent for business, "but if we'd done it a month
ago, it would have been around the low twos."
He said that spike of about 1 percentage point will cost an extra $49,000
or so over the life of the loan — the cost of hiring a teacher or making an
educational upgrade. But Mr. Bernhard wasn't complaining.
"We're just happy that we had enough bidders to show some interest in
our school district," he said, citing the district's aaa bond rating — the
In California, many districts may soon be seeking to borrow money to
help with cash flow, often called "TRANs loans" in that state, said John B.
Mockler, the president of John Mockler and Associates, an educational
finance consulting firm in Sacramento.
An interest-rate increase of just half a percentage point on such loans can
be significant — about $1.2 million in extra payments on a $250 million,
six-month loan, he said. "That's a lot of teachers," Mr. Mockler said.
Wall Street Impact
School districts and state and local governments are feeling pressure
when it comes to borrowing money for short- and long-term spending
needs. Here are some of the terms to watch for in following the fiscal
Bonds issued by school districts, or local governments on their behalf, in
exchange for cash payments with the promise to repay, with interest, the
investors who provide the cash. Repayment periods can be 30 or 40 years
or longer. Districts typically issue municipal bonds to pay for capital
projects such as new construction. Because these bonds are tax-exempt,
investors usually accept lower interest payments than on other types of
TAX ANTICIPATION NOTES:
Short-term debt securities issued in anticipation of future property- tax
money provided by the local government to districts. These are typically
shorter-term loans, sometimes repaid within months. Many school
districts receive property-tax money only once or twice a year and need
this money to ensure a steady cash flow from month to month.
LOCAL GOVERNMENT INVESTMENT POOLS:
A way for school districts and other government entities to invest idle
funds until they need them, to make payroll, for example. These pools are
supposed to be highly liquid, meaning that districts can draw money out
at any time. The funds are usually invested in short-term, highly rated
government and nongovernment securities.
An indication of how likely it will be that a debt issuer, such as a school
district, will be able to repay a bond on time. Companies such as Moody's
Investors Service and Standard & Poor's assign school districts a rating
that signals to investors a district's financial health. Ratings can range
from AAA, which means a district is highly unlikely to default, to D, or in
Source: Education Week
Some districts have more immediate problems linked directly to the
collapse of investment giants on Wall Street.
Many school districts, such as those in California's San Mateo County,
put their cash into what are known as local government investment pools
until they need it. The money San Mateo lost with Lehman Brothers
included some funds for district capital expenditures, as well as some
Mr. Buffington, the San Mateo County treasurer, said it's possible the
county could recover anywhere from 20 percent to 60 percent of the
investment a year from now, after bankruptcy proceedings take place, or
that the county could receive some reimbursement under the federal
"In the meantime, there's a world of hurt out there," he said.
One potential problem: California requires school districts to keep a 3
percent cash reserve on hand, and the loss of the investments is going to
make that difficult in some districts, he said.
Patrick Gemma, the superintendent of the 8,200-student Sequoia Union
High School District, estimates the district lost about $6 million in the
county's Lehman Brother's fund. Some of that money was slated for
capital improvements now likely to be delayed and some for district
operations, which could lead to layoffs, Mr. Gemma said.
"We've hit the perfect storm," he said, citing California's budget woes.
"Added on top of that is this shortfall in funds." Sequoia and other school
districts that lost money are urging the county Office of Education to
investigate whether the treasurer's office acted improperly with those
The recent bankruptcies and mergers among financial giants have also
caused some nail-biting elsewhere.
Ricky Lopes, the associate superintendent for school district business
operations in North Carolina's Cumberland County, said his district uses
Wachovia as its local bank, writing checks and doing its payroll from
When he saw that struggling Wachovia Corp. was planning to sell its
banking operations to Citigroup, a situation further complicated a few days
later by an announcement that Wells Fargo also hoped to buy the
company, "my immediate reaction was 'How does that affect us?' " he
said. "I was a little bit nervous."
His local contacts at Wachovia assured him there would be no problems —
and so far there haven't been, he said.
Several states, including Texas, require that any money school districts
have in banks over the $100,000 Federal Deposit Insurance Corp. insured
limit — now upped to $250,000 by the rescue legislaton — be
collateralized. In essence, that means that the bank itself must insure the
funds, said Art Martin, the assistant superintendent for financial services
in the 28,600-student Lubbock Independent School District.
Still, district financial managers are keeping a close watch even on
those investments typically considered safe.
Mohsin Dada, the assistant superintendent for business and the treasurer
at the Schaumbug School District 54 in Illinois, said his district receives
two installments of local property-tax money a year. He said the district
invests the money in certificates of deposit, or in funds that mature the
day payroll is due, to get the most interest possible.
If the district had trouble getting access to those funds or investment
vehicles — even for a short period — it could cause turmoil, Mr. Dada
said. For now, however, he is comfortable with the district's
investments, he said.
"We are alert, but not concerned," he said.
The credit crisis is also being felt in ways that could have long-term
effects in many school districts, especially when it comes to construction
and other capital projects.
In some states, school districts sell bonds themselves. In others, a state
or local entity arranges the sales of bonds and passes the money on to the
In Maine, officials decided to delay the 12 planned projects because
interest rates on the bonds needed to finance them would have been
significantly higher than budgeted, said Jim Rier, the director of finance
and operations for the Maine Department of Education.
A recent sale of state bonds came at an interest rate of 5.25 percent, and
Mr. Rier said his department had counted on districts, which do the bond
issues themselves, getting an interest rate of around 4.8 percent for their
"It's significant," he said of the difference. "Over the term of 20 years, the
payments would be much higher."
In North Carolina, Cumberland County officials put their prospective bond
sales on hold after nearby Wake County failed to find buyers for its fixed-
rate bonds, most of which would have gone to school projects.
Cumberland County school officials are facing cash-flow concerns, since
they'd already gotten bids on their $20 million project for a badly needed
elementary school slated to open in 2010.
The county "can't find the underwriters to acquire that debt on our
behalf," Mr. Lopes said. "We're scrambling to come up with a Plan B."
By Michelle R. Davis
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