Dist 428: Double Header Meeting Notes

Round One: Citizen Finance Advisory Committee Meeting Jan 15, 4:30pm

First, for some good news… interest rates for debt bonds are at a low point in a rapidly fluctuating market, according to Liz Hennessy with William Blair and Company. The first $30 million in bonds were sold in mid-April 2008 and the District was able to take advantage of low interest rates at that time. By splitting the selling of the bonds into multiple segments taxpayers were saved millions of dollars in interest.

Since April 2008 the muni market has been volatile. Interest rates climbed rapidly in mid-September 2008 but fell sharply after the first phase of the federal bail-out package. A large number of underwriters (e.g., Bear Stearns, UBS, and Lehman Brothers) have either left the market or the extent of their future participation is in question which has hampered liquidity. Tax exempt 20 year rates has seen a growing gap between relative market value over the last eighteen months.

As the economy weakens municipalities and school districts could face lower revenues. Factors that have impact on the repayment schedule are extremely volatile. New construction has slowed to a halt. The CPI has plummeted to a potential 0% increase between December of 2007 and 2008.

Hennessy did point out to “the blogger” sitting in attendance (moi) that the use of $2 million of TIF revenue the City of DeKalb owes the District per the 2003 agreement was factored in to reduce the bond size to $108 million. While being called a blogger is certainly better than “whiner and complainer,” I guess I still have to point out that the $2 million I’m talking about has not yet been paid to the District and will expire in 2010 if not used properly or unless the City extends that deadline.

Brendon Gallagher, who chairs the CFAC, urged patience in selling the next round of bonds. He thinks things might get worse before they get better. The advantage of waiting would be even lower interest rates. Those rates could instead increase but if so would be tempered by the savings in interest from selling now.

While not suggesting selling the entire balance of the bonds at this time, Misty Haji-Sheikh, wanted all options on the table. As such that would include selling the entire balance at once and other options including an issue of $30 million in September 2009 and another $50 million in July 2010 or do a $40 million/$40 million on the same dates.

Tom Teresinski poured a dose of local economic reality on that table. He pointed out the significant reduction in new construction EAV (click image for larger view). He asked for my input on the number of home foreclosures in the District. I pointed out that as of Dec. 24, 2008 there are 54 Sheriff auctions scheduled in DeKalb, Cortland and Malta before the end of this school year. I also mentioned that the news has not been rosy for local commercial property either.

Teresinski stated that with the scenarios as presented by Hennessy the financing costs have increased by $16 million.

No action was taken.

Round Two: Facilities Planning Committee, Jan 15 @ 6pm

The purpose of this meeting was to discuss a request by Superintendent Dr. Jim Briscoe to change the construction method for the high school from a General Contractor to a Construction Manager. He reported on the field observations of the contractor at the Cortland Elementary School project, which is employing a Construction Manager. Briscoe believes there are more checks and balances between the contractor and the architect when using a Construction Manager.

Mike Wood (Elliott and Wood) spoke to the committee of his experiences with General Contractors and Construction Managers. It has been his experience that on large projects where out-of-town GC’s are the only eligible bidders it has sometimes been a practice for them to use local subcontractors’ bids to get lower prices from out-of-towners. He believes taxpayers will be better served and more local contractors will have a better chance if the Construction Manager method is used.

Tony Ficarelli, chief legal counsel for the District, went over risk assessment and various contractual arrangements between the two methods. In larger projects he has seen a trend toward the Construction Manager method and the results have generally been favorable. He stressed that it really boils down to the General Contractor or the Construction Manager that is selected.

If it was decided to change to the Construction Manager method a new contract with the architects would be required. If that was to occur, I pushed for Value Engineering and Material Compensation Disclosure to be added to the contract. Both of these items were suggested by Ficarelli in earlier meetings. According to Ficarelli, a Construction Manager would have more say in material selection. That flexibility could result in substantial savings for taxpayers.

Briscoe is to get RFPs from Construction Managers for further analysis. Not all was in agreement with further exploration of changing from a GC to a CM. Ron Naylor and Ron Beldon voted against the notion. Their concerns are very valid. The District faces less liability with a GC and in theory the GC is more likely to get the sharpest pencil. A CM is selected through a Request For Proposal where a GC is selected by lowest responsibile bidder.

But Briscoe was not superintendent when the referendum passed and therefore not part of the initial discussion on the GC versus CM method. At a potential price of almost $90 million his request for a change should be given time and consideration.

Teresinski repeated his brief presentation to the FPC on the decline in new construction EAV and enrollment projections. Hopefully, FPC, CFAC and most importantly, District 428 Board of Education members paid attention. In all the scenarios put together on the financials, and all the discussions on the alternatives on the construction methods, the one variable not given serious consideration is downsizing the high school.

But unless there is a public outcry for resizing the high school to fit newer lower enrollment projections, and higher than expected debt costs, the new high school will be let out for bids sometime in February at a size and cost this community likely cannot afford.