Debt Service Forecast and Discussion

Attached is the spreadsheet which has four charts presented to the School Committee on 2/27/08.

• Chart 1 – Graph of existing debt service
• Chart 2 – Graph of existing debt plus non-building related capital projects (annual CIP, a new bus and a technology bond)
• Chart 3 – Chart 2 with the elementary facilities added (the other building projects are covered in the annual CIP – see below)
• Chart 4 – Chart 3 with the cost of Clifford added as local share

Items of note:

• All of the work done to renovate and upgrade the middle and high schools was done with local tax dollars. A lot of our existing debt in the next few years is associated with those projects.
• We can’t pay off the bonds early like a home mortgage – once we commit, we don’t have many options with the financing.

With that said, the operating premise is that we want to maintain our current debt service ratio of 5% in the operating budget ($4.35 million debt service divided by $85.66 million operating budget) in order to maintain the status quo. If the debt service goes up, we either need to raise revenue or cut costs (most likely eliminating programs, reducing staff and/or reducing employee compensation). In the current environment, increasing revenue significantly is unlikely and the district has already lost important programs such as elementary foreign language. Given our current budget projections, the reduction in state aid and the cost savings mandated in our Alternative Plan, we are forced to look at extracurricular activities (community centers, sports, arts and clubs) and programs associated with special needs in order to close the gap. With the goal of maintaining a 5% debt service ratio, what kinds of projects can we afford and when can we get them done?

A large chunk of the debt service is associated with the CIP. The first question to ask is, “Is it adequate?” The recognized industry standard is to reserve between 1% and 2% of the building replacement cost in order to preserve and extend the useful life of the facility. The useful life is typically on the order of 50 years. We have a number of buildings that are already older than that meaning we need to keep investing in them in order to continue to use them in the future. The effect of not investing in our buildings can be demonstrated through our experience with Jack (we had to demolish the building due to poor air quality).

There is around 1,555,652 square feet of building space in the district. Using an average replacement cost of $165 per square foot, the total replacement cost would be around $256 million (see Doug’s handouts from the Finance Committee meeting). That puts our recommended annual capital maintenance budget at between $2.5 and $5 million. Compare that with our current expenditure of around $1 million per year and one can conclude that we are not keeping up.

How do we address this problem? One option is to increase our operating budget to allow us to spend more money on long term maintenance. Another is to delay some of the projects on Doug’s list into the future. A third is to evaluate the number of buildings we have, closing the ones not needed thereby avoiding capital maintenance costs. Note, we would need to eliminate about 933,000 square feet of building space in order for our current $1 million annual CIP to approach the minimum industry recommendation of 1% - roughly the equivalent of all of our middle and high schools. It would appear that a combination of all three is required.

The next thing to look at is what we spend the money on. If you assume we need to buy a bus and invest in technology, this leaves buildings as the variable to play with. I looked at Doug’s list (see the first tab in the spreadsheet) and divided the projects into groups. There are a total of $35.8 million in projects on the ten year list of which $25.2 million is associated with the elementary schools (note I did not include Baxter or Clifford since we have the state money to cover these and excluded any projects on the list that are ongoing or completed). The remaining $10.6 million is distributed over the other buildings and if you divide that by 10 years, Voila, you get just over $1 million per year which magically equals our CIP amount (see note above on Chart 3). I then divided the elementary projects into groups based on the original EFTF (Bundle 2, Bundle 3 and the island schools) and plugged them into the graphs with arbitrary start dates staggered 3 years apart starting in 2009.

Looking at Chart 3, you can see that we will have some difficulty fitting those projects within the 5% limit and this constraint stays with us well into the future (roughly until 2018). When you add the impact of losing the state aid for Clifford shown in Chart 4, it sets us back a generation.

The last point deals with who is going to help us convince a skeptical public to support these projects. Because of the size of some of these projects, they will require voter approval and I believe we will be lucky to get 1 or 2 approved

The City Council has a new Energy & Environmental Sustainability standing committee. During their recent deliberations, they recognized that the school department is the largest contributor to the city’s environmental footprint. Again looking at Doug’s numbers, there are around $6.35 million projected for energy related projects in the district. There is an opportunity to coordinate these projects with the City Council and fund them outside of our 5% cap with the side benefit of improving our energy consumption (and hopefully lowering costs if energy prices stabilize). Combine that with a state subsidy for Clifford and one can imagine a scenario where many, if not all, of the projects on the list are achievable within an acceptable timeframe.