I’ve been told by some MISD officials that I simply don’t understand the difference between an Operating & Maintenance Tax Rate (General Fund) and the Interest & Sinking Tax Rate (Debt Service Fund). After working with government financial information for over 43 years, I think I do. I’ve been told that I am ignorant or just making the decision on my own to disregard the facts. I don’t think I have. I think the MISD is doing just that.
I do know this: the audited financial statements available on the MISD Web site are very helpful, but they are also not easy to discern certain critical pieces of information. And the posted budget? It is simply horrible. High level and without the most critical pieces of data to assess certain trends, ratios and key factors, especially as it relates to debt. So where do you go to find that information?
The Bond Holder.
In general, the MISD Board is dependent on the story and the spin on the story provided by the professional staff. The bond holder is a quite different. If you think Jane & Joe Citizen have a stake in MISD because they pay taxes, what about those holding $485,660,000 in tax supported bonds? There are a few individuals holding these precious bonds, but mostly banks and insurance companies hold these bonds. Smart individuals. They don’t accept “trust me” as an answer. They know the vernacular, the concepts and the downright hard dollar issues. And they ask a lot of questions.
In fact, the there is an entire array of financial disclosures MISD makes to the bond holder. MISD is not only obligated to disclosure a lot of data, but they sign an agreement that they will continually update and disclosure key datasets. The Official Statements and obligatory Continuing Disclosure statements are rich with meaningful data. Especially for the MISD Board and Finance Committee. Since these documents are prepared for bondholders and their “representatives” such as the bond rating agencies, these documents are generally presented in very clear tables and footnotes.
What Can We Learn?
I would be happy to spend several blogs breaking down and analyzing the data that MISD discloses to the bond buying public yet probably not even to its own taxpayers. But let’s just pick a few points to answer the question that is not being addressed in the current discussion regarding the football stadium. Let’s start with the Continuing Disclosure statement filed by Jason Bird, MISD Chief Financial Officer, on December 17, 2015, exactly three months ago. That’s pretty fresh data!
The Taxable Assessed Valuation has increased from $8.787 billion to $11.555 billion from fiscal year 2012 through FY 2016 (the year we are in). That’s a nice improvement and gives the bond holder a nice sense of security with assurances there is the ability to repay them through the I&S Tax Rate of $0.50. The math is easy. The tax base x the tax rate per $100 results in a levy of $192.972 million at the full rate of $1.67 (the one my checkbook cares about), with $0.50 or $57.776 million going to the I&S Fund to be spent only on debt service.
So, is the Debt Service payments for FY 2016 $57.776 million? No, another schedule shows us that number to be $55.838 million. Why the difference? It should be closer, but it is usually because an allowance is made in case some taxes are not collected. Some taxes that are levied are not collected? Yes, but it is a small portion. We can find that MISD collects about 98.7% of the current levy plus past delinquent amounts that adds up to darn near 100%. MISD even collected more than 100% in one year.
We can also learn that Debt Service (DS) obligations drop off significantly unless more debt is issued. In FY 2017 the DS will drop to $48.388 million. Payment levels hold in that general range for three years and then drops to $43.854 million by FY 2020. Then the DS drops off in a rapid fashion.
So, that is how MISD is going to be able to sell more bonds in the $200 million election and not have to raise the tax rate – in fact even drop the I&S rate by 2-cents? That is correct. The MISD has been conservative (that’s a good thing!) in its debt issuance strategies to allow for future debt capacity.
So what’s the beef you have with the football stadium, Lewis?
The Intellectual Dishonesty: Tax Rate Equivalent (TRE)
There is one sure way to understand the magnitude of local government and school spending. MISD already states much of the budget on a per pupil basis. What is missing is the perspective that gives the MISD Board and, in return, the public the ability to assess the fiscal impact of MISD decisions.
Somebody at MISD has a Debt Service payout schedule associated with the football stadium. In total, between the $50.3+ million to be voted on plus the $12.5 million authorized but unsold from the 2000 authorization, there is close to $63 million of debt likely to be issued. So the question that should be asked and answered is this: what is the Debt Service going to be on $63+/- million in new bonds just for the football stadium?
I am 100% positive that MISD has that debt schedule internally. To not have it would be reckless. In a bond election such as we have in front of us, it is likely they have several DS scenarios that vary to some degree based on the staging of the issues, interest rates and the length of the bond issue – likely to be 25 years. The bond committee and finance committee know the numbers. Again, for them not to have asked or for them not to be presented the numbers without having to ask for it is an oversight.
The Numerator & Denominator.
I am pretty sure I could get extremely close to the Debt Service number on my own. It is likely to be between $5-6 million in the first few years and then drop off, depending on how the payout is structured. That’s the numerator.
The denominator is the tax base. We already know the assessed valuation is currently $11.55 billion and is likely to increase in the near future. Not by double-digit levels as we saw in FY 2016. But for an average over the next few years, let’s use a generous $14 billion.
At $5 million of DS to cover with a $14 billion dollar base, we can get within a range of the tax rate impact equal to about $0.0357 for the football stadium. So, I believe I’m in safe territory saying the fiscal impact, the Tax Rate Equivalent of the football stadium is between 3 and 4 cents – and maybe as high as 5 cents.
There likely would be a stampede at the City of McKinney if the City Council even suggested a fraction of one penny TRE for something. Therefore, the range I am talking about (but MISD isn’t) is a gigantic taxpayer hit being disguised as no impact.
So, does that mean that if the football stadium is not built and the $60+/- million is not issued, that the increment of 3-5 cents could be reduced from the current $0.50 I&S tax rate? Yes, that is exactly what I am saying.
I received the most interesting response from a knowledgeable MISD person after I sent my blog out on Tuesday. After going back and forth with him about my “errors and ignorance in my blog,” I was not told of anything specifically I said in error. Let me say now that I am always willing to stand ready to be corrected if I have goofed. But after pressing the person and not finding anything specific where I was wrong, I asked about the elephant in the room. He had not said anything about the biggest blast I had made.
He had not mentioned I was wrong about the Ballot Bundling where the MISD is planning to not separate the football stadium but rather to make it all or none bond proposition. If you want the HVAC to keep working, give us a football stadium! But then I was shocked with his response when pressed on this biggest issue of all:
“I realize you don’t like it, but if it is legal, then they (MISD) can use it as a mechanism.”
OMG, that was the opening line of my blog played back to me! How arrogant! How intellectually dishonest could one get? I suspect he was puppeting the very words of the MISD staff pumping up the bond committee in a bond speaking points pep rally.
Unbundle the football stadium and tell me it is the Tax Rate Equivalent of 3-5 cents (they know the exact number), and I will vote YES.
Deceive the public, and my grandchildren will not have the HVAC fixed in their schools. I won’t be blackmailed. LFM
Bond Disclosure Materials.
Go to http://www.emma.msrb.org. Type in McKinney TX, and you will get a list of the Official Statements for both the City of McKinney and McKinney ISD. Click on the 2014 bond issue. You can then download the Official Statement as well as the Continuing Disclosure statement. LFM