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CONTENTS
[...] Overview
[X] Pay-As-You-Go Financing Saves Interest Cost
[X] A 15-Year Program Divided Into Three 5-Year Programs
[X] November 2002 Election - Issue 3 - 3.5 Mill Levy
[X] Information Source
[X] Disclaimer
Overview
The Columbus School Board is currently planning to replace some school buildings and upgrade others. The program is expected to take 15 years and cost $1.6 billion ($1,600,000,000). The local share of $1.2 billion will
be funded with property taxes---up to 9 mills using 28-year bonds. Our Ohio taxes will provide the other $400 million of the $1.6 billion. The expected interest cost for the 28-year bonds will be an additional $900 million, based on a forecasted interest
rate of 5%. (NOTE - The above forecasted figures are approximate amounts.) For a strategic discussion of bond-financing see page BOND-FINANCING IS QUESTIONABLE PUBLIC POLICY [X]
Pay-As-You-Go Financing Saves Interest Cost
Paying for a building program by issuing bonds (debt financing) is one of two options. This option carries an added interest cost. The other option, pay-as-you-go financing, is interest free. If the
Columbus School Board were to have used pay-as-you-go financing for the full 15-year building program, there would have been a potential saving of $900 million---the forecasted interest cost mentioned above.
Pay-as-you-go means to build a school only after enough tax money has been collected. However, when using the same millage as required for 28-year bonds (at 5%), the pay-as-you-go method takes about 16 years to collect enough money to build/repair the school buildings. Had the School Board in 2002 been willing to ask for 9 mills up front, the choices would have been:
A 15-Year Program Divided Into Three 5-Year Programs
In August, 2002, the Columbus School Board divided the 15-year 9-mill program into three 5-year phases, each costing about $400 million in local funds. With the State contribution added, the spending rate will be about $100 million per year. The
first 5-year/$400 million phase, is to be funded with a 3-mill bond levy. The life of the bonds will be 28 years. The following simplified graph shows how the tax millage paid by property owners will vary with time under the 3-step plan. A more
detailed discussion of the bond financing follows the graph.
(Mills)
9 l x-----------------l
l l l
l l l
6 l x----l l----l
l l l
l l l
3 lx---l l----l
l l
l l
0 l_____________________________________l___________
0 5 10 15 20 25 30 35 40 (Years)
(x = After voter approval)
The above millage-rate graph shows, in rounded numbers, a three step process. The first step starts with a 3-mill/28-year property tax. Funds from the 28-year bonds provides enough money for a 5-year building program. In the second step, voters are expected to approve an additional 3-mill/28-year property tax. Money from these bonds will pay for another 5 years of building construction and renovation. The third step will require another 3-mill/28-year property tax to pay for the last 5 years of building improvement. At this point, 10 years down the road, the total millage will be 9 mills. This 9 mill level will then run for 18 years (28 -10 = 18). After the first set of 28-year bonds is paid off, the tax rate will drop to 6 mills. It stays there from year 29 until year 33 when the second set of bonds will be paid off. Finally, taxpayers will pay 3 mills from year 33 to 38. At the end of the 38th year, all 28-year bonds will be paid off.
As a practical matter, the last 28-year bond may be issued during the 14th year and, thus, not mature until year 42 (14 +28 = 42). In other words, using debt financing, the taxpayers may be paying off bonds for the next 42 years, and at that time, interest payments are forecasted to total $900 million. The resulting total cost in local funds will be about $2.1 billion. Please note, the above discussion does not incorporate an inflation-rate forecast.
November 2002 Election - Issue 3 - 3.5 Mill Levy
In
November 2002, voters approved a 3.459 mill tax levy (Issue 3). Of this millage, 2.96 mills will generate $392 million for a 5-year debt-financed building program, and 0.5 mills will continuously generate about $4 million per year for future building
maintenance. The almost 3 mill tax will generate about $24 million per year. The State of Ohio's share for this first phase of the building program will be $129 million.
Presumably, the School Board reasoned that asking the voters for a 3-mill tax increase would be an easier sell than asking for a 9-mill increase during the current economic slow-down. The switch, from the full 9 mills to a first-phase 3-mill tax increase, changed the pay-as-you-go/debt-financing dynamics. Using pay-as-you-go, instead of 28-year bonds, the time required to complete the first phase (with income from 3 mills) would remain at 16 years. [$24m X 16y = $384m] Using debt-financing, it will now be possible to complete the rebuilding and repair projects in five years.
Because of three-phase pay-as-you-go/debt-financing dynamics, the issuing of bonds became more attractive. In addition, the first phase program will concentrate on making all buildings "warm, safe, and dry" and focusing on rebuilding high-priority old schools. As a result, the Columbus School District will have "warm, safe, and dry" buildings before phases #2 and #3 are started.
When phase one winds down in five years, the School Board will have two options:
Information Source
The Office of Treasurer of the Columbus City Schools may be reached at 614--365-6400 for specific debt-service and debt-interest figures.
Disclaimer
The above calculations do not take into consideration future inflation rates, future interest rate changes, and possible changes in the State of Ohio's share of building costs.
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This page last updated: January 5, 2005