Middle school: ‘Wrapped’ debt financing proposal said not ‘prudent’


A school board proposal to finance construction of a proposed new consolidated middle school utilizing “wrapped” debt service got less than favorable reviews Wednesday evening.

The Pulaski County Board of Supervisors heard a presentation on middle school financing options from Courtney E. Rogers, Senior Vice President, Davenport & Company – the board’s financial advisors for the past six years.

The school board had earlier proposed that the new $45.7 million middle school be funded through the Virginia Public School Authority pooled bond program.  The board proposed using a wrapped debt service approach on a 20- or 25-year term, which the board said would necessitate an 8 cent increase in property taxes per $100 of assessed value.

Wednesday evening, Rogers laid out several scenarios for both 20- and 25-year financing. The scenarios compared numbers on more traditional level debt service, heavy back loading of principal “wrapped” around school debt service, and light structuring in the first several years around existing school debt service.

In short, level debt service – according to Rogers’ research – would necessitate a 14.1 cent increase in the county’s real estate tax rate to cover the $3.2 million annual additional debt service payments on 20-year financing. The total cost of the project, including principal and interest, using the level approach would be an estimated $64 million.

Rogers said the heavy wrapped approach over 20 years would result in a 7.7 cent increase in the tax rate, but would cost $70 million – and $78 million if financed for 25 years.

In the third, light debt wrapping scenario, Rogers said the necessary increase in the tax rate would be 10.6 cents and cost $66 million over 20 years.

While the two wrapped debt service approaches offer lower tax rate increases, the total cost of the project in each scenario increases – and increases dramatically with 25-year financing.

Plus, both “wrapped” scenarios include back loading of debt, with interest only payments in the first few years.

In Rogers’ scenarios, the county’s total debt service payments go from $2.97 million in fiscal year 2018 to $6.1 million in 2019.  However, the debt service drops steadily back down through the years to just $3.2 million in 2034.

In the heavy wrapped scenario, the county’s debt service jumps from $2.97 million in 2018 to $4.7 million in 2019 – and stays at that level through 2038.

Rogers noted that means the county would have “no additional dollars for anything else” during that period, unless there was an increase in revenue through another tax increase or changes in the county’s tax base that result in additional revenues.

“So there would be no borrowing capacity if you need to build another school in the next 20 years,” said Supervisors Chairman Andy McCready. “We’d have $4.6 million in debt service for 20 years, with no drop.”

Rogers expressed his opinion about the idea of using wrapped debt.

“I mentioned I’ve been doing this for 25 years. I’ve never done anything like this in my 25 years. None of my clients have ever done anything like this (back loading) to this extent.  It’s just not something that’s real prudent,” Rogers told the supervisors.

County Administrator Jonathan Sweet agreed.

“We’ve been talking 13 cents (tax rate increase) from the onset with a level financing approach.  We’ve been pretty accurate from that standpoint,” Sweet said.

“As you heard Mr. Rogers mention, he’s never seen such an aggressive wrapping approach, nor would he consider it prudent,” Sweet continued.

Sweet said that, in his humble, professional opinion he would not consider that type of wrapping prudent for two reasons – the additional cost it would cause for the project and “in looking at the holistic needs of the county and the school system in the future – what that does to our ability to provide services and capital needs in the future.”

Sweet added that, “if it’s not financially sound and prudent we shouldn’t consider that as a low water mark for financing.”

McCready said the supervisors needed to give what Rogers had told them more thought, and suggested there may be another, lengthy meeting next Thursday evening – and possibly tele-conferencing and even discussions through Skype.

McCready stressed the board wants to be finished with the financing aspect of the middle school project by next Friday, and ready to take final action on Monday, July 24 during its regular monthly meeting.

McCready repeated that the board intends to make a final decision on the 24th. Some in the community have expressed concerns that the board’s recent decision to seek second opinions on the costs estimates for construction and road work offered by the project’s architect, RRMM Architects were an attempt to delay a decision on the project in an effort to keep a possible bond referendum off the November ballot.

Also Thursday, supervisors voted unanimously to hire Spectrum Design to conduct the second opinion on the design work – at a cost of $13,000 – and Hurt and Proffitt to conduct the road assessment at a cost of $14,000.


The Patriot