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AISD bond election: Spending on education, how bonds work and financial mismanagement.

Ben Franklin Wearing Graduation Cap on One Hundred Dollar Bill

Friday, April 25, 2014 by Steve Israel

This article, and a subsequent article, shares my thoughts and perspective regarding the upcoming $661 million AISD bond election. My comments are based on 25 years of education and experience working in the financial markets, having seen both private and public entities make sound and disastrous financial decisions.

The first article addresses spending on education, how bonds work and financial mismanagement of the AISD Trustees and school board (“Trustees”).  The second article addresses some of benefits the Yes crowd is claiming the proposed spending will yield.

If someone votes yes for the subject bond issue and associated tax increase they are voting for, in my estimation, 1) the AISD taking on a considerable debt obligation without the guaranty or promise of an improved product, more highly educated students evidenced by academic test scores that rival those of students through-out the world, 2) increased debt and higher taxes in perpetuity and 3) to reward the Trustees for a level of financial mismanagement.

Over the last 30 years during every Presidential election a theme by the candidates has been a vow to fix education. As such, over the last 30 years an ever increasing amount of money has been spent on education. However, the test scores of students in the United States is below that of nearly all developed countries and now even some under-developed countries. I think a 30 cycle of ever increasing spending and 30 years of declining test scores pretty much tells the story. The promotional material of the Yes crowd spends considerable time outlining all the wonderful improvements that will be made with the bond debt. However, the material is silent on a promise or guaranty of improved academic test results. The reason, it won’t happen, history has proven this. Should not improved results be the gold standard for any spending? If not, what is the value received for the AISD incurring $661 million of additional debt?

Bond issues are simply a vehicle for government entities, via debt, to raise taxes and increase operating budgets in perpetuity. In order for a bond issue to be repaid there either has to be funds from a current operating budget earmarked for the repayment or a tax increase. As such, a tax increase equal to approximately $100 for every $100,000 in home value is proposed. Assuming a $150,000 home value, the result will be an additional $180 in property taxes annually for Arlington home owners. That doesn’t sound like much but, once a tax increase is implemented it is never later eliminated. So once the bonds are repaid, which rarely happens, I’ll address that later, the extra taxes imposed to pay for the bonds then goes into the operating budget. But, much of the proposed spending are recurring costs. Then what? Another bond issue? Another tax increase? So what was $180 annually goes to $360 or more. There is currently approximately $200 of taxes associated with previous bond issues imbedded in the AISD property tax rate. Adding the subject $180 of taxes will bring the annual total to approximately $400. Over the next couple of decades, unless the Trustees change their approach, I would expect bond debt to increase, so Arlington residents could likely be paying an additional $600 annually in property taxes via bond issues.

Bonds are interest only instruments. Although there are stated repayment amounts, they do not actually require any periodic principal payments. The only requirement is full repayment at maturity. As such, any periodic payments would be at the discretion of the Trustees. I can tell you with certainty that bonds rarely get repaid in any amount prior to maturity. If the bonds are highly rated, investors buy the bonds for the interest income and don’t want them repaid until maturity. So the additional taxes, other than to pay interest, is added to an entities operating budget and spent on other items. Upon maturity the bonds are refinanced with a new bond issue and a plea is made for a tax increase to pay for the new bonds; which do not get repaid and so on and so on. If not properly managed, the financial stability, in this case of the AISD, can be in an ever decreasing state of decay. If the current AISD bond election passes, debt will have increased from zero to $1.1 billion over the last decade, so this upward trend certainly exist. As such, bonds are a vehicle to raise taxes and increase an operating budget, on the backs of residents, in perpetuity, over time.

For example; I need new cars, my house remodeled and a new computer for my son. I don’t have the money to buy them so I’m going to get a loan for the purchases. I’m going to ask my friends to commit to giving me $100 for every $100,000 of their home value for the next five years to repay the loan. I would also like to have someone mow my yard each week, my wife would like to have a maid and my sons needs some baseball lessons; all discretionary items, but things I would like to have but do not have the money for. So I’m going to use the money from my friends for the discretionary items instead of repaying the loan. But, in five years I’ll need two new cars, my house painted, new carpet installed and two new computers. Since I did not repay the first loan, but spent my friends money on discretionary items, I’m going to need another loan to pay for new cars, etc. I’m also going to need my friends to give me another $100 for every $100,000 of their home value for five more years to repay the new loan. But, I don’t think I’ll repay that loan either because I’ve got my eye on some other things I would like to have but don’t have the money for. What do you think the likelihood of this happening is? Zero. If so, why do we as taxpayers agree to let government entities do this to us? It’s the exact same thing.

The Trustees are guilty of the above example. They have not implemented a sufficient schedule to construct/replace the subject items within the AISD’s annual operating budget so they are asking to pile on more debt. For example; five years ago the Trustee proposed a $180 million bond issue and associated tax increase to update technology, which the voters approved. Now they again want funds to update technology. You would think the Trustees would have learned a lesson and implemented a replacement plan so they would not have to continually ask for bond financing and tax increases for technology upgrades. Further, these bonds remain outstanding and did not get repaid within the useful life of the technology. So there is $180 million in bond debt owed by the AISD for something that is largely obsolete. I would like to know what the increased tax revenue was used for and why the bonds did not get repaid? So the Trustees have certainly exhibited financial mismanagement over the last decade. The Trustees claim the subject bonds will be repaid and the tax rate deceased over time. However they made this promise in the above discussed bond issue and it did not happen. In fact, this has not happen with any previous bond issue. I believe this lays to rest the promise that this will happen with the subject bond issue.

In conclusion, you can see that spending on education does not correlate to improve results, the bonds will increase debt and lead to higher taxes in perpetuity and the Trustees have done an insufficient job of managing the AISD’s finances.

Part Two “AISD bond election: Shedding some light on the “benefits.”

11 Responses to AISD bond election: Spending on education, how bonds work and financial mismanagement.

  1. d.wilbanks

    April 28, 2014 at 2:04 pm

    Mr. Israel, I agree with the previous two comments. This article is filled with false assumptions, misinformation and flat-out false claims. It also lacks a basic understand of how school bonds work and public education funding in the state of Texas.

    Lets take your three main points:

    1) the AISD taking on a considerable debt obligation without the guarantee or promise of an improved product, more highly educated students evidenced by academic test scores that rival those of students throughout the world.

    I will be the first to tell you that there is little correlation between a new natatorium and test scores. However, the main portion of this bond is to alleviate overcrowding in our classrooms and make sure all facilities meet basic adequacy standards. At it’s most basic level, this bond is about keeping our kids “safe, dry, and warm” in classrooms that all meet the basic standards of what a classroom should be in the 21st century.

    The district brought in a highly respected consultant that looked at adequacy and capacity for every building in the district. Given how frugal this district has been in the past two decades, there were many facilities with a large amount of deferred maintenance and needed upgrades. The consultants came back with much more than we felt we could prudently tackle. We paired down the recommendations from the $880 million that were identified to the $663 million package that is on the ballot.

    Secondly, everything in this bond package (including the natatorium) is there because it is a component of the the District’s strategic plan. Put together with the other plan components (like the new instructional model), even items like the new Performance Arts Center and the Natatorium will contribute to student performance. It is well documented that participation in extracurricular activities is correlated to increased test scores.

    2) increased debt and higher taxes in perpetuity.

    Your claims throughout the article lack a basic understanding of how school financing works. Collections from our “Interest & Sinking” tax rate ( the tax rate that will increase from 0.25% to .40%) never go into the General Fund used for “maintenance and operations.” The funds collected from the I&S rate go to pay the INTEREST and the PRINCIPLE. As Mr. Chapa pointed out, sometimes this is over 5 years (for technology) and sometimes 10 years ( for buses). Only the portion of the bond used for new building and construction is financed for a max of 25 years. However, no matter the term of the bond, it is always PAID OFF IN FULL.

    Because this district has been so frugal with the use of debt, our total outstanding debt burden will fall sharply ( as the 1999 and 2009 bonds are paid off) starting around 2020. That old dept has not and will not be carried “in perpetuity” as you claim.

    3) to reward the Trustees for a level of financial mismanagement.

    Financial mismanagement? Form a district that has been recognized for sound financial stewardship? Your claims of mismanagement are totally false. Arlington currently has a very healthy fund balance. Our healthy fund balance exists directly from the sound stewardship from our Trustees and finance staff at AISD. The healthy state of our fund balance is a major contributor to our outstanding bond ratings from Standard & Poors and Moodys.

    Furthermore our board has been “debt frugal” when compared to other districts. AISD has one of the lowest overall tax rates out of 30 surrounding districts. The only districts lower are Azle and Godly—not exactly the kind of company you want to keep as a school district. If this bond package passes, our taxes will be in the middle of the 30 surrounding districts coming in at 12th overall. Again, any rate increase will not kick in for a few years and should be short lived based on our outstanding debt profile over the next 15 years.

    We are fortunate to have a Board and Administration that have been conservative with our finances so that we have the debt capacity to address the needs of our district and execute on our strategic plan—a strategic plan that is proving a sound roadmap to success.

    As a longtime parent, I am tired of seeing some of my best neighbors and friends pack up and move to neighboring districts for better schools and facilities. Arlington was once a premier school district. But, we have a financially prudent plan to get back on track, and this bond package is a critical part of that plan. I, for one, will be voting Yes!

    • rawrunner

      May 1, 2014 at 11:15 pm

      Quote 1, If it were capital maintenance needs that would be fine, but there is so much more. Razing buildings to add totally new functions is not capital maintenance needs.

      Quote 2, the tax rate from the bonds from 2009 were to down, but they won’t because you keep adding more bonds. In reality (vs. technically), Mr. Israel is correct.

      Quote 3, I don’t blame the board for a lot of stuff because they have no control. The city council throws apartments on the school district and the school district can only react. Children moving from apt to apt multiple times during the year is very hard on their education and the AISD test scores. Apartments are the giant problem, and your city council loves them, stacking them as dense as they can. People are not leaving Arlington because of the school district, but directly and indirectly because of apartments and your city council.

  2. B Phillips

    April 28, 2014 at 4:34 am

    This article is misleading. The city has asked for public participation all along. It was an open invitation to attend and participate with the The Capital Needs Steering Committee from the very beginning. I tend to vote pretty conservatively on most things, but I disagree wholeheartedly with your version of events in this article. I will be voting YES and putting a giant sign in my front yard this week saying so. I implore anyone who is planning to vote NO in this election to visit some of the schools named in the bond prior to the vote. You will see where your money is going and why. We will pay BIG time in the future when our kids are left behind in every single area of education. Normally, I enjoy the articles of this publication, but this time, you got it wrong. REALLY wrong.

    • rawrunner

      May 1, 2014 at 10:54 pm

      Mr. Phillips, Yes the school district asked for citizen input, but did it receive it? I went to one citizen input meeting in the first round and one in the second round (very close to Christmas). Both times I was the only taxpayer at my table that was not on the steering committee or on the AISD payroll.

      I attend board meetings, and a majority of the steering committee meetings. The second set of serveys were far too difficult for the average citizen. The first set were geared to get the results they wanted.

      The work the citizen committee did was very much feed to them the consultant. Decissions were made by the consultant then given to the committee to discuss.

      The buildings I have been have been fine. I am not sure what you are expecting me to see? I have no problem with capital maintenance needs being in the bond, but this package is so much more than just capital maintenance needs.

      • B Phillips

        May 9, 2014 at 5:43 am

        Dear “rawrunner”,

        It’s curious to me why you assumed I was a Mr. and not a Miss, Mrs., or Ms. It would have been more polite to address me as B Phillips, as that is how I signed my name.

        Based on the grammar and spelling in your reply, I suspect your education is exactly the type of example we are discussing here. What I “want you to see” is that in some areas, not all, but some…AISD is falling behind.

        As I stated in my earlier statement, go and spend a day at a school in let’s say, East Arlington, for example, with the Principal or a counselor. Better yet, spend it with a classroom teacher. One day in his or her shoes would be an eye-opener as to why we need this bond package to pass.

        If you are only looking at the buildings, you are missing a very large part of the point here. There are very real needs in our schools and for our students. Some of our kids are going home hungry each day, with no promise of getting fed at home. Some of these kids are the breadwinners of their families. Many of them cannot afford to participate in any extracurricular activities because there simply is no money for uniforms or instruments, etc. The drop-out rate in around the 9th and 10th grade is breath-taking.

        These kids need a good education, a well-built and well-maintained school, as well as activities that expand their minds. It’s a must in order to be competitive in the real world. Don’t we want these children to stay and contribute to Arlington long after their school years are over? Don’t we want them to be well-rounded and well-versed?

        I suspect you haven’t had a child in AISD schools for some time, if ever. If you were closer to the need, you would see that our students need to be able to focus on the needs of their age group, not worrying about very adult problems like money and their next meal. They need to be worrying about what to wear to prom, not if they have a coat for winter. This bond package is just trying to lighten the load in a few areas. It WILL have a ripple effect.

        Furthermore, if the meetings are open to the public and the public doesn’t show up, who’s fault is that? The meetings were publicized on every social outlet possible. Why do the people who are so anxious to vote “No” on this bond package only get involved when they find out what it costs in dollars and cents? Where were they when it only involved people, education, and fine arts? It’s easy to cry “foul” after all the hard work has been done. It’s simple to critique a process they never wanted a part of, until the final hour.

        No one’s asking for our schools to compete with the rich and famous schools in other parts of America. We just want our kids to have a fighting chance. Right now, there are quite a few areas of concern that have fallen between the cracks. Ask any educator in this city how much he or she contributes out of their own pockets to shrink the gap between what is needed and what is provided. You will be astounded.

        I will vote YES every single time it helps our students and teachers. I encourage you to get off your computer and go talk to a teacher. Go find out what’s really going on in our schools. Go find out what this bond package is REALLY about and why we need it so badly.

        • rawrunner

          May 9, 2014 at 12:22 pm

          You said, “Some of our kids are going home hungry each day, with no promise of getting fed at home. Some of these kids are the breadwinners of their families. Many of them cannot afford to participate in any extracurricular activities because there simply is no money for uniforms or instruments, etc. The drop-out rate in around the 9th and 10th grade is breath-taking.”

          So let’s go through the logic here. This bond carries a tax rate increase of $.15. This will causes taxes and rents to increase. This will not help small businesses which will probably be forced to raise prices to cover the cost increase. So these families you speak of should be placed under more financial stress to pay for a pool, athletic complex, six 70-yard indoor football fields, and numerous fine arts items?

          Vote NO, cut the fat, put it up for election in November.

          P.S. I have talked to teachers opposed to the bond.

  3. Chapa

    April 27, 2014 at 9:12 pm

    This article fundamentally misunderstands and misrepresents how school finance and bonds work. Bonds do not last “in perpetuity.” They are issued for a limited amount of time. They must be repaid.

    This District repays them. As a result, actual bond-financing experts like Standard & Poor’s give this District’s financial management a big “thumbs-up.” S&P and other bond ratings agencies have long given this District their highest or second-highest ratings.

    Bond funds cannot be used except for specifically authorized purposes. They cannot be siphoned off to the general fund or otherwise used for “discretionary spending.” The tax that supports bonds is a completely separate tax than that that supports the general fund.

    The “general fund” tax, called the Maintenance and Operations (M&O) rate, is currently at $1.04. It has been at that rate since 2006, when the state legislature imposed a new school finance system. That tax will not change as a result of the bond election.

    The tax that will change is called the Interest and Sinking rate (I&S). It is currently at about $0.25 and will increase by a maximum of $0.15, to a total of $0.40. Thus, if the bond passes, the total tax rate—M&O plus I&S—will gradually increase to a maximum of $1.44, and then decrease as the bonds are retired.

    The District cannot issue an ever-increasing amount of bonds because it cannot—by state law—exceed a total tax rate of more than $1.50. The District will be comfortably under that amount even if the bond package passes, but its ability to go to the voters for additional bond funding in the future will be constrained by the state-imposed tax cap.

    The bonds issued in this package will not finance purchases for items for more than the expected life of those items. So, for example, technology purchases will be paid for by bonds with a five-year repayment period because technology quickly becomes obsolete. Longer life span items, such as buses, will be repaid over ten years; the District’s buses typically reach more than 500,000 miles before they are replaced. Only facilities bonds will be repaid over twenty-five years, as buildings have much longer “lifespans.”

    Finally, it is unequivocally false to suggest that the District used funds from the last bond package for purposes other than those authorized by the voters in the last bond election. The District created a citizens committee to oversee implementation of that package. I served on that committee for two years, as did several of the citizens who put together the last bond package. The District accounted to us for every dime spent, down to the individual instruments purchased by the fine arts component and each individual project financed by the facilities component. The District did not—and could not—repurpose those funds for the general fund.

    This article utterly fails to explain school finance and “how bonds work.” This is not a mere difference of opinion. I have touched upon only a few of the many verifiably untrue assertions in the article. Opinion Arlington has done its readers a disservice by publishing it.

    • rawrunner

      May 1, 2014 at 10:40 pm

      Mr. Chapa, you are right as far as the technical “in perpetuity”, however, in realistic, actual, how it works in the real world, Mr. Israel is correct.

      The last bonds (2009) were also to only generate a 5-cent tax increase with conservate estimates and go down after 5 years, but what happened was the increase was almost 6-cents (that is what Mrs. Powell told me) and as you can see by the current bond attempt, the plan is not to go down after 5yrs, but add another bond on top of it.

      Bonds ARE used for discretionary spending, just as long as they meeting the very general wording of the bond that was past. Bond wording is never very specific.

      As far as the $1.50 limit, I suspect you already have people in Austin trying to lobby to get that changed.

  4. dkilly

    April 27, 2014 at 6:25 am

    This article addresses all my concerns except; less that 10% of eligible voters will vote on this gravely important issue … and most of those voters will be absolutely clueless on what they are voting for!

  5. rawrunner

    April 25, 2014 at 9:10 pm

    Great article Mr. Israel.

  6. buddy

    April 25, 2014 at 4:59 pm

    Thank you, Steve, for an eye-opening column! This is a longish piece, but it should be must reading for citizen taxpayers seeking a better understanding of how bonds work. I know I learned a lot. I’m voting NO. This isn’t just the kind of information the pro people don’t want us to know. I fear that they don’t understand what they are doing. Their ignorance, is followed, will get us all in trouble. One thing not addressed here that I’d like to see some coverage of is the role interest rate changes play in all this. Currently interest rates are at record lows, but almost certainly they will hit record highs in the near future due to government printing so much funny money. What happens then?

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