TO: Sue Klein
FROM: Christian Fenton
RE: Energy Bond Options
DATE: January 3, 2011
At the December meeting of the Board of Education, the refinancing of the energy bonds was reviewed. Some
background information may be helpful.
The Energy Bond was authorized by the Board of Education in November 2000 and the bonds were sold in
2001. It did not require a vote by the residents of the district as they were issued as General Obligation bonds
for energy improvements. The total value of the bond was $7,275,000. It has been used to make improvements
to district facilities for replacement boilers, uni-vent upgrades, windows and doors. Some examples of projects
funded by the Energy Bond include:
Windows at the 389 St. Clair, Barnes, Ferry, Kerby and Brownell
Boilers at “389”, Maire, Richard, Trombly, North and South
Energy Management system and uni-vent improvements at North, South, Brownell,
Parcells and Pierce
The bond has been gradually paid down over the last 10 years and is accounted for in the Debt Fund via a
transfer from the General Fund. This annual debt retirement expenditure has ranged from $428,000 to $685,000
with the current transfer of $692,606. The remaining General Fund debt payment transfers average $711,050.
The total outstanding balance of the Energy Bond as of June 30 is $3,105,000. The payment in May 2011 of
$555,000 is not part of this pay off or refinancing decision. The remaining balance after May 2011 is
$2,550,000. The bond will be completely paid by the end of fiscal year 2014-15.
Such as we did with the voted bond in March 2007, market conditions are such that refinancing the debt will
yield a savings to the district. We completed this analysis and have presented it to the Board of Education.
Some Board members have expressed an interest in retiring the debt by using General Fund equity reserves.
We note here, as we always do, that Fund Equity is not “cash on hand”. State and local tax revenues ebb and
flow in a pattern not consistent with district cash flow needs. Despite having a healthy General Fund Equity,
the district routinely borrows millions of dollars a year and subsequently pays it back.
The $2,550,000 obligation in some form remains outstanding in all scenarios. We have the opportunity for
savings ranging between $0 and $53,000 annually. None will deliver a true average savings of $711,050
annually. If General Fund Equity were used to retire the debt and the $711,050 line item previously earmarked
for the now retired debt was appropriated for other operational expenses (salaries, books, etc.) then this amounts
to simply spending General Fund Equity for other operational expenses.
There are many considerations given these options, some financial and some legal. They are summarized
Option 1 – Do nothing and continue to pay off the remaining five years as scheduled.
1. No limitation of future district program and initiative investment options as it relates to the “3%
clause” in the GPEA contract (explained below)
1. Payment would be at a higher interest rate than current market rates which would result in higher
general fund expenditures as compared to other options
2. Debt payment schedule not accelerated
3. Cost of borrowing would not be reduced
Option 2 – Refinance the remaining payments
1. Annual relief to the General Fund of approximately $23,000 over the next four years
2. Annual savings over the coming four years would be guaranteed, not subject to interest rate
and/or borrowing variability
3. No risk of encroaching on the “3% clause”
1. Other options could deliver greater interest savings (but with risk)
Option 3 – Pay off the bond in whole and shift incremental borrowing burden to a Line of Credit
1. Annual relief to General Fund in the range of $45,000 to $53,000 annually depending upon
interest rates over the next four years. (Relative to Option 2, a $22, 000 to $30,000 incremental
1. General Fund Equity would be used to pay off the debt, an increase in other borrowing would
2. Debt transfers from a stable interest rate to a variable interest rate
3. This and potential other burdens on General Fund Equity could lower the district’s bond rating
4. If credit markets tighten we could be forced to use even a less economical State Aid note.
5. We risk encroaching on the “3% Clause”.
6. Even if we are ultimately judged to have not encroached on the “3% Clause” adjudication could
easily consume the incremental benefit of the act itself.
Option 4 – Pay off the bond in whole and shift incremental borrowing burden to a State Aid Note
1. Would actually increase cost to the district since notes cannot be repaid early, as can a line of
2. Most of the other Cons from Option 3 prevail
Explanation of the “3% Clause”
The most recent teacher contract contains the following language regarding expenditures:
“It is further understood and agreed that any cost associated with new programs or new initiatives
should not increase the total year over year total budgetary expenditure by more than 3% unless such
general fund expenditures are made to support or implement programs and initiatives by federal and/or
Based on recently approved GAAA #1, here is our current position in respect to that contract provision.
• 2010-11 General Fund budget (total appropriation) is $97,424,912.
• 3% of $97,424,912 is $2,922,747
• Total cost of the contemplated Energy Bond payoff is$2,632,640
• This leaves approximately $290,107 for any newly contemplated "programs or initiatives.”
Increased salaries, MPSERS, health, etc. are not new programs or initiatives. Meanwhile, reduction of class
sizes, new technology initiatives, purchase of musical instruments, implementation of recommendations from
the Study Committee on the Elementary Schedule and other similarly desirable interests could be considered as
Our labor counsel, John Gierak, has advised us that the energy bond payoff would fall into the category of new
initiatives. Hence, the cost of refinancing would greatly limit other investment options that may prove to be
more desirable than retiring the debt.
Administration’s Recommendation – While reducing debt is desirable, none of these options truly
accomplishes that. It is the opinion of the Administration that the benefit of doing so does not outweigh such
risks as a creating a liquidity crisis, lower bond rating, tighter cash flow, limitation of educational investment
options, and potential legal action.
While we have protection in the new contracts regarding General Fund Equity, this voluntary
reduction, combined with the unknown MPSERS rate and other variables in State/Federal revenues could result
in the district reducing fund equity beyond the 10% threshold in the course of one year.
Conversely, the risks of refinancing are minimal and it does deliver guaranteed relief to the General Fund
potentially equal to or exceeding that of the higher risk options.
Some Board members have voiced concern regarding the fee structure; however, these fees are necessary as the
underwriter, financial consultant and attorney provide a service in order to market the bonds. We are getting
something for that money. Notably the fee structure is lower now to reflect the desire of these professionals to
be cognizant of current financial conditions.
Consequently, the administration’s recommendation is to refinance the energy bonds as outlined in Option 2.
Our district has attained our strong financial position through proper planning, analysis, and conservative
action. The refinancing option best reflects this successful strategy.
The Grosse Pointe Public School System
Energy Bond Refinance and Debt Transfer Options
January 7, 2011
FINANCING OPTIONS (1)
Continue Refinance Transfer Debt Transfer Debt to
As Is Energy to Line of State Aid Note
Bonds (2,3) Credit (4) (5)
Assumes General Fund Short-Term Cash
Flow Borrowing Needs Of: $8,000,000 $8,000,000 $10,550,000 $10,550,000
Fees - 52,289 20,000 100,000
Net Principal Paid on Energy Bonds 2,550,000 2,550,000 2,550,000 2,550,000
Interest Paid Energy Bonds FY 2012-2015 294,019 146,794 - -
Interest Expense - - 57,640 98,250
Total Cost $2,844,019 $2,749,083 $2,627,640 $2,748,250
PAYMENT SOURCE OF EXPENSE:
General Fund Costs FY 2011 - - 5,000 5,000
General Fund Expenditures 2,844,019 2,749,083 2,627,640 2,748,250
$2,844,019 $2,749,083 $2,632,640 $2,753,250
Savings - $94,936 $211,379 $90,769
Best Case Estimated Annual Savings - $23,734 $52,845 $22,692
Annualized Effect of 100 Basis Point
Increase in LOC Cost - - ($8,188) ($16,375)
(1) All scenarios assume cash flow in future years for scheduled principal payments are used
to replenish fund equity.
(2) All cost of issuance paid from bond proceeds- no general fund monies are used. Reflects
reduced cost of issuance of $52,289 vs original estimate of $69,000.
(3) Interest Rates have increased 40 to 60 resulting in lower savings of $23,122.
(4) Assumes current rate on line of credit of 1.76% for the next four years. Assumes LOC
borrowed each October and repaid each March 31.
(5) Assumes State Aid note with an interest rate of 1.5% and $25,000 annual issuance costs.
The Grosse Pointe Public School System
Estimated Energy Refinance Issuance Fees
Par Value $2,600,000.00 $1,300,000.00
Cost of Issuance:
Bond Counsel - Miller Canfield Paddock and Stone $14,800 $13,500
Underwriter's Discount (% of Par Amount) - Mesirow Financial $16,800 $8,400
Registered Muncipal Advisor - Bendzinski & Co. $10,000 $7,500
Verification Agent - Robert Thomas CPA LLP $1,250 $1,250
Escrow Agent - The Huntington National Bank $400 $400
Paying Agent (First Year Fee) - The Huntington National Bank $150 $150
Official Statement Printing - Muni Deals $1,500 $1,500
Rating Fee - Standard and Poor's $7,900 $7,700
Advisory Council of Michigan $200 $200
Michigan Department of Treasury Fee (% of Par Amount) $560 $280
Total Issuance Costs $53,560 $53,560 $40,880
To: Sue Klein
From: Christian Fenton
Re: Revised 3% calculation for 10-11
Date: January 11, 2011
After reviewing the contract with Mr. Walsh, Mr. Harwood and Mr. John Gierak of Clark Hill
the following is a recap of the calculation and the impact of the pay off of the outstanding
General Obligation Energy Bonds.
Note that the base for the 3% calculation is the summary of expense and transfers from 09-10 not
10-11 as indicated in my previous memo.
09-10 Total Expenditures plus transfers $103,308,790 (from 09-10 audit report)
3% Max $3,099,264
New Initiatives/Programs for 10-11 (excluding the Early Severance Buyout of $1,620,000 for
the 2010-11 fiscal year.)
ADK program new for 10-11 $701,233
Outstanding Energy Bonds paid off 2,550,000
Maximum 3% Factor (3,099,264)
Exceeds Limitation by $151,969
The improvements exceed the 3% limitation imposed in the contracts.
Mr. Gierak, has provided a separate memo addressing various legal questions about the impact of
the energy bond payoff and the 3% factor in the contracts.
The Grosse Pointe Public School System
Actual Projected *
2010-11 School Year 2011-12 School Year
Date Amount Date Amount
10/15/2010 $1,500,000 10/14/2011 $1,500,000
10/29/2010 1,000,000 10/28/2011 1,000,000
11/12/2010 1,000,000 11/11/2011 1,000,000
11/24/2010 3,500,000 11/23/2011 3,500,000
12/23/2010 1,000,000 12/2/2011 1,000,000
Total Borrow $8,000,000 Total Borrow $10,550,000
* All things being similar to previous year