Instead of the 5.5% bond interest rate that was estimated for $22.6 million in school facilities improvements prior to last November’s referendum, it appears the district will be able to borrow at an average rate of under 2%, the Whitefish Bay School Board was told Wednesday night.

“We estimate the average interest rate on the bonds over 20 years at 1.91%,” said James J. Miller, senior vice president of Hutchinson, Shockey, Erley & Co., which is providing the district with financial advice on structuring its bond issue.

“You’re never going to find cheaper money,” he said. “From the financial side, your timing is perfect.”

The effect of the low interest rate – cobbled together from various subsidized government programs together with traditional tax-exempt general obligation (GO) bonds – and a slightly lower amount borrowed means the total overall interest cost of the improvement program over 20 years will drop from $15.59 million, estimated prior to the referendum, down to $3.69 million, according to Miller.

Exact numbers will not be known until the district’s allocation of low- to zero-interest Qualified School Construction Bonds (QSCBs) is announced by the state next week and GO bonds are sold in the public market in July.

However, it appears that the tax impact of the improvement work on village homeowners will drop by about 30% from 71 cents per $1,000 in assessed valuation to 50 cents per thousand.

This rate reduces the impact on a $350,000 house from a $250 a year tax increase to a $175 increase. The figure includes a potential reduction in the actual amount borrowed to $20 million from $22.6 million, based apparently on expected reductions in construction costs, which were not discussed.

The lower borrowing cost also means less loss of state aid, the district’s business manager, Shawn Yde, told the board.

The interest rate and total cost estimates were arrived using the following assumptions:

• $1 million already borrowed from the State Trust Fund at 3.575%, after a 35% credit from the federal government’s Build America Bond (BAB) program.
• $7.45 million in QSCBs with a subsidized interest rate of 0% for 17 years.
• $3.55 million in additional BAB funds (due to an exception granted to the district on the State Trust Fund borrowing limit in 2010).
• $8 million issued as tax-exempt GO bonds financed over 10 years at an estimated interest rate of 3.68%.

“We feel confident in the plan,” Miller said. “We’ve talked to our sales force and we’ve talked to our underwriters. We think it can be done.”

Although the district heard the report as a Good News agenda item, it was not without controversy. Michael Braun, a frequent vocal critic at school board meetings asked how the school district “could vote to increase its debt when it was in default on another loan.”

The loan he was referring to is a moral obligation loan made as part of a failed Collateralized Debt Obligation investment purchased by the board in 2006. A managing director of the bank that made the loan, Depfa Bank, also made a surprise appearance at the meeting.

“Will the Board work with Depfa to support the Whitefish Bay OPEB Trust as it pledged to do when the trust was established in 2006?” asked Jane Russell, from the New York office of Depfa. “I think it is in the interests of the Whitefish Bay School District to answer in the affirmative.”

Russell said Depfa wanted to work with the district “to ease the burden of its obligations” but “the district’s representatives have not been cooperative in this effort.”

She said the bank was willing to consider alternatives “such as a reasonable reduction on the principal amount of the loan and an extension of terms to make the debt easier to pay off over time.”

The board, by law, was precluded from disucssing the issue with Russell because the defaulted loan was not an agenda item posted under the state’s open meeting law. However, the district is in a lawsuit to recover its losses on the investment and has usually declined commenting on the matter in the interim, on advice of counsel.

“A confluence of events is now bringing us to a critical moment,” Russell said. “You are putting together a budget for the next fiscal year. And another interest payment is coming due on the trust loan on June 22, 2010.”

She urged the board to “put this matter behind it” and “restore its good name and its access to the public capital markets, avoiding the necessity for bailouts from the State Trust Fund.”

As to the characterization of State Trust Fund loans as a bailout, Superintendent Jim Rickabaugh asked representatives of Hutchinson Shockey at the meeting how the building improvement debt plan would have been different if the district had not been in default on the CDO loan or in litigation on the failed investment.

It would not be significantly different, Miller said.

He did add, however, that the lawsuit made marketing the GO bonds “more costly and difficult,” and was one reason why the bonds would be issued as 10 year bonds aimed at investors rather than 20 year bonds marketed to speculators.