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School referendum debt service may become numbers game

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news Cloquet, 55720
Cloquet Minnesota 122 Avenue C 55720

The Cloquet School District faces a series of challenges in passing a referendum to replace the 94-year-old Cloquet Middle School — but paying debt service on a large obligation will probably not be one of them.

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According to the Carlton County Auditor’s Office, the district currently has five outstanding bond series totaling $27.2 million with outstanding principal balances of $22.8 million through Dec. 31, 2013.

Of those obligations, one is for OPEB, or Other Post-Employment Benefits, and funds the district’s retiree health care program. That obligation totals $5,750,000 and is accounted for separately in calculating debt service.

“We split out the debt service between OPEB and the other general obligation bonds,” District Business Manager Kim Josephson said.

In fact, the majority of the district’s levy goes to pay down debt. In fiscal year 2013 the district levied $4,325,000, and $2,555,000 of it went to pay down the district obligations. That’s not unusual, according to Josephson.

However, the amount and nature of the district’s levies mean that it does not presently qualify for what is known as “equalization aid” from the state of Minnesota. Under that program, districts with higher levy ratios can receive assistance in their debt service.

Presently the district levies approximately $45 per student each year for debt service, according to Josephson. That’s roughly in the middle of state districts.

“I’ve seen it as low as $20 to $22 per student and as high as $60,” he said. “We’re middle of the road, without exact figures in hand.”

However, the passage of a referendum of even moderate size would make the district eligible for equalization aid. The district can’t qualify for aid on OPEB bonds by state law.

“We have the authority to levy what we expend in debt service, in general debt and the OPEB fund, ” Josephson said. “It comes out evenly on the balance sheet.”

That process works in a manner similar to a board-approved levy, which does not require approval by voters. Last year, the school board took advantage of a change in state law to increase its own board-approved levy to $300 per student without a vote, up from about $90.

But here’s where it gets interesting. The larger the referendum, the more aid the district would get — to the point where if a $50 million referendum were passed, the district would receive equalization equal to nearly the amount of total interest on the bonds over a 20-year period.

A $30 million bond issue would generate about $18 million in interest payments in addition to the principal. State equalization would bring in $9 million over a 20-year period to assist in repayment, leaving the district’s total obligation at $39 million.

A $40 million issue would generate $24 million in interest, and $18 million in equalization aid, leaving a total indebtedness of about $46 million.

The top suggested amount, a $50 million issue, would mean about $29.5 million in interest — but $28 million in equalization aid, which would mean the district could essentially do the project for the principal cost in terms of its own obligations.

“You can make the case that the higher you go, the better deal you are getting,” Josephson said.

However, the total amount of payment on the $50 million bond issue — about $51 million — is also the highest of the three comparison options provided by the district’s financial consultants. The price tag is bigger, but the amount paid by other sources is also higher.

“If you look at the net levy, it is going up but while the bond amount goes up, the aid amount goes up faster, too,” Josephson said.

Cloquet’s last bond issue, in 2010, was rated A3 by investing grading service Moody’s, which is the lowest level of bonds considered of ‘above average’ credit worthiness. Grades Aa and Aaa are higher, while bond ratings of Baa and below are obviously lower.

The district currently has no major issues meeting its debt obligations, according to Josephson, and the possibility of state aid — or, a different pot of taxpayer money where exposure to the local taxpayer is reduced — does help ease the potential tax blow.

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