A Board of Education meeting tonight at 7pm at the Administration Building at 389 St. Clair could lead to the expenditure of $2.5 million of district savings and an incalculable loss of trust between our teachers, other employees, and the Board of Education.
The district approved a non-voted energy bond 10 years ago. We budget about $600,000 per year to pay it off. It will be retired in five years at current rates.
Some Board members want to use district savings to pay it off immediately at time when most business are being cautious with their cash reserves. Doing so would not truly eliminate debt, but exchange the fixed, low interest financing of the energy bond to a variable interest rate at a time when everyone expects interests rates to increase. If it sounds, well, not smart, it’s because it’s not.
Yes, we have a healthy district savings, a key enabler to our innovative new teacher contract. Nevertheless, like every other district, we borrow money for cash flow purposes because tax collections and state aid are not in sync with operational expense patterns. So technically, by “paying off” the energy bond debt, we’re really just transferring it to another borrowing vehicle. It’s a cash flow issue. Accelerating the payoff schedule would not free up that same $600,000 we budget annually, either. This flawed logic was proposed by one of the “pay off” proponents.
Interest expense is the only cost that can be affected. We owe the principle no matter what and in a best case scenario, transferring that debt could save the district $30,000 per year – a whopping .03% of our total budget. Doing so, however, brings such risk as higher interest rates, being subject to the vagaries of the credit market, and lowered bond ratings. A $30,000 limited annual return is not worth those risks.
So why would anyone want to pursue this option?
Recall our recent groundbreaking teacher contract? It’s simple, elegant and innovative design keys on the basics: revenues, expenses, and district savings (aka Fund Equity). The parties agreed that we need a minimum level of savings (10% of our operating budget) to be financially responsible. We agreed that locally we are not in real control of our revenues. The state is. We agreed that employee contracts constitute the majority of our expenses.
So we agreed to a formula that will adjust employee compensation (expenses) based on state aid (revenue) to ensure we maintain a 10% fund equity level (district savings). No school district in Michigan had ever done anything like it before. It distributes risk and reward equally and proportionally in a way that protects all of us from the uncertainties of Proposal A, the state retirement system, and health care costs.
The teachers and other employees recognized the risks of the plan, in particular if the Board wantonly increased expenses in order to decrease savings and therefore their compensation. It makes you wonder whether the desire by some Board members to consume $2.5 million in savings is driven by the greatest fear our employees had before they joined us in partnership. I am wondering that myself. My cynicism increased when the Board members not named Gafa, Minturn and Walsh opposed my efforts to have the meeting tonight televised. What don’t they want you to hear?
Stephen Covey’s new book “Speed of Trust” is all the rage in management circles today. His main idea is “When trust goes up, speed will also go up and cost will go down. When trust goes down, speed will go down and costs will go up.” The simplest ideas are usually the most powerful.
This issue is all about trust. Trust between our Board and our employees enabled the achievement of a partnership that will pay dividends along many dimensions for years to come. That trust, and its potential benefit, now stands threatened by a measly $30,000 per year for five years. For calculable and incalculable reasons, using $2.5 million for this purpose is a really bad idea. The motivation for doing so may be worse. Hiding the discussion from the public eye is simply unacceptable.
Feel free to share your feelings on this matter by sending an email to schoolboard@gpschools.org or by coming to the meeting tonight.