Rensselaer School Refinancing Helps Boost Budget

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A recent bond refinancing is part of an effort to propel a struggling upstate New York school district back to fiscal health.

The $60 million refunding certificate of participation sale from Rensselaer School District priced on Dec. 20.

The district just outside Albany originally came to market in 2006 with a $71 million COP transaction to build a new 288,000 square-foot kindergarten through 12th grade campus that included elements of a public-private partnership. The refinancing has helped the Rensselaer schools enhance its weak budget position by boosting its reserves as the district  redevelops its former school property in an effort that is supposed to lay the foundation to boost future property tax revenues.

The refunding deal came six weeks after a groundbreaking for the mixed-use development at the old Rensselaer Junior Senior High School, a plan that experienced a decade of delays due to environmental challenges and the 2008 recession.

"Sometimes we get transactions and it's just a transaction and sometimes it's personal," said Jeff Hyman, principal of Hyman Hemispheric, who worked as financial advisor on the recent deal and on the 2006 deal when he was with UBS. "This one was personal."

The original Rensselaer bond sale was honored as The Bond Buyer's 2006 Northeast region small-issuer Deal of the Year.

But the school district's financial picture weakened subsequently, culminating in an audit from the office New York State Comptroller Tom DiNapoli last October that cited the district for adopting structurally unbalanced budgets from 2012 to 2016. DiNapoli's report said that the RSD overestimated revenues by $3.5 million (5%) from the 2012-13 to 2014-15 fiscal years, which resulted in "rapid deterioration of the District's fund balance and reserves," from larger-than planned operating deficits and declining fund balances.

The original 2006 transaction, which marked the second-ever COP financing for a New York school district, was described as "an innovative" P3 where the developer agreed to assume construction risk and create a new school building on a turnkey basis. The district was tasked with convincing creditors that it could satisfy repayment on a borrowing that was more than three times larger than a previously approved $23 million general obligation ballot measure.

"The public good that came out of this was not just the school district, it was leveraging to do an economic development project because of the swap of lands for the highest and best use," said Ken Bond, a partner with Squire Patton Boggs, who was bond counsel for both the 2006 and 2016 transactions. "It can't be done easily without a flexible legal structure."

The 2016 COP sale is insured by Assured Guaranty with enhanced credit ratings of A2 by Moody's Investors Service and AA by S&P Global Ratings based on insurance. No underlying rating is reported in the official statement.

Morgan Stanley was the lead manager.

"The bond deal helped put the school district in the condition of good financial hygiene," said Bond of the December deal. "It had much more effect than merely a refunding because we had to go in and clean the whole place up to make it attractive."

The 2016 deal brings the school district $6.8 million in savings over the life of the bonds that mature in 2036, day district officials, who add that the district will utilize the savings to build up a healthier fund balance.

"The district is in far better financial condition now than it was just a few months ago, before the refinancing took place," said RSD business official Meghan Heimroth. "It was a fantastic opportunity for the district and a proved to be a huge benefit."

Morgan Stanley Executive Director Robert Pattison, who was senior banker on the December refinancing, said the newest transaction was designed to allow the district to achieve immediate fund balance relief. The deal also enables RCSD to refinance the COPs for future savings.

"They definitely needed the savings so we structured a bunch of the deal so they could achieve some of it for this school year," said Pattison, who previously worked with Hyman on the 2006 deal when the two worked together at UBS. "They are very happy with how it turned out."

Bond said he hopes the history of the RSD deal brings to the forefront the need for amending New York State's constitution to grant school districts and local development corporations' statutory authority to issue revenue bonds without needing to get state legislative approval. The RDC received such approval for the original 2006 bond issuance, but Bond emphasized that the process would be far smoother if the state comptroller was given front-end power to approve bond issuances.

"There is a need for a general statute that allows revenue bond financing for these kinds of large projects," said Bond. "The constitution should be amended to put the comptroller at the front end of these deals instead of at the back end of these deals so that you don't have bad deals being done, you have them stopped at the state level and then good deals can go forward."

Bond hopes that voters will vote approve a ballot measure this November that would authorize a convention to implement changes to the state's constitution. The referendum only goes before voters every 20 years and Bond is hopeful that this time it will succeed in passing after previous failed attempts including in 1977 after Fordham Law School held a symposium on the importance of finance law changes.

For the lead up to the 2017 vote, Bond and 17 other legal scholars contributed to a book entitled "Making a Modern Constitution: The Prospects for Constitutional Reform in New York" with his section detailing the need for constitutional finance law reforms.

"Were the state constitution amended to permit local government debt to be issued and secured by non-real property tax revenues and budget appropriations with a mandate to the legislature to enact a statutory regime for such indebtedness, local governments and school districts could finance public facilities routinely the way Rensselaer CSD did under its special act," said Bond. "The structure and techniques employed in the Rensselaer project should be institutionalized with a general state law on revenue bond financing for munis."

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