How a mid-sized school district passed a billion-dollar bond measure

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The 18,000-student Ann Arbor, Michigan, school district passed a billion-dollar bond proposal by convincing voters that a delay in funding could mean a bigger price tag down the line to fix the problems, backers say.

Plans for greener buildings and a commitment to education by residents in the city best known as home to the University of Michigan may have provided a helping hand.

The district, which has just $164 million in debt now, turned to voters to approve a $1 billion, 30-year capital bond funded by 1.65-mill property tax increase to renovate aging schools dating back to the 1920s, place solar panels on the roofs of all 35 district buildings, build new classroom space to accommodate growing student enrollment and purchase buses and technology.

Ann Arbor represented more than a third of the $2.8 billion of school bonds up for a vote across Michigan. The capital bond was the second highest to be approved in Michigan since 1994, when Detroit Public Schools voters approved a $1.5 billion bond measure.

The increase means Ann Arbor Public Schools tax rate will be 4.1 mills. The higher tax rate levied would cost taxpayers an average of $228 annually, based on average taxable value, the district says.

The district believes its success is tied to its ability to make the case for the upgrades, said Andrew Cluley, director of communications at the school district.

“Our community has a strong value in education and that is first and foremost,” Cluley said. “Beyond that a lot of work really went into it planning on the district’s behalf. The average age of our schools is 63 years and five of our buildings are going be 100 years old within the next five years, so the need for some upgrades on these buildings was pretty apparent and the district did a pretty good case of showing that need and it wasn’t just the district saying it we actually had some experts saying we need this work.”

The district hired EMG, a Maryland-based commercial real estate inspector, to conduct a needs assessment based on the current condition of its buildings. EMG reported that the district needed to spend $823 million on facilities alone over the next 20 years. Other improvements, like purchasing buses, technology and furniture, bring that figure to $1.4 billion over that same period, according to the district’s assessment.

In June, Ann Arbor Superintendent Jeanice Swift said respondents to a survey the district conducted indicated it should pursue the most ambitious of three bonding proposal options — $533 million, $805 million and $1 billion — to fund facility upgrades and other projects.

The district has a 10-year sinking fund which voters most recently approved in 2017 that brings in about $22 million year for the school district. A sinking fund is a pay as you go system that does not require borrowing money. The sinking fund is expected to collect $612 million in revenue over the next 20 years, if it is renewed in 2027 and again in 2037.

“The review of our 35 buildings showed that while buildings are in pretty good shape right now, without some infusion of funds they would fall into poor conditions rather quickly,” Cluley said. “They estimated about $50 million a year in work being needed over the course of the next 20 years. With only $22 million coming in a year from the sinking funds it was obvious that there was going to be the need of some form of funding.”

Cluley also credits the green update aspect of the bonding proposal as another factor in the bond’s success. The proposal calls for solar power on all of the district’s buildings, it calls for installing LED lighting, which uses a lot less energy than traditional fluorescents, and it calls for, where possible, using geothermal heating.

“Our district and community believe that climate change is a real thing and needs to be addressed so there is a lot of efforts that we made to ensure that this proposal will help make our schools take that step towards carbon neutrality,” Cluley said. “The response that we got — the local chapter of the Sierra Club endorsed the proposal and the Ecology Center, which is based in Ann Arbor, backed this proposal and that is an organization that has never endorsed a school proposal before.”

Voters ultimately approved the bond on Nov. 5 by a 53.3% to 46.7% margin.

Michigan is one of 12 states that doesn’t provide state funding specifically for school buildings and infrastructure.

Ben DeGrow, director of education policy at the Mackinac Center for Public Policy, said the state provides aid to districts for financing their facilities in other ways.

“Michigan allows districts to have their debt ‘qualified’ by the state,” DeGrow said. “Essentially, the state guarantees its 'faith and credit' that if the district fails to make its payments, the state will come in and bail it out.”

This is accomplished through the state’s School Bond Qualification and Loan Program. In addition to using the state’s credit rating, districts can borrow from this program to make bond payments, if their local millage is not sufficient to cover these costs. S&P Global Ratings rates the state’s general obligation bonds AA, and appropriation backed debt and state building authority debt AA-minus. The outlook is stable. Fitch Ratings rates the state’s GOs and state appropriation debt AA. The outlook is stable. Moody’s Investors Service rates the GO debt Aa1. Most appropriation debt is one notch lower. The outlook is stable.

Ann Arbor's outstanding school bonds are rated Aa2 by Moody’s Investors Service. The outlook is negative.

“It hasn't been determined yet if we will use qualified or unqualified bonds,” said Marios Demetriou, the assistant superintendent for finance and operations. “That will depend on if the state's rating helps save on interest rates. Our tax base might be strong enough that it doesn't.”

Demetriou did not say what the timing on the bonding would be but said that the current low interest rate environment make now the best time to sell bonds. A June staff report prepared for the school board as it prepared to vote on the bond measure contemplated four separate issuances between 2020 and 2029.

Around Michigan, 37 school bond proposals were on the ballot last week, and nine failed. DeGrow said that the number of qualified school bond proposals on the ballot this year “is about the same as other recent November elections.”

In Dearborn, voters rejected a $240 million bond proposal for school infrastructure by a vote of 52% to 48%. The $240 million would not have increased the current millage rate of 4.82, according to officials.

“Why some are successful and others aren’t? All politics is local,” said Eric Lupher, president of the Citizens Research Council, a not-for-profit public affairs research organization. “You’d have to go on a school district by district basis to see the conditions of buildings that the kids are getting educated in now and can you really make the case that improvements are needed and how is it going to impact your tax community because the right community can do it for little impact on tax burden but less wealthy ones require more taxes to pay down those notes.”

Lupher says it may be another reason taxpayers approved the $1 billion bond in Ann Arbor.

“They aren’t rolling in the bucks, but with the professors attached to the University of Michigan, a fairly thriving business community, there is a lot of new construction going on in the city — it is not a struggling community,” Lupher said. Even with the bond measure, the Ann Arbor mill rate will be significantly lower than eight other districts in the county, the September staff report said.

Washtenaw County, where Ann Arbor is located, is the fourth wealthiest county in the state based on 2010 United States Census. Wayne County, home of Dearborn and Detroit, is ranked 34th. Dearborn Public Schools is rated A1 by Moody’s. The district has $135 million of bonds outstanding.

A group against the Dearborn proposal, calling itself Dearborn Parents for Better Schools, said the bond wouldn’t help the district tackle issued such as class sizes and transparency in the school’s budget. “We have been told about repairs for years, and for years we have not been presented with real solutions that ensure lasting results,” a letter posted to the group’s Facebook page said.

The district has also experienced a decline in students over the years. The district said in a June presentation that it could lose over 100 students, going from 20,747 students this spring, to 20,619 students in the fall.

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