CHICAGO - Facing decisions on how to deal with escalating operating costs and delayed state aid without eroding educational services, Minnesota's school districts have just one more month to issue debt without voter approval to address one of their growing fiscal burdens - other post-employment benefits for retirees' health care.
The state last year approved legislation allowing local governments and school districts to establish irrevocable trusts and issue taxable bonds to fund their OPEB liabilities. A rush of districts acting to take advantage of the change prompted lawmakers to rein in their issuance with legislation this past spring that requires school districts after Oct. 1 to seek voter approval for OPEB bonds.
"School districts needed to have some options for how to fund their liabilities so the original legislation was great, but the deadline is hurting districts that didn't have their actuarial studies done," said Joel Sutter, a financial adviser at Roseville, Minn.-based Ehlers & Associates Inc. The firm has advised 39 districts that have taken advantage of the 2008 legislation and issued debt. Another five are scheduled this month and others are still considering it.
"Time is running out," Sutter said.
St. Paul-based Springsted Inc. also is advising on a handful of sales set for this month including Anoka-Hennepin District No. 11's $26 million issue, North Branch School District 13's $ 4.4 million issue, and Thief River Falls School District 564's $2.5 million.
The Proctor District 704 yesterday sold $4.5 million of general obligation OPEB bonds to fully fund its unfunded liability.
In 2008, 27 districts sold $214 million of debt to fund their unfunded OPEB liabilities and so far this year 48 districts have sold $379 million, according to Thomson Reuters. Larger governments are now required to report under Government Accounting Standards Board rules their current and future costs for non-pension other post employment benefits like healthc are on an actuarial basis while smaller governments face a looming deadline of next June.
Previously, governments were only required to report the cost on an annual, pay-as-you-go basis. Governmental units are also required under the new rule to calculate the annual required contribution it would take to fully fund their liability, although no action is required on a government's part to meet the ARC or to begin addressing the total liability.
A special study released in late March by the Minnesota auditor Rebecca Otto that was conducted at the request of the state Legislature surveyed 342 school districts, and 274 responded. The report can be seen at http://www.auditor.state.mn.us/reports/gid/2009/opeb/OPEB_liabilities_report.pdf.
The results found 43% of the responding districts, or 119, had conducted an actuarial study of their OPEB liability and 33 had issued debt totaling $337 million, with at least eight more considering such action at the time of the survey.
The number of districts turning to debt has since grown to at least 75 public offerings and private placements following the Legislature's passage of legislation that imposed the Oct. 1 deadline. The 119 districts reported combined unfunded OPEB liabilities of $1.4 billion.
The reason behind districts' swift embrace of the OPEB bonding option lies in the strict operating levy caps they face. Counties and cities did not move quickly to take advantage of the 2008 legislation because they have more flexibility in their levies to address OPEB costs.
"The bonding option was really the only option for school districts to raise revenue to help cover OPEBs," Sutter said.
Ehlers' first school district OPEB issue sold last September followed by another in October, then the market froze in the aftermath of Lehman Brothers' September bankruptcy filing. OPEB borrowing resumed in December, Sutter said, but at higher rates that hit 7% on longer maturities.
As the market opened up and rates fell this year, the number of districts entering the market has remained steady with 10-year maturities for some districts that captured rates in the 4% range, Sutter said.
All of the issues the firm has advised on have sold competitively with a general obligation backing, although Ehlers has also handled several private placements for smaller districts. Many of the school systems have borrowed to fully fund their OPEB liability while some have funded just a portion.
While districts have had a year to consider a financing, some of the smaller ones that do not face a reporting deadline until June 30, 2010, are just now conducting or completing actuarial studies, and others have been preoccupied dealing with other fiscal issues, such as passage of additional operating levies.
While time is running out, the 2009 legislation did include options that will still aid districts in coping with their OPEB burden. They can still issue debt if voters approve and they can now include, with some restriction in their operating levy, funding for the pay-as-you-go amount of their OPEB liability as long as the districts have moved to put a sunset date on employee benefits. Many districts have already moved to include such sunset dates in their collective bargaining agreements with unions.
"School districts will still have options, but the ability to issue bonds without a referendum was a very good one for many as referendums are a hard enough sell when you are trying to fund a tangible project like a new school," Sutter said. "Explaining the need to fund OPEBs even if it was something a prior board approved 30 years ago is much harder."
While OPEB borrowing has proved a popular option, it's been rejected by some districts. Some clients of both Springsted and Ehlers have opted against issuing debt, some over concerns that it would damage their relationship with voters and others over concerns about taking on long-term debt to address the liability.
While some are now rushing through the consideration process, most have spent considerable time weighing the benefits and pitfalls of the borrowing option.
"Some districts looked at it like Duluth, Lake City and Comfrey and decided against borrowing," said Ehlers' financial adviser Jim Schmitt. "Some just were not comfortable taxing without a public vote and I have found that all districts we've worked with have made thoughtful decisions."
One public observer of school districts' OPEB issuance is troubled by the potential impact of the deadline on district boards' decisions.
"Even though interest rates are low, I think the deadline is problematic because districts are acting quickly without thinking about the long-term costs of bonding," said family law attorney Kent Laugen, who is tracking districts' OPEB issuance on his Web site at http://minnesotafamilylaw.com/.
Laugen lives in the Red Wing School District, which is expected next week to vote on a final size for its OPEB bond issue of up to $16 million at a meeting on Tuesday. He said he's not opposed to the bonding option, but believes districts must weigh all their options and in some cases should not fully fund the liability, which eliminates some of their leverage in collective bargaining.
The deadline comes as districts are struggling to cope with state payment delays. To help address the state's own budget deficit, Gov. Tim Pawlenty pushed off some school aid payments to the next fiscal year.
That move has prompted a rise in short-term issuance by school districts. Springsted, which operates a pooled borrowing program sponsored by the state association of districts, recently completed a cash-flow issue for $120 million with 65 districts participating, up from $52 million for 42 districts last year.
Ehlers, which advises districts on individual issues, has 37 cash-flow issues scheduled or completed since the summer, up from 29 for the same time last year.