New Jersey Economic Development Authority board members tomorrow will consider approving up to $775 million in state appropriation bonds for the first tranche of debt under the Educational Facilities Construction and Financing Act, which calls for $8.6 billion in state appropriation bonds.
But the total amount of bonding that could occur as a result of the law passed last year is certain to grow. Local school districts will receive 40% of their construction costs from the state bond, and they are expected to issue bonds for the matching 60%.
The New Jersey enacted the law after a state Supreme Court decision mandated provision of an adequate education for all school districts by the state. The 30 poorest districts -- known as Abbott districts after the lead plaintiff in the case -- will get 100% of their school construction costs paid by the state and the suburban districts 40%.
However, the law has sparked another lawsuit, this one filed in January by Mayor Steven Lonegan of Bogota, which challenges the constitutionality of the state appropriation bonds being sold by the EDA to finance the construction. The lawsuit could interfere with the planned sale by Lehman Brothers later this month of the debt being consider by the authority tomorrow.
The act allocated $6 billion for the Abbott districts, $2.5 billion for the suburban ones, and $100 million for county technical vocational schools. That formula means that there is a possibility of a total of $3.75 billion in local share bonding for suburban school construction and renovation to match the state contribution.
Underwriters are not as thrilled about the prospect as they might be, because school district bonding in New Jersey must be done competitively, but bond counsel and financial advisory firms are anticipating a bigger demand for their services.
The state share for suburban districts can be paid either as a grant or a debt service payment.
If the district already has a project that counts under the financing act and bonds were issued prior to 1998, that district could be eligible for debt service under a different formula. The choices can create some confusion among school boards, some market participants said.
"They are not as in touch as people who are regular issuers, and my guess is the less sophisticated issuers are relying heavily on professional advice," said Jeffrey Blumenfeld, a partner with the law firm of Blank, Rome, Comisky & McCauley. "That may change once this gets going in the next couple of years, but at least right now it's clearly creating an additional level of concern for the school boards."
The bonding being driven by the financing act will come to market in two waves, according to muni professionals. The first wave will occur in the next few months. It will involve the districts that passed their referendums before the law was signed but were waiting to issue permanent financing. Districts that passed referendums in December 2000 for projects that were already in the pipeline and approved early because of health and safety concerns will also be part of that first wave.
The state Department of Education said 53 bond referendums totaling $567 million were passed in 2000 as part of this first wave.
Hamilton Regional School District in Ocean County had three bond questions on the ballot last December. Two of them, totaling $22 million, passed. The state will pick up the rest of the tab for the projects, which total about $36.6 million. The one question that failed had asked voters to approve a $5 million technology program that would not be leveraged with state money.
On the whole, the first group of projects is anticipated to be small when compared to the second wave of school districts seeking state money.
The second group will include the districts that were waiting for the law to pass and are now seeking Department of Education approval that the law requires for long-range facilities plans. Once those plans are approved, the districts will begin the process that will lead to fall and winter bond elections this year.
"They are just going to keep on coming," said Bill Mayer, a partner with DeCotiis Fitzpatrick Gluck Hayden & Cole. "We are certainly aware of that and we are looking to expand our board of education bond counsel practice."
Andrea Kahn, a partner at McManimon & Scotland, said she has about 15 school districts as clients that have passed referendums and are waiting to take advantage of low interest rates. She also has another 15 to 20 districts seeking permanent financing.
Kahn said she is hoping that the state will approve the facilities plans by May for the second wave of bonding because she already has tentative dates set for some of the pricings.
Financial advisers are busy too. Kim Whelan, a managing director at Public Financial Management Inc., said the most challenging thing about the legislation is trying to figure out how to coordinate two separate financings for one project.
"I think it the legislation will create a situation where we need to make sure we are on the same page as the state and coordinate on the financial end with the districts," said Whelan. "We will probably have a greater degree of a consulting role in making sure that the financing is specific and makes sense the way its structured."
Others in the financial advisory community are waiting to see how the EDA handles the grants before they move forward with anything. Dennis Enright, a principal at NW Financial Group, said he wanted to "wait until the smoke cleared on everything" before structuring debt.
There is also the question of Mayor Lonegan's ongoing litigation challenging the constitutionality of its state appropriation bonds. The lawsuit is now in the appeal phase and could complicate the state's first tranche of school construction bonds.
The state treasury department says that the preliminary official statement does not disclose the lawsuit but it will advise the EDA's board about the lawsuit when it meets tomorrow.
The lawsuit also has caused some districts to wait or reword their bond referendums to ensure that the district are able to bond for the additional money even if the state's share doesn't come through.
Clients of Jacqueline Shanes, a partner at McCarter & English, are disclosing the litigation in their official statements. Her main concern is how the litigation will affect the timing of the grant payments for clients that have bonded and are ready to begin construction.
The local share aside, the state's bonding for the Abbott districts is moving ahead at a quick pace. The Department of Education approved more than $4 billion in projects for 17 of the 30 Abbott districts, including $1.1 billion for Newark, according to David Mortimer, the state's assistant commissioner for education and transportation.
The approvals are based on the long-range facilities plans and the actual costs of the projects have yet to be determined. If the costs increase beyond the legislated bonding levels, Mortimer said that the money could be appropriated from the general fund or that the Legislature could raise the bond cap in another statute.
The rest of the state's 616 school districts will share the $2.5 billion and Mortimer said that this money would be distributed according to the status of the districts' facilities plans. He said 30 districts had not sent those plans in yet, and they would obviously be last in terms of funding.
As the process matures over the next three or four years and the end of the $2.5 billion is in sight, Mortimer said the department would then evaluate potential projects against the four tier's of importance outlined in the law. Health and safety issues would get top priority.
The litigation, which has Shanes' clients a little worried, doesn't bother Mortimer. He believes that it will not affect the program, even if the first bond sale prices a little late. He said the state has enough money in hand to appropriate and he isn't worried about the suit's success.
"I think the state will ask that it be moved right to the Supreme Court," Mortimer said. "And frankly what we have crafted has modeled the Supreme Court's decision in the Abbott case fairly closely so I don't think they would rule against this."
