Recovering from bond scandal, Illinois school district readies restructuring deal
A suburban Chicago school district returns to the market this month three years after being stung by regulatory and criminal probes against a former superintendent accused of misusing bond proceeds.
Ahead of the $23 million refinancing of 2009 bonds that were among the issues under scrutiny, Moody’s Investors Service upgraded the Lincoln-Way Community High School District 210 one notch to Baa2 and assigned a stable outlook.
Moody’s returned the district to investment grade in August in recognition of its fiscal gains and policies enacted to protect against future abuses that led to the regulatory and criminal probes in 2016.
Lincoln-Way lost its investment grade status that year amid the fiscal mismanagement scandal, which included the misuse of bond proceeds from 2008 to 2012 and criminal charges against the former superintendent. The cut followed a five-notch downgrade the previous year over the district’s weak finances and use of short-term borrowing to deal with fallout from the improper accounting of past bond proceeds.
The district has about $222 million of debt.
The upgrade “reflects the district's improved reserves and liquidity, which are the result of stronger budgetary management and consecutive years of surplus operating results,” Moody’s wrote in the Dec. 16 report.
The district that serves 6,800 students in the southwest suburbs benefits a large and affluent tax base but the credit profile is strained by above average debt burden with escalating debt service.
The district plans to refinance and restructure about $23 million of outstanding debt from a 2009 issue. The restructuring will push out maturities beyond the current 2022 payoff and repayment on the new bonds does not begin until 2021, easing near-term debt service pressures by $4 million the tax levy year of 2019 and $3 million for 2020.
“The transaction will provide both interest savings and taxpayer relief with restructuring of the current debt,” said Brad Cauffman, the assistant superintendent for business. PMA Securities LLC is advising the district and Raymond James is the underwriter.
The district reported an operating surplus of $5 million for fiscal 2017, $8 million in fiscal 2018, and $6 million for fiscal 2019, which ended June 30, 2019. “Overall, the district will have replenished its fund balances by $19.09 million over a three-year period,” officials said in a statement on the rating upgrade.
The refinancing follows the board’s adoption last February of seven long-term objectives for managing debt obligations with the goal of balancing fiscal responsibility with taxpayer levies. The district is pressured by capital appreciation bonds that will drive up debt service costs.
PMA in the fall presented three refinancing options based on the goals and the board settled on one that used a multi-phased approach. The upcoming transaction will trim costs for taxpayers in 2019 and 2020 with the next phase of debt restructuring expected in the 2021 tax levy year.
A probe by the Securities and Exchange Commission and Department of Justice disclosed by the district in 2016 led to the filing in 2017 of criminal fraud charges against the district’s former superintendent, Lawrence Wyllie. He was accused of using bond proceeds to inflate the district’s apparent fiscal health. The charges remain pending. The SEC declined comment on whether its probe is ongoing.
Wyllie is accused of fraudulently causing Lincoln-Way to assume at least $7 million in additional debt.
Wyllie allegedly sought to bolster the district’s balance sheet because it was a factor in his ongoing employment and his contract was up for board renewal. In 2009, at the request of Wyllie and with board approval, the district sold $29 million of bonds.
Wyllie said $10 million of the debt was for capital expenditures, including construction or renovation of high schools “when in fact Wyllie knew that he would spend the money on the district’s general operating expenses and payroll,” federal documents said. The remainder refunded debt.
Wyllie also allegedly misappropriated at least $16,500 of school district funds by paying himself a retirement stipend and he received another $14,000 of school district funds by falsely describing it as compensation for unused vacation days. Neither was in his contract.
Wyllie’s attorneys have denied the allegations and called him a model educator. Wyllie retired in June 2013.
The district cooperated over the course of the probe and self-reported the accounting errors regarding the bond proceeds.
Moody’s said the district has since implemented a number of enhanced financial policies and procedures, including the maintenance of five-year operating projections and a fund balance policy that requires the district to achieve a 3% surplus each year until it reaches 33% of budgeted expenditures.
The district has hired a new superintendent, finance director and assistant superintendent of business operations, and operating reserves are on the mend. Before 2017, the district posted six years of operating deficits.