Lansing bases new bond law on CVS debt

District owes state $143 million dating back to 1967

By: Robert Guttersohn | Macomb Township Chronicle | Published November 28, 2012

CLINTON TOWNSHIP — When Chippewa Valley Schools went to voters to approve an $89 million bond in 2010, it said the funding would pay for much-needed capital improvements without raising taxes.

Voters approved the bond, and since then, the district has used the money to repair roofs, parking lots, playgrounds and more, according to the bond updates published on the district’s website. But there’s a reason the district was able to issue the bond without raising taxes — it borrowed the money from the state through the School Bond Qualification and Loan Program.

According to the House Fiscal Agency, a non-partisan group that analyzes the budgetary impacts of bills, that is not anything unusual. Schools issue a bond, the state loans the district the money to pay for the bond and the district pays the state back with interest over time. It’s a program that has been in place since the 1960s. Currently more than 100 districts are using it.

What is different with Chippewa Valley is that it has not paid the state back in 45 years, according to an analysis by HFA and records from the Department of Treasury. Instead, it has rolled old debt to the program into new debt, snowballing the amount owed throughout the last four decades into the $143 million it currently owes Michigan.

The program has loaned school districts across Michigan $1.4 billion as of Oct. 1, meaning CVS makes up 10 percent of all school districts’ debt to the program. Comparatively, it owes the state nearly double the amount owed by Detroit Public Schools, the state’s district with the largest student population.

CVS is “always used as a prime example of why the bond program needs to be changed,” said Ben Gielczyk, a senior fiscal analyst from HFA.

CVS maintains that the debt comes from being an exponentially growing school district that must borrow in order to build structures in which to house the thousands of new students coming through its doors.

Lawmakers call it an abuse of the program. For the last year, Michigan lawmakers have used CVS as a case study of why the program needs reform.

“Chippewa Valley Schools is an example of why legislative amendments are needed for the School Bond Qualification and Loan Program,” wrote state Sen. John Pappageorge, R-Troy, in a December 2011 memo to other lawmakers.

The revolving fund
Michigan began the Bond Qualification and Loan Program in 1961, allowing school districts to borrow money through bonds while using the state’s credit rating. It also allowed districts seeing significant student growth but with smaller taxable house values to borrow money from the state to pay for the construction of larger school buildings.

The state would loan the bond money to the district from an ideally self-sustaining revolving fund. Over time, districts would repay the state with interest, allowing the fund to gradually grow.

Several districts like CVS have borrowed from the fund but have not returned the money. Because of this, the revolving fund is drained, forcing the state to pull money from other parts of the budget, like the school-aid fund — the part of the budget that feeds per-pupil funding. For the fiscal year 2013, $120 million from the school aid fund was appropriated to the revolving fund to keep it afloat, said Bethany Wicksall, a senior fiscal analyst from HFA. If divided among all Michigan students, that equates to $78 per student more that the state legislature could have appropriated to educational funding.

Growing pains
According to records, CVS began borrowing from the state in 1967 and has been rolling over that debt to new bonds ever since. “They keep issuing more debt,” Gielczyk said. “What they need to cover, they just borrow it from the state.” It is not clear how many times the state has loaned CVS money during the last four decades, but since 1997, CVS has rolled over existing debt into new bonds four times, records show.

Between 1997 and the present, the district built seven new buildings to accommodate a 6,000-student increase during that same time period, according to statistics provided by the school district. And because the state has no capital improvement formula set aside for public schools, the district had to borrow money from the state in order to pay for the bond.

“In that time, we had to issue bonds because we’ve had to build buildings to address the number of students walking in our door,” said Scott Sederlund, the district’s assistant superintendent for business and operations.

Simultaneously, Sederlund said the district has been battling decreasing property values, which decreases annually the amount of money in local taxes it collects. CVS currently levies 7.65 mills to pay off debt.

“So as (property values) fall, we borrow more from the fund,” Sederlund explained.

As a result, the district’s debt to the bond program has jumped $40 million since 2010. Instead of raising the millage, Sederlund said the district is waiting to see if projections for property values change during the next three years. “If things don’t start to change, we’re going to have to do something,” Sederlund said.

Stopping a “bad practice”
A new School Bond Qualification and Loan Program bill currently in the state House of Representatives Appropriation Committee and passed earlier this year in the state Senate would drastically alter school districts’ ability to borrow from the bond program.

“We’re stopping a bad practice,” said Pappageorge, a sponsor for the Senate bill and a member of the K-12 appropriations subcommittee.

The bill would cap the amount the revolving fund loans districts at $1.8 billion, set a mandatory repayment date and only allow the district to issue new bonds while the old bond is still out, if it also increases the local property millage. “They didn’t have to pay,” Pappageorge said. “They just borrowed again, and that was the big loophole.”

Additionally, Pappageorge said, when asking for approval for a new bond, the school district must let voters know it still hasn’t paid off the old debt.

Sederlund said the proposed bill goes too far.

“What they are planning on doing, I think, will significantly impact all districts’ ability to bond,” Sederlund said.

HFA predicts that the revolving fund would hit the $1.8 billion cap in 2014 and wouldn’t fall below the cap until 2042. This means districts would have to pay for bonds without help from the state until then.

“A lot of critics are saying you are harming the districts that are doing the right thing,” Gielczyk said.

Sederlund views the bill as punishment to districts using the fund, despite the fact that they weren’t doing anything illegal. “It’s not like we were doing anything wrong,” Sederlund said. “The Treasury was approving all of these.”