I always try to review the monthly Community Impact newsletter which has arrived religiously in our mailbox for many years. I like the updates on new businesses, and local construction, as well as keeping fresh my knowledge of the community my wife and I live in. I live in what is now Gilbert, but it was Higley when we purchased our home. It was the Higley Unified School District that educated our son, and it was fine, and we didn’t think much about it because we were busy working. My wife and I paid no mind to the machinations of the district.
Our indifference to school district business was total and lasted up until the last edition of The Impact showed up in our mailbox. My attention was drawn, not to the headline, “Gilbert businesses seek to solve hiring issue”. Good luck with that…! No, I looked to the right and saw, “Higley USD looks to bond as a chance to move forward”, by Tom Blodgett. “BOND FACTS,” it said the factoid in the upper-right corner. There was a picture of a bag of money next to “JUST THE FIGURES”, also in bold. The front page told me that the total of the bond was $95 million, and though it didn’t say this was the only cost, it showed an up arrow with “.14” printed below it and that a 1-year property tax increase of 14 cents per $100 of assessed value of every property within the district would be the cost. It showed important dates, and then the article began. Before I read the article I was thinking well, if my house was $350K, a one-year increase of 14 cents per $100 of value would only be like $500. Better yet, I know that since my property tax is paid by my escrow account at the bank it does not come out of our pocket so it would be like I wouldn’t even miss it! Then I did some math. If there are 20,000 properties like mine in the district, that would raise about $10 million. $10 million does not $95 million make and I doubt there are 20K houses in the district boundaries, so I read the article. By the time I realized I was in the rabbit hole, it was already too late. After a few nights of research a few things were apparent:
- There were a lot of things that made no sense in this proposal
- The proposal seemed extraordinarily large, given the precarious financial situation of the world.
- The transparency that was lauded in the article…not so much.
I will point out that there are MANY things I still don’t have a strong handle on with regards to the overall budget of the district. There are also a few gray areas, one of which is enormous, as in the whole bond proposal hangs in the balance enormous. I encourage the district to refute any of my data or correct anything that is wrong here. I have had a personal conversation with Mr. Moore, and an e-mail exchange with one of the board members who responded to an e-mail regarding my feelings about this bond proposal. Based on what I have gathered, here are a few key things I would ask voters to consider when voting in November.
The Lease – When I first read that we leased two of the schools, I didn’t see what the big deal was. I knew nothing of why we had this lease versus owning the building, nor the apparent malfeasance which has now sullied the district’s reputation. To be honest, I could care less about that, what matters is the future. In both the business world, and in our personal lives, there can be MANY reasons to lease MANY different things. Over the last decade, many corporations have sold many of their buildings only to lease them back from the entity they sold them to. Why would they do that? It frees up their balance sheet to be more flexible with their spending and have a finite expense when it comes to operation of the building while they are busy making money based on what happens inside. School districts need to have facilities for years to come so it is likely better to own them, but in my view diversifying in a few leases among all the other buildings they own may stabilize other capital costs that come up in the owned properties. The initial plan for the $32 million was to pay the cost of the lease on both buildings for 5 years ($22 million total), then maybe buy one of the two schools outright for $10 million. I know enough about leases, and finance to know that two things were bad here:
- Floating long-term bonds to pay for short-term expenses was about the worst financial idea ever barring being in the middle of a financial catastrophe.
- It seemed unlikely that the lender would be inclined to sell the building for $10 million six years from now, since they had the district on the hook for $2.2 million over an additional 25 years! Why did I think that unlikely? The charitable entity (also presumably a long-term entity who needs income to pay for their charitable pursuits) would be walking away from a 21.84% annualized rate of return on that money. No way that happens in this lifetime.
I researched more and came across a copy of the lease thanks to Jake Hoffman (who used to be on the board). He had attached it to an article he wrote decrying the leases in 2014 after they had been functioning for a year. The lease I saw does have a buyout clause. The option to buy is not for one school or the other, but both. In other words, the lease does NOT say the district can buy one of the two schools, but it MAY buy both based on the following schedule:
After 12/1/22 – $61.25 million + certain fees
After 12/1/34 – $49.4 million + certain fees
After 12/1/2036 – $46.1 million + certain fees
After 12/1/2047 – $27.12 million + certain fees
$61.25 million/2 = $30.125 million (plus certain fees) to buy out one school IF the charitable organization indeed agrees (or has formally agreed) to a change to the lease I saw. Is the lease Jake Hoffman posted back in 2014 the currently enforceable lease? Have there been amendments agreed to by both parties? Why were those changes agreed to? I’m not sure. But I do know that the cost paid by the district for the lease of one of the two ($2.2 million/year) will NOT be increasing, no matter how much inflation deflates the amount until the lease is over in 2052 when the district owns the buildings. Every year as the budget goes up, the expense for the lease becomes a smaller percentage of the budget. The cost for leasing one school remains at $2.2 million. I also know that the charitable organization and apparently the district have agreed to delay some of the capital expenditures called for in the lease which were to be paid by the charity – not the district if I read the lease correctly. If the district waits them out, and makes the charity continue to pay for the agreed upon expenses at an inflated rate over the coming 31 years – maybe it is a net positive to the district? Maybe the charity is willing to give up its EXCELLENT rate of return on what the district would be quick to tell you is a “horribly one sided” lease because it is not in good financial shape, and needs the liquidity the $32 million a sale of one of the schools could provide to meet their short-term needs? What if we just wait the charity out and see where we are at in a few years? Until I see documentation that verifies what the district has the right to do signed by both district officials, and acting members of the charitable organization, I assume it is both schools or nothing, and the talk of buying one is moot.
The Large Proposal – Financially, the district needs to maximize efficiency and function with the tightest budget possible. The team within the district should not approach our finances with a mentality of, “what proposal will give us the most flexibility and the most possible dollars to spend, regardless of economic conditions, despite the cost to those that fund the operation”. This is what the board and financial team have done. Economist Milton Friedman described the four ways that money can be spent. Your own money on yourself, your own money on someone else, someone else’s money on you, or someone else’s money on someone else. In the case of the last classification, the spender does NOT tend to economize, or seek highest value for dollars spent.
The taxpayers of the Higley Unified School District are in debt around $95 million between the $82 million we owe to pay bonds as they mature, and the $13 million we will pay in interest on the current debt between now and when the last piece of that debt is retired in 2035. The proceeds from those bonds, issued years ago, has been spent and will no longer provide any assistance nor increase to the budget. The district is now proposing that we not just double the debt but increase it by 115% to $177 million! The budget for Higley USD FY’22 is $130 million. This new bond proposal will put us in debt to the tune of 135% of our current budget. The Federal Government is in a similar position in their budget, and they can PRINT MONEY!! Sound like a conservative financial stance to you? Luckily for us, interest rates are low, and the $95 million of new bonds are likely to be at low interest rates. Sadly, any financial downturn could be devastating for those on a fixed income. Though many of us could absorb an increase of $500 – $1000/year in our property taxes, those citizens most at risk would be hurt the most. If the rosy illustrations of property tax value increase in the proposal do not become reality, the taxpayers most at risk in the district will be hurt the worst, and the district will be in a poor financial situation to borrow or ask for additional overrides to rectify a budget shortfall.
Lastly here, look at the proposed contingency. Though originally touted as 3.7% of the project in the bond proposals in April – June, it became 9% or almost $9 million of the $95 million total. If you throw in the “if” expenses in the bond proposal (read it on HUSD.org and you will understand) the district has presented us with a plan that starts with a lot of “slush” money and potentially includes much more. The overall potential contingency amount (if this doesn’t happen, and this doesn’t happen) balloons to a percentage that would get you immediately fired as a CFO of any corporation if you submitted it as a suggested budget. What happened with the last bond proposal? There was a ton of excess money that apparently was not spent as it was budgeted in the bond (or maybe this was the “contingency money” in that proposal?). A few years ago, the district asked for and received permission to spend that excess with total discretion, and it looks like they spent it all over the last few years, and now seek more. The new $95 million in debt will cost taxpayers as much yearly in interest as paying for the lease on one of the two schools, and cost the taxpayers $137 million more overall, extending their indebtedness.
Transparency…where? – Given what Higley USD has endured in the last decade you would think lessons would be learned. Tell the voters the truth, help them understand a solid funding of needed services, and they will assist! Seems simple enough, right? Or…propose a bond with a giant contingency and “what ifs” that will provide the district a boatload of money over the coming five years to spend, at the expense of the future. That way, regardless of what comes, the current board and financial team will look great, and can move on to other endeavors before the chickens come home to roost. Higley USD has a great website. From it, you can link to info on the bond issue, to the different departments in the district, to the budgets, to the superintendent’s office, really whatever! Sadly, they chose to obfuscate, or hide some salient facts that voters should know:
- This bond extends taxpayers debt from 2035 – 2043
- The contribution from taxpayers to repay the new debt will equate to an additional $30 million dollars owed in FY ’28-’30 based upon how the district illustrated the new bond issuance.
- If indeed property tax values go sideways or drop versus the rapid growth the district predicts taxpayers will be paying a much larger property tax /$100 of value than the illustrations show. This will hurt the poorest property owners among us the most.
Were any of these concepts discussed in any bond presentation from the financial team to the board? Were any alternatives discussed? Why aren’t any of these hard truths brought up in the “bond facts” section of the website? Why was this presented as costing “14 cents for one year” in the paper? If you feel this is transparent…I’m not sure I can help you. Need more to persuade you?
I was the lone resident at the roadshow on 9/2, everyone else in attendance was on the board, or part of the district. That is, except for the Chase bank rep district liaison who came in late with a bunch of signs to “vote yes” that had not yet been installed in the community. Apparently, instead of an enthusiastic parent’s group, the district resorts to their Chase relationship for manpower to put up the signage to support the cause. Oh, and the article in the Community Impact…it quotes Ben Harrison of the “Higley Political Action Committee” who says, “We love the fact that we’re planning for the future. We love that Higley is thinking about the safety and security of kids and thinking about technology. But another huge piece is paying off one of those middle schools to get us out from under the huge debt that we are in. We think it is going to transform the flexibility of our finances for years to come.” First Ben, a lease is not a debt but an expense. Second, the overall cost of this bond WILL transform the flexibility of our finances for years to come, but not in the way you project.
Last weekend my wife and I walked down Ray Rd. to the newly opened Air Guitar on Ray and Higley. We noticed that the “vote yes” signs along the sidewalk indicated that the signs were provided by, “YesForHigleyStudents”. When you go to their website, who are the backers of that organization? Three of the five listed are Brigette Peterson (the Gilbert mayor who likely has better things to focus on than the Higley USD bond proposal) and two members of the Higley USD board.
This morning on 9/13, I filed public information request forms with Higley USD to get the following documents:
- A copy of the study done to support the bond proposal from Rick Brammer, and any e-mails between district personnel and his organization.
- A copy of the lease between the district and the charitable organization including ALL current amendments/additions.
- A copy of meeting notes and members of the required “citizen advisory committee” required by the district’s policy when “examining educational and building needs of the district”. I asked for all data from 1/1/2020 to current.
My hope is that this bond issue can be scuttled and replaced next year, or to ask the district to come back with a better plan less riddled with pork and more responsible to the taxpayers in the district. Instead of all the contingency in the current plan, do something that shows you are PARTNERING with the taxpayers. The illustration the district used shows that we can issue bonds at around 2% interest rate in today’s environment. If so, use the contingency money, and “what if” money to repay early outstanding bonds that mature in 2025-2033 that we are paying higher rates on currently. Looking at the district’s current bonds outstanding, we have $18.27 million or so of “high-rate debt” with the worst offenders having interest rates between 3.25% – 5%. The district may “call” those bonds and pay them off early ending the higher interest payments forever, replacing them with debt that costs us only 2%. Using part of the new bond money (about 20%) to retire our old high-rate debt still allows the district the funding to do what is needed now, but also puts us in a better financial position in the future in case the district does have a growth spurt and requires more capital from a future bond or override. How much would this simple move save the taxpayers? $1.265 million in interest paid over the next twelve fiscal years. This is an example of basic debt structuring and would be the first thing pursued by a for-profit entity when examining ways to improve their budget. Why wasn’t this called for in the bond proposal? Maybe because it didn’t provide the board a bigger budget now, so they didn’t care.
A scaled back approach is more appropriate for taxpayers within the Higley USD given the pandemic we have all gone through, and the uncertain future we all face. The school district seems to have a “go big” and “trust us” attitude when neither is warranted and either can get the taxpayers into trouble. Though we have all gone through an incredible boom recently with regards to the value of our properties, let me take you on one final detour before this tale ends.
Early in my son’s schooling, the district rented trailers to have a place to educate the kids. Trailers. Was it ideal? Was it best? No, but it was needed (just like the lease the district signed for the two middle schools in 2013). All was well until 2007 then we had a small financial worldwide calamity. In 2006, our neighbor sold the house they built in 2003 for a huge profit and moved to Florida. The family that bought it from them could not have sold it for what they bought it for until a decade later, or maybe more (though now it is at a nice profit of course). A repeat of this could be a long-term detriment to our neighbors living on fixed incomes. In my opinion, this bond puts our future ability to educate our kids at too much risk and we should vote no as-is, or demand that the district partially offset this new debt by paying off some higher-interest existing debt as they become callable, and transparently show us how the rest of the money is spent.
Thanks for your attention!
Marty Bender