Bond Reform—Another Dire Threat to Public Schools in the GOP’s Tax Plan

By John D. Musso, CAE, RSBA posted 13 days ago

  

By John D. Musso, CAE, RSBA
November 20, 2017 

As Congress moves forward with efforts to pass H.R. 1, the “Tax Cuts and Jobs Act,” many education groups, including ASBO International, have cited concerns about Republicans’ tax proposals.

The House and Senate proposals include provisions to shrink or repeal the state and local tax (SALT) deduction; divert public funding to private and religious schools via college 529 savings accounts; and eliminate tax deductions for school supplies and student loan interest payments. While these issues would devastate school funding, teachers’ jobs, taxpayers’ wallets, and student learning—they only tell half the story.

If you asked your school district’s CFO, treasurer, or school business official (SBO) what they think is the biggest problem with Republicans’ tax plan, they’d probably say, "bonds.”

Both versions of H.R. 1 would reform how state and local governments, including school districts, can issue tax-exempt bonds to refinance debt. Specifically, they would prohibit school districts from issuing tax-exempt “advance refunding bonds” (ARBs). ARBs are a cost-effective way for districts to refinance high-interest debt at lower-interest rates, potentially saving hundreds of thousands of taxpayers’ dollars in lower debt payments. Karen Smith, Assistant Superintendent of Business and Financial Services at Cypress-Fairbanks Independent School District, TX, tells us she has overseen multiple advance refundings that “saved taxpayers millions in interest.”

While refinancing school district debt is more complicated than taking out a low-interest loan to pay off higher-interest debt or refinancing a mortgage, refunding bonds effectively serve the same purpose. School districts have two options when issuing tax-exempt bonds for debt refinancing: current refunding bonds (CRBs) or advance refunding bonds (ARBs).

Both options allow districts to pay off high-interest outstanding bonds with a newer-issued bond that leverages falling market interest rates. The main difference is when a district can issue them. CRBs can be issued within 90 days of the outstanding bond’s first call provision date. ARBs can be issued even earlier, giving districts more time to take advantage of falling rates to refinance debt; the lower the rate, the more cost savings the district can expect. Without tax-exempt ARBs, districts will have less flexibility to refinance debt and reallocate funds from debt obligations to what matters most—students.  

If passed, H.R. 1 will allow districts to continue issuing tax-exempt CRBs, but not tax-exempt ARBs, effective December 31. Sharie Lewis, Director of Business Services and Operations at Parkrose School District, OR, says the sudden cutoff for using this critical financing option will put her district “in a huge bind.” Refinancing is a lengthy process requiring extensive discussion between SBOs, school boards, and other stakeholders. It isn’t a decision to make lightly, and requires careful consideration of the pros and cons. Implementing a cutoff date so soon will force districts with outstanding debt to accelerate their refinancing decisions (and risk moving forward with incomplete information), or forego refinancing at taxpayer expense. Jim English, Associate Superintendent for Business Services at West Ottawa Public Schools, MI, says the district is “working on refinancing some of its bonds to save local taxpayers $500,000,” but won’t be able to do so if the tax plan becomes law.

Any tax policy that reduces local school funding, increases tax burdens on taxpayers, and revokes critical tools districts rely on to manage debt and reinvest in student learning does a disservice to our nation’s children, parents, and communities. However, there is still time to advocate on this issue; find everything you need to communicate with your representatives here.  

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John Musso is the Executive Director of the Association of School Business Officials International (ASBO). Founded in 1910, ASBO International is a nonprofit organization that, through its members and affiliates, represents approximately 30,000 school business professionals worldwide. Learn more at asbointl.org. This blog was cross-posted with permission and originally appeared at asbointl.org/Network. Education Week published an article based on this blog, available here.

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