Only government can borrow more money and tout it as a “savings.” At this minute, our Mt. Lebanon School District is seriously pondering “saving” taxpayers money by borrowing an additional $3.9 million in concert with a bond refinancing. The plan under consideration will enable the district to take advantage of favorable interest rates on the outstanding principal of a 2005 bond issue, $52,155,000, AND receive an additional $3.9 million for no specified purpose. Total borrowing about $56 million. The original 2005 par value was $52,980,000.
The principal outstanding is a good place to start a discussion. Based on the principal and interest structure the district adopted in 2005, only $825,000 (1.6 percent) of the principal has been paid off in nine years, all the while, millions of dollars in debt service has flowed from taxpayers.
This extraordinary interest expense results from a financing strategy known as bond “wrapping,” which permitted the district to have its money up front, defer principal payments into the future and minimize the tax burden in the moment. In the long run however, it cost taxpayers millions in unnecessary interest expense. This is a fine example of the costs associated with “kicking the can down the road.”
As to the additional $3.9 million under consideration, the district’s financial advisor has described the scenario as refinancing a home and taking equity out at closing (cash).
No. It is like paying off a loan with an even bigger loan. The district has no equity position … only OPM (Other People’s Money) with which to work.
There are options to reduce the tax burden with this refinancing, however to no one’s surprise, these options have failed to garner majority support. Taxpayers are due relief, considering the millions of dollars that have already been squandered away on interest expense.