Updated funding scenarios for Project 2 were presented to the Oak Park and River Forest High School Community Finance Committee on March 13 by the school’s financial advisor, Elizabeth Hennessy of Raymond James Financial. Project 2 is a $102 million plan to demolish the southeast portion of the OPRF building and rebuild it with upgraded physical education facilities including a new swimming pool and other notable upgrades.
The funding scenarios were all updated to include $12.5 million in gifts the private Imagine Foundation is on pace to raise to help pay for Project 2. The foundation could end up raising more than the $12.5 million. The private gifts will lower the amount OPRF would have to borrow to pay for Project 2 and reduce the cost to taxpayers. The five scenarios are similar to those presented in January but tweaked to account for the private gifts which will lower the cost to taxpayers.
Four of the five funding scenarios include issuing bonds that would have to be approved by voters in a referendum, often called building bonds or referendum bonds. All the scenarios propose using a large chunk of the district’s cash reserves, ranging from a low of $36 million to a high of $51 million, to help pay for Project 2.
One scenario, referred to as Scenario 4, does not include any referendum bonds. It is the only scenario that would not require any part of the funding to be approved by voters in a referendum. Scenario 4 would pay for Project 2 by taking, in addition to the $12.5 million expected to be raised by the Imagine Foundation, $44.2 million from cash reserves and borrowing $45.3 million by issuing 20 year debt certificates, a type of bond that is paid out of the district’s operating levy unlike referendum bonds which are paid back through a separate levy and separate line item on a property tax bill. The debt certificates would be paid using $3.5 million from the operating levy annually for the next 20 years for debt repayment. Because there would be no separate levy for the debt certificates the memo to the CFC states that the average additional debt levy to a homeowner under Scenario 4 would be zero.
That claim generated push back from some members of the CFC who pointed out that property taxpayers would likely pay off the debt certificates by paying a higher operating levy than they would have to pay in the other scenarios.
“It seems likely that the operating levy would have to eventually go up or services would have to be reduced in order to keep on paying the debt certificates,” said Kathleen Odell, the newest member of the CFC. “So I’m still nervous about that zero number which I think looks attractive but might be confusing if you don’t know the information behind the way we’re thinking about that.”
Odell, who has a Ph.D. in economics from UIC and is the associate dean of the Brennan School of Business at Dominican University in River Forest, said it seemed misleading to specify the cost to taxpayers of paying off bonds but not to do so for debt certificates.
“Either way you’re paying back $45 million,” Odell said. “It’s just whether it’s sort of named and explicit in a referendum type of a bond.”
CFC chairman Steve Miller was also concerned about relying on long term debt certificates also noting that it could affect the size of the operating levy
“In the short term having $3.5 million committed means you’re spending less on something else or you’re levying more than you might have otherwise, but the longer you lock that in the fewer options you have,” said Miller, who works as the top business person at Schaumburg School District 54.
Questioned by CFC members Hennessy acknowledged that future operating levies would have to be large enough to pay off the debt certificates but said that it is impossible to predict exactly how future levies would be affected.
“In future years it’s up to future boards what they do with levy and budget so that cannot be determined at this point in time,” Hennessy said. “If the district is going to use debt certificates they have to decide how are they going to fund it and it’s an annual decision.”
Scenario 4 is the favorite financing option of many of the most vocal supporters of Project 2 because it does not require a referendum and would allow construction to begin in 2024. It also seems to promise, at least at first glance, a lower cost to taxpayers. Any financing option that includes a referendum could delay the start of Project 2 by one year to 2025 since the earliest a referendum could take place is next year.
A one-year delay is projected to add $6 million to the cost of Project 2 boosting the projected cost to $108 million according to an estimate the school has received. That additional $6 million cost was incorporated into the cost estimates of all the funding scenarios that include a referendum.
Supporters of Project 2 say that the physical education improvements long overdue and don’t want to wait any longer than necessary to get started.
“This community wants Project 2 to be funded the fastest and least expensive way possible,” said River Forest resident Laura Huseby, in a public comment at the CFC meeting. “The only way this can be accomplished is with debt certificates.”
But Monica Sheehan, a vocal advocate of a referendum and a critic of Project 2, said in her public comment that if the school board had been so concerned about delaying the start of Project 2, they could have put a Project 2 referendum on the April 4 ballot this year, thus avoiding the costs of a delay.
“Regarding Project 2, we all know that the board could have put its funding on the ballot next month as it received its construction estimates in October 2022,” Sheehan said. “The board chose not to do so, which means Project 2’s funding can go on the ballot in one of two elections next year.”
To get a referendum on the April 4 ballot this year the school board would have had to submit a referendum proposal about six weeks after getting construction cost estimates at the end of October which might have been difficult.
When estimated interest costs are included Scenario 4 turns out not to be the cheapest option after all. According to the memo presented to the CFC Scenario 4 is projected to have the second highest interest cost of the five scenarios with the district paying an estimated $25.9 million in interest for the debt certificates which boosts the total estimated cost of scenario 4 to $127.9 million. That’s makes Scenario 4 only the third cheapest option among the five scenarios even after $6 million is added to the cost of the other four options to account for the year’s delay because of a referendum in 2024.
The overall cheapest option is Scenario 5 which has a projected total cost of $122.9 million which includes estimated interest costs of only $14.9 million. Scenario 5 would use a mix of funding sources: $44 million in cash reserves, $22.2 million in 10-year debt service extension bonds, a type of borrowing that does not go to a referendum unless enough voters sign a petition to force a referendum, $15.6 million in five-year debt certificates, and $13.7 million in 20 year referendum bonds in addition to the anticipated $12.5 million Imagine Foundation contribution.
Scenario 5 is estimated to cost the owner of a home worth $500,000 an additional $138 in property taxes but the cost would vary over time. Annual additional taxes would average $215 for the first 10 years but then drop to $61 a year in the second 10 years after the 10-year bonds are paid off.
The second cheapest option, Scenario 3, which has a similar mixture of funding sources as Scenario 5, but in different proportions with more money coming from 20-year referendum bonds and less from the 10-year bonds. Scenario 3 is projected to cost $125.9 million, including interest costs of $17.9 million. This option would cost the owner of a home worth $500,000 an estimated additional $146 annually, $200 a year in the first 10 years, and $93 a year in the second 10 years.
Scenarios three, four and five all use debt certificates and their cost, paid out the operating levy, is not included in the estimated additional cost to property owners.
Two scenarios don’t use debt certificates and rely only on cash reserves and referendum bonds.
Scenario 2 would use $51 million in cash reserves, bringing the cash reserves down to around 35 percent of annual operating revenues, and $44.5 million in referendum bonds along with the $12.5 million Imagine Foundation contribution. The total all in cost of this option is estimated to be $133.4 million, which includes interest costs of $25.4 million. It is estimated that this option would cost the owner of home worth $500,000 an additional $199 in property taxes each year for 20 years.
The most expensive option is Scenario 1, which consists of $59.5 million in referendum bonds and just $36 million from cash reserves to maintain a 50 percent cash reserve fund balance. This option is projected to cost $141.9 million, including interest costs of $33.9 million, and would cost the owner of a home worth $500,000 an extra $266 a year for the next 20 years.
While long term capital projects such as Project 2 have typically been financed by long term referendum bonds some well-funded districts have begun to use other financing mechanisms for such projects. Both New Trier High School District 203 and Highland Park Township District 113 are using alternate revenue bonds, which are similar to debt certificates in that they are paid for out of operating funds but different in that they are subject to a backdoor referendum process, to mostly fund large scale physical upgrades to their campuses. However Lake Forest High School District 115 is taking the more traditional route going to voters on April 4 asking them to approve issuing $105.7 million in building bonds to pay for modernizing Lake Forest High School.
One advantage of debt certificates over referendum bonds, from the perspective of supporters of capital projects, is that debt certificates don’t need to be approved in a referendum. Going to voters in a referendum can be risky because it can be difficult to get voters to vote to raise their own taxes. Debt certificates often carry a slightly higher interest rate than referendum bonds because there is no specific tax levy backing the bonds.
OPRF projects to run an operating surplus of about $5.5 million annually from 2025 to 2027 giving it the financial cushion, at least for now, to easily pay off debt certificates out of its operating levy. But what the financial condition of OPRF will be in the more distant future is difficult to know.
Some CFC members expressed concern that issuing long term debt certificates could limit the flexibility of future boards down the line in dealing with operating needs. Hennessy has noted that debt certificates require careful budgeting.
“In my view it’s very, very difficult to project what’s going to happen with regards to future levies and future budgets,” Hennessy said.
After one more meeting of the CFC the school board aims to decide on a funding option by the end of the school year and perhaps as early as next month.
School board member Kebreab Henry, who along with board president Tom Cofsky, sits on the CFC noted that whatever funding method is ultimately chosen: debt certificates, referendum bonds, non-referendum bonds or some combination, property taxpayers will end up paying most of the cost of Project 2.
“Either way somebody has to pay for it,” Henry said.