Part I
The District 200 Board of Education is following some really bad advice on how to finance roughly $53 million in Imagine OPRF capital projects. It intends to do that entirely with existing cash. If they hired a consulting professor who teaches Public Finance at the University of Chicago or Northwestern in the Economics Department or their Graduate School of Public Policy, they would be told otherwise.
Local government capital expenditures of significant size should be financed with bonds, to spread the costs to those who will benefit over the next two decades. The problem is that most bonds require a referendum vote (or one can be forced via “backdoor petitions”). The voters will not approve such a large amount of bonds while D200 holds such large cash balances due to past over-taxation.
The Tax Swap vs. The Standoff
Voters aren’t upset about the large cash balance per se. They’re upset that they paid for it, and they want their money back. Spending it on capital improvements is not an answer; it is a problem. Four and a half years ago, I proposed to the board and pool committee a “Tax Swap”: Bond the needed capital, and promise the same amount in temporary tax reduction. This leaves the district with exactly the same cash drawdown, but the voters with tens of millions in taxes returned and with the liability shifted to the next generation, where it should be because they are the ones who will benefit. Otherwise they will get a free pool and other facilities as an unmerited gift. That would be paid for by the past over-taxation of the rest of us, and the money will be forever gone.
The problem is who moves first since neither side trusts the other? It’s like a classic “standoff” in the old Westerns: Each side has a gun drawn on the other. How can a resolution be reached?
A solution
I’ve wracked my brains on this for years, and have an answer: Have the school board members each place a large amount of their personal money into escrow accounts. If they fail to reduce taxes after the voters let them sell bonds, the escrow account is due to the Red Cross. But why would they fail to reduce taxes, when they would have gotten the money they need and will have restored trust with the voter? And why would the voters deny the district its bond money when that closes off any chance at tax relief?
More to follow in Part II, including “What about interest?” “Why give back money only to re-tax?” “What to do about the $20 million they’ve already transferred?” and more
Let’s start thinking creatively, by using some real financial strategy, not the easy-out gimmicks the board is being fed.
Kevin Peppard has an MBA in Finance from the University of Michigan Ann Arbor.
