Can you see the Red Rainbow? 

by Loren Martell

Photo credit: Ted Heinonen
Photo credit: Ted Heinonen

During the 3/12/19 Business Committee meeting, the school board discussed some refinancing options on Red Plan bonds.  Two of the lease-levy bonds — 2009A, 2010C — are eligible to be refunded at a lower interest rate.  If the Board approves, this refinancing will save taxpayers about $1.7 million, or about $190,000 a year over the next 9 years.  

I always find it striking how little tangible difference a savings of $1.7 million, spread out over years, makes on the tax bill for individual taxpayers — but assumingly the school board will approve this move.  The only controversy that arose during this discussion centered around the fact that most of the savings came from one bond: the 2009A lease-levy bond.  Refunding the 2010C bond only saves a total of $108,135 over nine years.  Member Oswald pointed out that the cost of refunding this bond is $52,100.  

In the bond world, “refunding” is synonymous with refinancing.   
Member O asked if the $52,100 refunding cost needed to be subtracted from $108,135, to determine the actual savings.  The bond broker responded that $108,135 was a “net” savings, meaning the cost was already subtracted.
Still not impressed with the cost/savings ratio, member Oswald pressed: “I need to know why it’s worth it.  If it (refunding this bond) is only saving us a $100,000 — that’s not even a penny a household, I think.”

Despite the price tag, the bond broker still claimed there were some cost “efficiencies” in refunding the two bonds together.  “What you would get is $10-12,000 (a year) on the debt service levy…Though it’s not a large savings, it would be some savings to the taxpayers.”
“It seems like a big check for your company, compared to the savings that we get.”  Member O astutely observed.   
 I’ve always wished I had the time to dig in and calculate just how much the broker, underwriter and bond counsel — all the money people--have made from the Red Plan’s financing.  Numerous bond issues and reissues have occurred over the years.  The price tag for refinancing these three bonds alone totaled $590,850.  The whole bond-sales hustle has got to be pretty good work, if you can get it.   

If I was one of these operators, I’d just follow Johnson Controls around the country.  

The other bond on the table for possible refinancing was the 2009B lease-purchase bond.  This discussion was more controversial, because the financial move being recommended to the school board extended payments out another six years and actually cost more money.  
The 2009B bond is one of three Red Plan bonds currently being paid out of the district’s general fund.  These bond payments are appropriated automatically each year with passage of the budget.  The monies being drawn from the general fund to pay Red Plan debt are technically called “Installment Lease Payments.” 

During a special school board meeting held in June of 2016, the district’s bond counsel explained this part of the Red Plan’s financing this way: “Those portions of the overall plan that did not fall within the eligibility category for use of proceeds (monies that couldn’t be taken from the public by use of a nonvoter-approved, forced tax) under statute were financed with Certificates of Participation (using) an Installment Lease Contract.  So that’s the reason it (scheduling Red Plan bond payments to be paid out of the district’s general fund) was done.  There wasn’t another authority short of a referendum (and actually letting the public have a vote) to finance this part of the long-range facilities plan.  All along, it was intended that these additional costs would be paid out of your operating general fund money.”  

Obviously the Red Plan was the work of financial geniuses.  
These payments out of the general fund have been killing the district’s budget.  Though he’s been reluctant to admit the truth publicly, Superintendent Gronseth is fully aware that ISD 709’s fiscal stability has been hampered by these bond payments coming out of operating general fund money.  Refinancing the 2009B bond would give Super G. some breathing space, by reducing the amount coming out of the fund by about $700,000 annually. 

The catch in all of this is that money would be drawn out of the fund for six years longer than currently scheduled and actually, in the long run, would rob $4.3 million MORE out of the fund.   

It’s just our community   

    Member Lofald earned the meeting’s Denial/Delusion Award with her comments about this part of the financing:  “I like the idea of extending (the debt payments,) to give us this general fund boost, because I think that, you know, there are — I, I, don’t see the reason we’re in financial ruin is because we have — as a district--done something terrible.  I think we have been struggling with unfunded mandates.  I think we have been struggling with — you know — just a decrease in enrollment that doesn’t have anything to do with what we’re doing wrong in our district.  It just is our population, and it’s just our community.”    

Lofald next layered in some conjecture about increased State funding, treating us to the full, official narrative — which was no more convincing this evening than the other million and one times I’ve heard it. 
This fiscal problem was self-inflicted.  ISD 709 was not victimized and forced it into this situation.  No external forces beyond our control mandated that our school district start pulling money out of its general fund to pay for buildings.  Setting up a payment mechanism of this sort — stealing from classrooms, to pay for facilities — based on some hyperbolic promises of efficiency savings (with nothing in contract to back anything up,) and a fool’s plan of selling ten buildings (eight of them school buildings, and nearly 200 acres) in a little town like this — was so irresponsible a comparable decision made by a corporate board would have resulted in a lawsuit.          

We dumped all ten large, multi-million dollar buildings on the market at the same time, violating every tenet of supply-and-demand, AND, for good measure, eliminated our primary customer: other educational entities.  
And, if that wasn’t foolish ENOUGH, our school board also approved paying a sizable portion of the facilities tax levy out of the general fund.  At one point, our sideways school district was drawing more than $7.5 million a year out of its general fund to pay for buildings.  That withdrawal has been the largest contributor to a depleted reserve fund and the aforementioned “financial ruin.”  An examination of the numbers by the State Auditor’s Office concluded that other district operational funds had been raided to “offset the deficit in the (general fund’s) designated account.”  

The district’s Finance Manager described the general fund payments made on Red Plan debt this way, during the Board meeting held 6/19/12:  “We established a designated account, as you know.  We are taking general fund operational savings and depositing them into that account.  We (also) have some rebates going into that account and our land-property sales will go into that account.  The lease payments — that the Board has to annually approve with the budget each year — those are currently being made out of our Capital Fund, which are approximately $2.8 million for next fiscal year…Then we do make an equity transfer from the Capital Fund — which is (also) coming out of the designated account — and move it as a transfer into debt service, as a levy reduction.”

Rebates amounted to a pittance.  The designated fund was supposed to a money pot brimming to overflowing with $27 million from the sale of “excess” properties and millions more ($122 million, over two decades) from the Red Plan’s “efficiency savings.”  Obviously property sales were a flop.  After reading my report on the Red Plan’s financing structure, the Audit Manager for the State Auditor’s Office stated this about the savings: “It was very clear from the information you sent that the savings claims were an issue, that there might have been a lot of things done and presented that things were going to be a certain way that are not coming to fruition.  In relation to the savings claims, those are based on estimates and assumptions.  The minute one estimate or assumption changes — which clearly that has happened — the whole projection is skewed.”    

I have my conference with the State recorded.  The Duluth News Tribune verified the recording and ran the above quote in a letter to the editor.  The Red Plan savings claim was largely a $122 million unsubstantiated, pie-in-the-sky daydream.  This year (fiscal year 2019,) ISD 709 is supposed to have $4,286,529.68 EXTRA money in the general fund from the plan’s savings, beyond the Installment Lease Payments — the money currently being drawn from the fund to pay for buildings.  Anybody see $4,286,529 (and 68 cents!) lying about anywhere?

If you can see this money, you should contact the Roswell alien-conspiracy people.  Assumingly, on a clear night, you can also see the Martian army gearing up to attack Earth from the moon.   
Stan Mack, by far the best candidate for Superintendent after Dixon slipped out the door, called the Red Plan’s funding mechanism a “serious problem… unprecedented in Minnesota…major leakage from the general fund caused by school board action.”  
The fact that ISD 709 is still trying to staunch that leakage (at least to some degree) is proved by this desperate recommendation from administration to withdraw $4.3 million MORE out of the general fund to pay for buildings in the long run (extending Red Plan bond payments all the way out to 2036,) just to obtain some short-term relief. 

The 2009B bond was first issued 10 years ago.  If the Board approves this scheme, we won’t get it paid off until 17 years from now.  27 years of major leakage from the district’s general fund!  And don’t forget the 2012B bond, generated from the Red Plan’s cost overrun.  That bond will rob a total of $9,134,917.50 from the general fund through 2032.  And for good measure, another bond — 2010D — will draw a total of $2,555,737.71 out, through 2030.

If you add $4.3 million to the 2009B bond, these three bonds will rob seventy million ($70,489,684.95) from ISD 709’s general fund.  
Another $13,227,704 was transferred from the fund to pay down the levy on the 2009A lease-levy bond, for a total of over $80 million effectively robbed from classrooms, to pay for swimming pools and other facilities.   

What a legacy Dixon left us

Administrative and other Red Plan efficiency cost savings never materialized anywhere near as much as promised.  Some money was saved from updated boilers and insulated windows, but the highly-touted Red Plan energy savings were also grossly inflated.  The Duluth News Tribune reported, on 9/13/17, that a district energy audit “compares 2017 costs to pre-Red Plan numbers,” and “shows projections made a decade ago were nowhere near reality.”
No rational person would upgrade his or her home furnace, then pull the “saved” money allegedly gained from the furnace’s efficiency out of his or her checking account with a 3% dividend every year for two decades — especially if he or she also plugged in a brand new electric-heated sauna and an outdoor Jacuzzi. 

Faustian bargain

Setting up a financing scheme which pulled millions out of operations based on flimsy promises was not a responsible decision.  Former Board member Johnston was maligned relentlessly by the establishment of this city for pointing out that truth.  During the school board meeting of 6/16/16, he engaged the district’s bond broker on the subject: “The Minnesota Dept of Education is kind of surprised by the way things worked up here, in Duluth.  One of the things I asked them was: why we’re paying for building debt out of the general fund.  We’re getting money (education aid) from the State, and the State is expecting us to use that money to educate children.  As a rule, when a school district builds buildings, the local taxpayers pay for it.  In this case, the general fund money we’re getting from the State is paying for this.  How did the State allow us to pull some of their money from the general fund to pay for buildings?”  

The broker responded: “I’m not sure there’s a direct answer…when you say someone at the State wonders how you did do it — I’m not going to say that you can’t find someone down there to say that, in fact, I’m sure you can…”
During this Business Committee meeting, Member Sandstad weighed in on extending Red Plan bond payments from the district’s general fund, this way: “Short term — it sounds really good--to have another $700,000 in our general fund, but I also think that we have the responsibility of looking at when we might need facilities--for more early childhood programming, or voluntary pre-K across the district or whatever the use is.  I don’t want to--I think that we need to consider when we might be going out to borrow more money for facilities in making a decision that will have a 16, 17-year impact.”

When she ran for re-election in 2011, Judy Seliga-Punyko claimed she and her fellow Red Planners had cured the “distress” of the district.  She claimed this distress had “caused people to leave.”  Now, however, thanks to “what we’ve done for our community” she declared that stability had been reestablished and everything was “laid out for the next 30 years.”  

If this refinancing is approved, according to Judy’s calculations, by the time the last penny of the Red Plan debt is finally paid off, we will have a 3-year window left, before we need new swimming pools.  I’ve always considered the thirty-year future Judy and her comrades so aggressively “laid out” as being only slightly better than the one arranged by Faust.  (For those not familiar with Faust, just Google “Faustian bargain.”)

I won’t even insinuate who played the part of the devil in this bargain.  
The school board’s new fourth district representative, however, has apparently procured a pair of our current school board Chair’s patented “Rosie”-colored glasses.  Life would be a bowl of cherries if I could buy a pair of those glasses, but I may instead have to resort to having some of my frontal lobe synapses cauterized if I want to see the Red Rainbow. 

As for the claim about the decrease in enrollment being strictly attributable to “our population” and “our community,” I could fill up the Reader with evidence to the contrary, but I’ll just point out that even the Duluth News Tribune listed the “tumult caused by the district’s long-range facilities plan” as one of the primary drivers of student enrollment loss from ISD 709.  
The Red Planners dominated our school district for a decade, but didn’t do anything terrible or wrong.  Clearly it was our population and our community that caused all the problems.