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Photo credit: Ted Heinonen

The Human Resources and Business Committee meetings held on 9/10/18 were short by school board standards: a mere total of two hours, and of course every second was as gripping as an action-packed movie. 
 
HR

The highlight of the Human Resources Committee was the news that ISD 709 has hired (provided the Board approves the contract) a new Chief Financial Officer--a move roughly equivalent to parachuting a new Fire Chief into a raging wildfire. 
The new Chief, Catherine Erickson, apparently jumped ship from ARCC (Arrowhead Regional Computing Consortium,) which is the firm ISD 709 hired to put some kind of 2019 budget together. Our venerable Superintendent said this about his new employee:
“We are very excited to welcome her onboard. As you know, she’s coming to us from ARCC. She was one of the key people who were active in doing the audit process that we were just involved in (i.e., trying to make sense of our financial numbers and salvaging a budget,) and I can say that there’ve been several superintendents from across the region who have contacted me, not very happy to be losing Cathy, and so we are thrilled to have her onboard.”

From this point, Super G. performed one of his patented verbal gymnastic moves, assuring the Board that a certain point of fact is nailed down, while somersaulting backwards and laying the groundwork to give this “fact” some wriggle room. 
“She has a — I do want to say that, across the State, we are seeing a shortage of people for CFO positions, and (universities) are kind of scrambling to start school finance programs, to try to train people for these positions. And more and more, we are seeing CFOs that are working remotely — from not even the State that they’re working in. And so, for us to have someone who is very close to us (boiling in this fiscal cauldron) is pretty exciting. There is — you probably noticed, in the contract — the ability for her to work remotely, and I think that while she will be here, she will be housed here, there may be times that she’s working remotely, if for weather reasons she is not able to get here, or other situations that may arise.”

Reading between the lines, it seems likely the closest thing to a dwelling our new CFO may ever call home in Duluth is Old Central. She’s of course free to bunk out in the decrepit castle’s basement, if she has no fear of being haunted by the ghost of our former CFO, whose bones may or may not be buried somewhere down there. 

Not long ago, the now-banished former CFO, Doug Hasler, was also welcomed with accolades to the team. We were told Mr. Hasler was a great find for a district which needed financial help. We were getting TWO for the price of one--a financial wizard AND a lawyer. We were lucky the gifted man even WANTED the job! 

Naturally, this all begs the question: How long will this marriage last? Will the THRILL wash out quickly again, after the honeymoon? 
Member Sandstad brought a big laugh to the room with the following remark: “I noticed, too, that she’s on the Two Harbors city council, and so she’s used to dealing with the personalities of elected officials, and so I think that should serve her very well.”
Will this new marriage serve the public well? Stay tuned. 
 
Mr. Pumper pumps us up

The Business Committee meeting began with a repeat performance by Steve Pumper, a financial advisor from the brokerage firm: PMA. PMA has been the bond brokerage advising the district throughout the Red Plan and its aftermath. The firm that has been underwriting all these bonds is called Northland Securities. The bond counsel who has been guiding the district through all the State statutes and other legalese involved in the bond sales is a gentleman named Bob Tofte, from the local powerhouse law firm of Fryberger, Buchanan, Smith & Frederick. 

The world of bonds is a complex terrain, but one thing needs to be noted: beneath all the complexity, these people are essentially involved in sales. They are not providing their expertise out of generosity or a sense of altruism towards education. They are peddling a product, and their firms have extracted a small fortune from the taxpayers of Duluth.

Municipal bonds are issued with a “call date.” About midway through the payment schedule (the tenth year of the a twenty-year bond,) the party paying the debt can “call” the bond for “refunding,” essentially refinancing the remaining balance at a lower interest rate. Some of the Red Plan bonds are ten years old and have reached their call date. 

One of the tasks PMA performs for ISD 709 is keeping an eye on all the outstanding bonds and evaluating the marketplace when their call dates come up, to see if it is in the district’s (and taxpayers’) advantage to try to refund them at a lower cost. The call date isn’t the date refunding has to take place; it just marks the spot in the payment schedule beyond which the bonds are eligible for refinancing. 

Mr. Pumper told the Board two Red Plan bonds are nearing their call dates and may provide some reasonable return through refinancing: the 2009a and the 2010c. The 2009a is one of the larger (though not the largest) of the Red Plan bonds, with a total debt of $96,408,474.19. The 2010c is one of the smaller ones, with a total debt of $3,711,065. One thing I didn’t understand, and haven’t had time to pursue, is why the 2010c is being refunded rather than paid off. According to Exhibit A-1, from the Red Plan’s financing documentation, final payment for the bond was scheduled in fiscal year ‘18.

The 2009a bond is about half paid off, with $45.6 million remaining in outstanding debt. 

Count your pennies and be grateful 

Mr. Pumper pointed out that the bond market is a fluctuating world, hard to get a bead on and accurately predict. To illustrate, he laid out some of the variables he’d encountered in predicting the savings from refunding. Six months ago, in April, the savings realized from refunding the 2009a bond would have been $697,000. Two weeks previous to this Business Committee meeting, that savings potential had jumped to $960,000. According to Mr. Pumper, the figure dropped back down to $834,000 by the previous Friday, 3 days prior to the meeting. 

Even the rosiest figure — $960,000 — would only save taxpayers $106,000 a year over the nine remaining years of currently scheduled payments. The overall savings from refunding a bond with an outstanding balance of $45.6 million and selling new bonds at a lower rate would amount to only few pennies deducted from annual tax bills in our community. 

I sensed some Board members, such as Nora Sandstad, had reservations about going forward at this time. Refinancing these bonds was in fact pulled from the September meeting’s agenda, a week later. The Board will revisit the issue in November, however, making this committee meeting’s discussion still pertinent. 

Prompted by Sandstad’s questioning, Mr. Pumper addressed the district’s dismal credit rating, beginning with a remark about irony. Whenever someone uses the word “irony” in a government setting, my ears prick up. Governments are generally rich and fertile environments for irony, but I had trouble discerning the irony being referred to in these particular remarks. 

“Ironically, and truly this is just irony,” Mr. Pumper began, pumping out his view on the matter, “when you had your bonds rated last time, you received a — from Moody’s, the rating company — a Ba1 rating, with a negative outlook.”
Very dismal and sad, but not ironic.
“Now, when a rating company assigns you a negative outlook, or even (ironically suggesting?) a positive outlook, they come back usually within a year and review your bonds again. It’s called a ‘surveillance call.’” According to Mr. P., the ratings company, with no intended irony, will ask the struggling, broke organization: “How are things going?” 

Mr. P. went on to add that whether the organization is issuing new bonds or not, the ratings company checks in and updates information, “to see if they can remove the negative or change the positive, or whatever.” They pay a second visit to also make certain they’re giving “the public the best information.” I initially thought Mr. Pumper’s “public” was the common citizens who pay the tax bills, but he was referring to the wheeler-dealers “who might be buying your (new) bonds in the secondary market.” 

“When is that (‘surveillance call’ from the ratings company,) going to happen?” Member Sandstad asked. 
“That just happened about a month ago.” Pumper replied, pointing out that Moody’s “just reaffirmed the existing Ba1 rating. But…” he added, “we are going to have another ratings call in two weeks from now, and they’ll go through the process again. Since they just went through the process a month ago, the updated call is just going to be kind of asking for some better information — for instance: ‘What, now, is your estimated enrollment for the start of the school year?’”

Pumper explained that Moody’s was given an estimated enrollment number just a month ago, “but now, or two weeks from now, you would probably have a better enrollment number.” He went on, expanding on this point, but space requirements prevent me from including several more extraneous phrases. 
Mr. P. finally concluded by reiterating that the next ‘call’ would be “more brief than it normally is, because you just went through it.”
“And so,” member Sandstad inquired, “would it be fair to say, in your expertise, that the likely outcome would be the same as it is now?”
“The (basement, Ba1) rating?” Mr. Pumper asked rhetorically, before answering, “Yes.” 
I didn’t detect anything I would call irony, but did once again sardonically note how much discursive bs is sometimes tossed around a government room, even by finance people, only to finally get back to square one and the bedrock TRUTH. . 
With no cash reserves, even a three or four hundred student jump in enrollment would likely keep ISD 709’s bond rating in the basement into the foreseeable future.
  
Some irony delivered 

Three days before he left town, Keith Dixon told the school board: “The idea, really, that the Department (the MDE) authorized you tax capacity above the blue line, to move those dollars into--that whole discussion about how much is going into that — you know, to pay that five million, every year it’s how much is the payment this year, is transferred — to say we don’t have to transfer all that.” 

I included the full quote to show what an absurd verbal contortionist Mr. D. was. Six months before Dixon gave his convoluted little sermon, the Board had approved a transfer of $4,587,733 to pay down the levy on the 2009a debt. Mr. D. rounded that figure up to five million. His advice to the Board was to throw the Red Plan’s tax promises over the side of the boat and start shifting this $4.6 million annual burden onto the backs of Duluth’s taxpayers. 

The Board began moving millions to the tax base in December of 2012, smashing the Red Plan’s tax promises and making it a bit ironic to listen to any hullabaloo over a savings of a few pennies for the taxpayers now. There was also some irony in the fact that refunding the 2009a bond would nullify its Build America tax subsidy, put in place as part of Federal stimulus package when the Great Recession hit in 2008. This subsidy (over $4 million) has to be subtracted from any savings, because any new bond issued would no longer have this tax exempt status. 

Digging more rusty iron out of all this irony: The Red Plan bonds being paid from the district’s general fund were first downgraded by Moody’s five years ago, due to a “risk of annual non-appropriation, and given that the securities do not benefit from a dedicated levy.” 
In other words, the budget was in such bad shape the rating company felt the Board would have trouble continuing its withdrawals out of the general fund without careening into statutory operating debt. Unlike the other Red Plan obligations, however, there was no levy attached to the appropriated bonds, so they couldn’t simply be shifted to the taxpayers without their approval. 

Ironically, the bonds being paid for out of the general fund also did not qualify for the State of Minnesota’s “credit enhancement” program. The lease-levy 2009a and 2010c bonds (technically now also rated sub-prime) can actually be traded at a higher rating of Aa2, because they are underwritten and secured by the State. The lease-purchase bonds (being appropriated out of the district’s budget) have to be negotiated under their actual Ba1 market value, making them impossible to refund for any savings at all.

Two lease-purchase bonds have reached their call dates, but the district can’t find any marginal relief for the general fund (and the classrooms) by refunding them. They’d have to be refunded at such a high interest rate, the transaction would likely LOSE money. The irony, of course, is that Red Plan was supposed to HELP education. 

 
The Board, the budget and the new CFO

During the Business Committee discussion about the new CFO’s contract, member Oswald suggested administration “add some language” specifically directing that the Board be presented with “our predicted budget numbers, by the middle of February.” Clearly hoping to prevent a repeat of the budget fiasco the district just went through, member O. wanted some contractual requirements for the new Chief Financial Officer to bring more budget information to the Board sooner in the process, so members have “time to figure out what our reductions and investments are.”

Business Committee Chair Trnka added: “The piece I’m struggling with is: We had processes in place; we had policies in place; we had requirements and data requests, and we still ran into--we’re just a couple of months away from not having a budget that we were trusting in, in June. And so, I think it’s beholden on us to learn from that experience…we need to be really honest about reflecting about how that happened and what our role in it as Board members (was,) and figure out how we can support that not happening again, in the future.” 

“I’m not in disagreement with you, Sally.” Member Loeffler-Kemp responded. “But, (clearly disagreeing with you,) I want to remind us that the new CFO will have a handle on the timeline and the process…”
Member L.-K. confidently told her colleagues the new CFO would be included in discussions about the budget process, but of course the ex-CFO was, as well. In her halting voice and typical lecturing tone, Loeffler-Kemp laid out her “rosie” assessment: “I’ll tell ya, from serving on the Board for four years, the process worked well.” 

Oh, my, the irony.