The moment $18.8 million was lost

Rick Raushenbush, Former Piedmont School Board Member

In Rick's Piedmont Civic Association Oct 17, 2018 article he makes the following statements that I challenge or refute below. I copied and pasted his comments and have my own numbering. See his original article for additional context.

  1. First, the District and the School Board clearly understood the difference between Current Interest Bonds (CIBs) and Capital Appreciation Bonds (CABs), as well as Qualified School Construction Bonds (QSCBs) and Bond Anticipation Notes (BANs). These financing mechanisms, their pros and cons, were discussed in public meetings back to 2006.
  2. Very roughly speaking, CIBs reduce total interest payments by levying taxes at a higher rate to pay down the debt starting immediately, while CABs reduce the immediate tax rate at the cost of greater total interest payments by deferring repayment of the debt. -- Rick Raushenbush 2018

  3. Pursuant to statute, anticipated tax rates to repay bonds issued under Measure E were limited to $60 per $100,000 in assessed value. The District could not have sold CIBs to fund this work as the tax rate to repay the bonds would have exceeded the limit.
  4. I do not recall anyone, including current School Board candidates, appearing before the School Board at the time to argue that Wildwood and Beach work should be deferred for years to reduce total interest payments.
  5. Third, refinancing bonds to save money is not a new concept. Even before the CABs were sold, the Board and District anticipated re-financing them as soon as it was possible to do so (call dates were set as soon as feasible given market requirements)
  6. Fourth, the School Board, well aware that CABs keep current tax rates lower only by increasing total interest payments, has chosen CIBs over CABs when available. In 2014, when proposing a bond measure to fix Alan Harvey Theater, the Board ruled out using CABs as the feasible tax rate supported the CIB option. No one on the Board was advocating CABs.
  7. According to Minutes of the Nov. 8, 2017 meeting, however, “Hari Titan encouraged the Board to wait for at least a year on CAB refinancing.”

Rick never contacted me about his beliefs but my responses are below.

Hari Titan's Responses

  1. Rick did not produce any links to public discussions back in 2006. Although technically these discussions are open to the public most of the public is unaware of what they are about. His 2018 "roughly speaking" description is to this day overly simplified and misses key financial concepts, the absence of which mislead the public regarding the negative side of CABs. For example Rick does not mention any of the following: deferred taxation, compound interest, negative amortization, balloon payments, above market interest rates, increasing debt, non-productive debt. I have been educating the public about these aspects which led to the vast majority of the public not wanting CABs.
  2. In the October 11, 2017 meeting to refinance the 2013 CAB at H:M:S 1:35:16 - onwards it is revealed that as long as there are savings to the public from a refinance, the new refinance can go over the prior $60/$100k AV limits. This was new information from district bond counsel that was not discussed (and likely not known) at the May 8, 2013 board meeting prior to issuing the 2013 CAB.
  3. My proposal was not to defer the work and financing in 2013 but to use CIBs by getting a new voter authorization, see my article here. In the May 2013 board meeting, KNN Public Finance confirms that a new voter authorization would provide a new $60/$100k AV limit, see: http://piedmont.granicus.com/MediaPlayer.php?view_id=3&clip_id=916 Minute 1:06
  4. Maintaining the no-refinance clause to 10-years per market demands for CABs is not the same thing as planning to do a refinance of the CABs. There is no record of board members actually stating their wish for refinancing the upcoming August 2013 CAB in their May 2013 board meeting: http://piedmont.granicus.com/MediaPlayer.php?view_id=3&clip_id=916 Check Minutes 0:44 - 1:07 . In fact we did the 2017 refinance of the 2013 CAB before the 10-year no-refinance clause expired. Board members at the time did not balk at or comment on the high repayment multipliers from 4:1 to 5.6:1 and only CABs were on the table at that time.
  5. Measure H had CABs as Option 1 even though there was no existing $60/$100k AV limitation. The board voluntarily put CABs on the table and then removed it in favor of CIBs. It shows that the board was not just putting CABs on the table because they thought they were forced to by Prop 39 but instead that they were relying on what I would say is a faulty presentation of present value arguments that don't apply to taxpayers but apply to bond investors. Andrea Swenson invited KNN Public Finance and another community member to do the advocating for CABs. I was the only community member to oppose CABs at this meeting and a few earlier meetings. Here is the video to follow along with the proponents of CABs: http://piedmont.granicus.com/MediaPlayer.php?view_id=3&clip_id=1042 see Minutes 2:00 - 2:41
  6. The minutes of the meeting ignores that I changed my opinion in that meeting based on new information from KNN Public Finance. Here is a link to the actual video of the meeting: http://piedmont.granicus.com/MediaPlayer.php?view_id=3&clip_id=1688 Initially at minute 54 second 47 I say: "Even if the Fed dot plot is correct and the interest rates will go up 75 basis points next year, it may be well worth just waiting to see if that is really going to happen. We have a new Fed chairman who has made verbal statements to not increase rates.... we could wait and monitor interest rates." However at minute 1:25, based on the new information provided by KNN I switch my recommendation to: "I'm with Cory given this new information... maybe the best thing for the community is to take action now and go with Option B... I would give a thumbs up if the board took action now."

In summary, the board in 2013 missed 2 approaches to avoiding the 2013 CAB. One approach was to get a new voter authorization and another approach was to consult with bond counsel and find out if a new voter authorization was even required.

Furthermore and consistent with the above video evidence, KNN Public Finance told me that they were not asked to run numbers for a CIB option in 2013 because the board was not interested in CIBs at that time.

The actual moment the $18.8 million was lost was at 1 hour and 6 minutes into the May 8, 2013 board meeting when KNN points out (in response to Tolles) that a new voter authorization would grant a new $60/$100k AV limitation. Nobody on the board asked if such a new voter authorization would allow CIBs back on the to table and what those savings would be.

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