Part of the Lawrence school district’s larger-than-expected tax increase will be used to make an approximately $1.1 million debt payment that it isn’t required to make this year.
The $1.1 million in funds instead could be used to lower the district’s property tax rate, but the district’s financial staff is recommending against that strategy.
“You are just going to cost the district more money in interest expense — because you are not taking the income that you can get from your mill levy and putting it in a bigger down payment, thus the interest expense,” said Kathy Johnson, the district’s director of finance.
The fact the district plans to make the extra debt payment wasn’t discussed as part of last week’s special school board meeting where the budget was crafted. Neither was the possibility of using the $1.1 million in funds to lower the district’s property tax rate.
District officials, however, acknowledged the proposed payment when the Journal-World began asking about a set of specific budget figures related to the district’s bond and interest fund. At that point, district officials explained the strategy behind the proposed payment.
“It is kind of like paying a little bit of your mortgage on your down payment,” Johnson said. “We’re paying a little more down payment within the same mill levy in order to minimize interest expense later.”
As it is currently proposed, the district plans to increase its property tax rate by 3.5 mills. If the district didn’t have to account for the $1.1 million payment, its mill levy could be reduced by about 1 mill. That would bring the total tax increase for the district to about 2.5 mills, which is roughly in line with the 2.4 mill increase voters were told to expect when they approved an $87 million bond issue for school improvements in May.
Some taxpayers were caught by surprise when the proposed tax increase last week came in at about 3.5 mills. The additional 1 mill increase largely has been attributed to actions the district had to take as part of its local option budget in order to take full advantage of the state’s new school finance formula.
The district’s budget is up for approval by the school board at a special meeting at 5:30 p.m. on Aug. 22 at district headquarters, 110 McDonald Drive.
The Journal-World began asking questions about the debt figures after comparing numbers the school district provided during the spring bond election to numbers included in the district’s proposed 2017-2018 budget.
In April, the district provided the Journal-World a report from bond advisers George K. Baum & Company that detailed why the district believed a 2.4 mill increase in the property tax rate would be adequate to pay for $87 million in new debt.
That report estimated the district would need to collect approximately $12.8 million in taxes in order to make the 2017/2018 payments on its existing debt plus the $87 million in new debt. The report further stated that the estimated payment for the $87 million in new debt would be approximately $4.2 million in the 2017/2018 budget year.
At last week’s special meeting, the school board received a staff recommendation that the district undertake only $43.5 million of the new debt this year, with the other half being undertaken in the 2018/2019 budget year.
However, the district’s proposed budget showed it still needed to collect about $11.8 million in property taxes to cover its expected debt payments.
The Journal-World began asking district officials why that number wasn’t lower. If the district was cutting the amount of new debt it issued in half, it would stand to reason that the payment for that new debt also would be cut in half, if all else is equal. Based on the numbers in the Baum report that would result in a savings of about $2.1 million in debt payments. However, the district’s recommended budget indicated only about $1 million in savings.
As the Journal-World inquired about those numbers, the district explained the matter of the extra payment. Johnson did acknowledge that the school board could choose not to make the payment, or could choose to structure the debt payments in a variety of other ways that would have impacts on the mill levy.
But she said she believes the staff’s recommendation is a prudent one.
“We’re trying, in the best interest of the district, to save on as much future interest expense as we can by putting principal down now at the point in time that we’re doing it.”
That strategy should reduce the district’s interest expense in the long run, but the district’s decision to split the $87 million of new debt into two bond issuances may cause interest expenses to go up in other ways.
Today’s interest rates for bonds continue to be near historic lows. If the district issued all the bonds at once, they would be able to lock those rates in for the entire $87 million in debt. Under the new plan, they’ll be able to lock rates in for half the debt. The second half of the debt would be issued next year, when interest rates could be higher or could be lower than rates today.
A pair of board members told the Journal-World they support both the idea of splitting the bond issuance into two years and making the $1.1 million payment to lower interest costs.
Board member Vanessa Sanburn said the district employed a similar strategy over the course of its 2013 bond issue, separating bond sales into three chunks instead of issuing $92.5 million in bonds all at once.
Sanburn, though, acknowledged the district could “lower the mill levy if we choose to,” but she said the staff’s recommendation takes into account the desire for a stable mill levy, rather than one that fluctuates.
“It is possible that we can, but I don’t think I would support that either,” Sanburn said of lowering the mill levy below what is currently proposed.
School board president Shannon Kimball said she also supports the district’s current strategy, in part because it was based on the guidance of the board’s financial advisers.
Sanburn, though, said she does understand that some voters were surprised by the proposed 3.5 mill levy increase instead of the 2.4 mills that was touted during the bond campaign. She said it is understandable that some residents might not realize the estimated 2.4 mills touted during the campaign only referred to the district’s bond and interest levy.
But she said she also hopes voters understand the school finance formula is complicated, and she believes district residents still largely support the district’s goals with the bond issue. The bond issue was approved with about 75 percent support in the May election.
The difference between the 2.4 mill increase and the 3.5 mill increase is not huge for most homeowners. On a $200,000 home it amounts to about $25 in additional property taxes for the year.
But the increase comes at a time when Lawrence residents already are facing their largest property tax increase in recent memory. The combined tax rate between the city, the county and the school district is scheduled to increase by about 5 percent from last year, or just under 7 mills. A mill is one dollar in tax for every $1,000 in taxable value of a property. That rate increase is in addition to an increase in property values that many Lawrence homes experienced. Many property owners saw the value of their homes increase by about 4 percent, which also will raise the amount of property taxes due on their homes.