"Interest Savings" Could Cost District 200 Taxpayers Nearly $800K More

As District 200 tries to explain its diversion of a state school construction grant for other purposes, part of the spin is a claim that the diversion will “save” the District money in interest costs.  But District 200’s prepayment of a lease will actually cost taxpayers almost $800,000 MORE in interest costs, if the District’s proposed $17.6 million referendum passes in April.  The District says it saved $133,922 in interest by using $2.8 million of the $14.4 million state school construction grant it received last May to prepay a lease. But the interest costs of reborrowing that same money for Jefferson, assuming you believe the District’s numbers, would be $922,780.  This “new math” does not add up for the taxpayers.  Here’s why.

On June 8, 2011, the District 200 School Board voted to upgrade its computer network and to pay for it by signing a finance lease with payments of about $3.3 million.  A finance lease is similar to an installment contract for a car or other major purchase; it requires regular payments and has an interest charge included.  According to the meeting minutes, “Funding for the lease payments will be allocated in the 2011-2012 technology budget” – in other words, the District said it had a plan to pay for this without using state funds.

Fast forward one year. On June 13, 2012, the Board, flush with cash from the $14.4 million school construction grant it had just received, voted to use $2,863,397.64 of school construction funds, NOT for school construction, but to pay off the finance lease for the computers.  It said that paying off the lease early would save $133,922.36 in interest costs.

Yes, BUT the Board was already planning to borrow money to build a new Jefferson Preschool.  Based on the Board’s current numbers (which some have questioned), borrowing $17.6 million will cost a total of $5.8 million in interest.  What if the Board had, instead, put the $2.8 million it spent to pay off the lease toward school construction, and reduced the amount of the referendum by $2.8 million?

You can do the math.  The $2.8 million would have paid for 15.9% of the amount the Board wants taxpayers to spend on a new Jefferson; in other words, the referendum could have been for 15.9% less money, and the total interest costs would have been 15.9% less.  That would have saved taxpayers $922,780 in interest (which is 15.9% of the $5.8 million interest cost).  Basically, District 200 prepaid low interest debt, and now wants to reborrow the same money at a higher
cost.  It’s like taking a cash advance on your credit card to pay down your low rate mortgage. 

The actual difference is probably even bigger, because the referendum is back loaded with the highest payments in later years.  Reducing the amount of the total borrowing would save even more interest than the $922,780 - that number assumes each year's payment would be reduced proportionately, whereas actually the total would probably be deducted from the last payments.  Even if we discounted future payments for inflation, it makes no sense to spend money that will be reborrowed at a far higher interest rate than the "savings".

So, don’t believe the hype.  District 200 should use the money from the technology budget that it planned to spend on this lease anyway, to “make whole” the school construction grant over the next two years, so the money can be used for school construction at Jefferson.  The only way to force the Board to do the right thing is to vote NO on April 9.