Budget Hearing Minutes - April 21, 2005
Minutes
BETHLEHEM AREA SCHOOL DISTRICT
BOARD OF SCHOOL DIRECTORS
BUDGET HEARING #1
APRIL 21, 2005
BUDGET HEARING #1
The first 2005-2006 budget hearing of the Board of School Directors of the
Bethlehem Area School District was held on Thursday, April 21, 2005, beginning at
6:07 p.m., in the Auditorium of East Hills Middle School, 2005 Chester Road,
Bethlehem, Pennsylvania.
MEMBERS PRESENT
Members present: Directors Amato, Haytmanek, Heske, Koch, Leeson, Rowe, Venanzi,
and Williams - 8. Members absent: President Craig - 1.
OTHERS PRESENT
Others present: Dr. Joseph A. Lewis, Superintendent of Schools; Stanley J. Majewski,
Jr., Board Secretary; administrators, members of the press, and other interested
citizens and staff members.
Director Koch chaired the meeting. She explained that the meeting would begin
with the presentation of the proposed budget by Dr. Lewis and the administration.
Then, members of the public will be given the opportunity to address the board
during courtesy of the floor. Questions or concerns from the floor are to be
restricted to budget items only.
DR. LEWIS - INTRODUCTION OF BUDGET
Dr. Lewis stated opening remarks will be very brief. Budget packets were
distributed, the press has been briefed thoroughly. He complimented
administration, cabinet, principals, division heads, supervisors, Mr. Majewski
and his staff. Dr. Lewis stated that as he interacts with superintendents
throughout Northampton County and IU20 and 21, Monroe, Pike, and Lehigh Counties,
with the exception of perhaps one district, Bethlehem Area School District's
budget is the lowest initial proposed budget. We are seeing budgets that are in
the double-digit area. A couple recent adjustments not yet printed will also be
shared. Essentially, the proposed budget calls for a 1.78 mill increase or a
5.15% increase in millage for a total of 36.37 mills. It is noteworthy that if
Act 72 was in force, budget development could not feasibly take place in the same
rational format as, just as recent as today, Mr. Majewski, Mrs. Kostem, Dr.
Nelson, and he were working on several items to further identify such items as
grants to reduce some general fund obligations. There is no way that could be
done if budgeting needed to be done in a September through November timeframe.
Dr. Lewis noted that there are some significant shifts on the expenditures side.
Mr. Majewski will give some detail on that. In talking about technology, the
replacement initiative has been reduced by one half. Later, there will be
another announcement about the laptop initiative. Dr. Lewis also noted that, in
looking at proposals of other districts, our health care costs increases are well
below other districts, although not acceptable. There are additional teachers.
MR. MAJEWSKI - REVENUES
Mr. Majewski provided a Powerpoint presentation, stating that the initial
proposed budget for the 2005-2006 year will be reviewed. Most focus will be on
the first column, the area of all the taxes. That does not mean that the middle
column, federal/state/local grants, is not significant. It is a very significant
part. It has already been assumed that at least $9,000,000 will be received in
grants through the efforts of Mrs. Cintron and others. However, the district
cannot control that. The first column, the district budget, is where the
district has the opportunity to increase or decrease what is being proposed. A
pie chart showing revenue and how it is received shows that 75 percent of the
revenue is identified as coming from local sources. State sources are 22.98
percent. However, when looking at what is received from local sources, other
financing which is also a local source, and the fund balance, it brings the local
impact on the budget at 77 percent. The district has little or no control of
taxes other than the real estate taxes. Other taxes are set and capped by law.
Therefore, the health of our local economy, the assessment growth becomes
important. The district is comprised of five municipalities: the borough of
Freemansburg, the borough of Fountain Hill, Hanover Township, Bethlehem Township,
and the city of Bethlehem. In the borough of Freemansburg for many years there
was very little activity. As of 2003, 2004, 2005 there was a significant
increase for one of the first times in their assessment base. Some residential
developments have been completed. That type of growth is not expected to
continue into the future. The borough of Fountain Hill is an almost completely
residential community with the largest employer being St. Luke's Hospital which
is a tax exempt entity. In the last eleven years, very little change has
occurred. Hanover Township has seen considerable growth for at least the last 11
years. That is expected to continue at least for the next several years.
Bethlehem Township is a very large township, the second largest municipality
within the Bethlehem Area School District. It is very significant to the tax
base. In the last eleven years, it has grown at an average of 3.45 percent.
There is continued growth within Bethlehem Township in both commercial and
residential property. The city of Bethlehem is more than half of the tax base
which is why what happens in the city of Bethlehem can significantly impact the
growth of the revenue base. In the last eleven years it has seen negative
growth. The Bethlehem Steel site is the primary culprit for the reduction in the
growth. Even as of late, there is some positive growth, but very little. In the
last eleven years, the assessed value of properties has increased at an average
of 1.2 percent. However, during recent times it has been somewhat higher and is
now at about 1.85 percent, a very healthy rate of growth. Another significant
number shown on the far right is the value of a mill which is a combination of
the millage rate, assessed value, and the collectibility of that assessed value.
In 1994-95 it was below 95 percent and it stayed at that level for some time.
The last several years have shown considerable growth in the mortgage industry of
people buying, selling, and refinancing. The result for the school district is
that as people have mortgages, their taxes are escrowed. These escrow companies
typically pay within the discount period and this has improved our collection
rate. In the last four years the collection rate has gone up to approximately 96
percent of taxes billed. The letter of transmittal in the budget shows that the
value of a mill has increased from $2,410,000 to $2,473,000. This is a
combination of factors including the increase in assessments and recognizing that
more is collected of what is billed. With that change alone, it would create an
additional $2,000,000 in the proposed budget under the real estate category.
Director Venanzi asked if we are not collecting four percent of the taxes owed.
Mr. Majewski replied that what it means is that in the current year, the district
is not collecting four percent. However, those are turned over for collection by
the county. When looking at total collection in one year, combining current
collections and collection of delinquent taxes, the district is getting
approximately 100 percent, in the high nineties. The largest source of local
revenue is the current real estate tax at $89,956,848. The amount budgeted for
collection of delinquent real estate taxes is $2,750,000.
Mr. Majewski stated some other things have occurred to show that there is a
vibrant local economy. One is that due to the tremendous collection efforts by
some of our tax collectors, primarily from the city of Bethlehem, the earned
income tax budget is able to be increased from $9,500,000 this year to
$10,100,000 next year. The real estate transfer tax continues to be strong. He
is not expecting for next year for it to slow significantly to need to reduce
that budget. Therefore, he has increased that budget from $2,000,000 in
2004-2005 to $2,500,000 in the 2005-2006 proposed budget. The mercantile tax is
another indicator of a strong local economy with a $1,600,000 budget this year
and $2,000,000 budget for next year. One of the other sides of a high rate of
collection is that the district expects to turn over less in delinquent real
estate taxes. This area shows a slight increase but has been better in the past.
This is not a bad sign, just recognizing that the more collected currently, the
less will be available to collect as a delinquent tax collection.
Mr. Majewski reported that the budgeted amount of interest was able to be
increased. A lot of that is due to the fact that short-term interest rates are
now starting to show some rise.
Mr. Majewski reported that the basic instructional subsidy was 13.8% in
2000-2001. As budgeted now, although it is not certain that the district will
receive this amount, it is 12.5%. That is a fairly significant reduction over
the last couple of years. The amount has been increased, but it has not kept up
with the trends. One of the trends considered is the revenue per student.
Enrollment growth has happened faster than the state has been remitting money to
the district. Special education, another large area of state subsidy, several
years ago was 4.6 percent of the budget, now is 4.1 percent.
Mr. Majewski explained where the district is making up some of the state revenue.
The state pays 50 percent of what the district pays in Social Security and
retirement. Social Security has remained pretty level as a total part of the
budget. The retirement rate being charged to the district shows an increase and
so has the state subsidy. Several years ago, it was .6 percent. Now it is 1.2
percent of the total budget. There has been a significant increase in their
contribution, but it is a mandatory 50 percent contribution. If it wasn't for
that type of subsidy, the district would see even less participation of the state
in the overall budget.
Mr. Majewski spoke about the millage rates over the last 10 years. The average
millage increase, as a percentage, for the last nine years prior to the proposed
budget, has been 5.26 percent. As proposed tonight, subject to change, it is at
5.15 percent, a slightly less than average increase of what has occurred over the
last decade. Comparing our district's millage with the other seven school
districts in Northampton County, Bethlehem ranks second lowest in the county.
Pen Argyl School District is lower.
Mr. Majewski stated that the practice has been to not accumulate more funds than
are believed to be necessary for contingencies in fund balance. When that will
occur, it has also been the practice to be able to put money into the budget in
order to lower the proposed millage real estate tax increase. Consistently, fund
balance has been between five to six percent, slightly lower. As of late having
to do with real estate transfer tax and the local economy growing faster than was
anticipated, some of the fund balance grew which is maxed at eight percent.
However, a portion of that is allocated to balancing the budget, not because
administration is trying to provide something less than a balanced budget, but to
maintain the practice of having an appropriate fund balance in the district.
MR. MAJEWSKI - EXPENDITURES
Mr. Majewski stated that he is attempting to provide more information than was
shown in the past by giving several years of actual audited data, current year
budgeted, as well as proposed for next year. The largest component of the budget
is salaries and wages. In the 2000-2001 budget year, salaries and wages was 57.8
percent of the budget. In the proposed budget, it is 52%. When looking at any
additions to staffing and increases paid to employees, it has been at a rate
lower than the overall budget. Employee benefits is a completely different case.
In 2000-2001, the cost was 13.3 percent of the overall budget. It is now at
16.7 percent of the budget. Some areas of significant change have been in the
cost of retirement assessed which is mandatory. In 2001-2002 the cost was
$730,000 to $3,700,000 budgeted in 2005-2006. Mr. Majewski stated that the other
area of significant increase is in self-insurances (health benefits).
Mr. Majewski pointed out that in intersystem payments, the cost of special needs
student has remained fairly similar to the overall budget. What has caused such
an increase in the intersystem category is charter schools. Several years ago
there was no cost in the budget. In the proposed budget $3,630,500 is budgeted.
Mr. Majewski stated that all other costs have generally shown steady increases.
In this proposed budget it is increased from $13,100,000 to $14,600,000 - a
fairly significant increase. Much of that is attributed to what has been
happening in the fossil fuel area. The cost of fuel oil and natural gas as
budgeted in the proposed budget is a $663,000 increase. We know that the cost of
a barrel of oil has doubled plus two other buildings will be online in next
year's budget. The cost of diesel fuel to run the student transportation fleet
had to be increased by $70,000, almost one-third more.
Mr. Majewski commented on health care. In 2001-2001, the district had 621
subscribers. Subscribers could be employees and a small number of retirees.
According to the federal COBRA law, the district is also required to maintain on
the rolls or at least offer this to individuals who are dropped off the rolls.
This is very significant in the 2004-2005 projection. A large portion of the
increased number of subscribers are COBRA participants. There is a significant
increase in the amount of money being received for them. The average cost for
hospital and physician services, which includes major medical, has shown an
annual increase averaging 17.1 percent which is a combination of increased cost
and increase program participation. The effect on per subscriber cost is that
prescription has been higher at an average of 21 percent. Dental costs have been
the most tame. Once a dental program is established and maintained, it is rare
to see spikes in the dental program because most people go on a regular basis.
The gross average of the cost per subscriber has been 12.8%. However, the net
cost has been 9.9 percent. The cost to the school district is at about 10
percent average cost increase per year per subscriber.
Mr. Majewski pointed out that it is known that Bethlehem has put the majority of
its focus and its money to student instruction. Now, with the proposed budget,
68 1/3 percent is for direct instruction of students and instructional support
such as libraries.
Mr. Majewski reviewed charter school/cyberschool enrollments. Total current
charter school enrollment is 419 students. The district is budgeting about
$7,000 per regular education student, $12,500 per special education student
enrolled in a charter school.
Mr. Majewski reviewed the system of cabinet codes which identify areas of
responsibility within the budgets.
Mr. Majewski commented that a lot has been heard about Act 72. The timeline is a
special concern. The district has always gone throughout the months from the
proposed budget to the final budget, gathering every piece of information
possible in trying to impact the budget. There are things that occur during
springtime that do not occur during late fall and early winter. If a budget had
to be presented in January for approval in February, one of the areas not known
would be something like retirements. The number of retirees is always closely
monitored. Administration tries to find every opportunity to reduce the budget.
It is starting to be known that a fairly significant number of staff will retire
this year. That will mean, in the teacher compensation package, that people are
retiring at the top end. Replacements will very likely not be at the top
salaries which means there is a differential. That is being monitored now.
Savings will be brought in the form of reduction of the teacher salary account.
If the budget had to be presented in January, there is no way to know that
information. More than necessary would be budgeted in that account.
Dr. Lewis stated that another item causing a lot of discussion relative to the
district's technology needs is the laptop initiative. Concurrent with Mr.
Majewski's statement that if funding opportunities had to be considered in
September, October, November, and December it would not be known that these
grants are available or applicable. The letter of transmittal states that the
laptop initiative will be funded through grants and general fund dollars. As
recently as this afternoon, Mrs. Lutcher informed him that the district has the
balance of the $450,000 earmarked for laptops covered through the EETT grant and
Mrs. Cintron stated two grants could cover $200,000 and $100,000 respectively.
Between $150,000 on the EETT; $100,000 in a state grant; $200,000 in another
state grant in DCED monies, that amount can be pulled out of the budget. That is
not reflected. Therefore, about $450,000 will be removed from the technology
budget. Dr. Lewis stated this reduction, coupled with Mr. Majewski's information
on retirement creating another reduction, should be a good starting point to cut
into the 1.78 mills.
COURTESY OF THE FLOOR TO VISITORS
Director Koch offered courtesy of the floor to visitors. Speakers are allowed
three minutes to address the board on budget items. The following person
addressed the Board of School Directors:
1. Judith Dexter, referred to page 15 - Statement of Expenditures. She
inquired about the large increase in line item 320 - Professional Educational
Services.
Dr. Lewis replied that the $69,000 increase is the assimilation of the
resource officers into this year's budget. Previously, they were covered by
the COPS grant which was exhausted a year ago. Mr. Villani stated that the
agreement with the city of Bethlehem is that the costs of five of the school
resources officers are split with the City. Mr. Majewski added that the
township of Bethlehem is also included.
Mrs. Dexter questioned page 41 - Information Technologies. She understands
that Dr. Lewis has stated that $450,000 will be taken out for the laptop
initiative. She asked if the district had grants during the year 2004-2005
for this initiative and, if so, how much of the program was funded by grant
money.
Dr. Lewis stated the majority of that was bond fund expenditures.
Mrs. Dexter said she thought the board had agreed to some type of evaluation
of the laptop initiative. She questioned the expense of that.
Mr. Majewski stated the evaluation was totally grant funded.
Mrs. Dexter asked if there will be another study in 2005-2006 in addition to
this year's study by Dr. Cates.
Dr. Lewis stated that the district is talking to possible vendors to assist
with a grant to underwrite that.
Mrs. Dexter asked what a vendor would stand to gain from funding such a
study.
Dr. Lewis stated if a vendor were to fund the study directly, he would
probably be coloring the study in the eyes of some.
Mrs. Lutcher stated that the district is also applying for another federal
grant. Part of that federal grant application would be to continue Dr. Cates'
work. That grant is also going to encompass the higher education and the
collaboration of the Community Action Committee of the Lehigh Valley on the
south side.
Mrs. Dexter asked if she is to understand that if the district gets the
$450,000 in grants, that plus the grant money for Dr. Cates would be the only
grant money that has come to the district for the laptop initiative.
Dr. Lewis stated he can't answer that without Dr. Garrigan's account book.
Director Koch stated that she prefers the board to have the opportunity to
question the budget before the audience begins with their questions,
consistent with the district's practice.
Mrs. Dexter stated she will let the board members ask the questions. If they
don't ask the questions she has, she will speak again.
QUESTIONS AND COMMENTS FROM THE BOARD
Director Koch asked for board members' comments and questions.
Director Leeson referred to revenue shown on an unnumbered page showing that the
value of a mill is increasing approximately $60,000. In revenues there is an
increase of $7,600,000 in local sources, almost $3,000,000 in state sources. Mr.
Majewski confirmed that she was correct. Director Leeson stated that the revenue
side shows a very healthy increase in revenue without even having to go into
millage increases. Mr. Majewski stated that the increase in revenue includes the
1.78 mill proposed increase. He directed her to the real estate increase of
about $5,800,000. About $4,400,000 of that is a result of the millage increase.
Director Leeson stated the district would still have $6,200,000 in increased
revenue without even raising taxes. Mr. Majewski stated it would not be
increased revenue because $3,500,000 of that is fund balance. You need to back
that out when looking at increased revenue. There would be $5,800,000 of revenue
increase without a tax increase. Director Leeson stated she thinks that is a
pretty healthy increase without having to go into tax revenues.
Director Haytmanek asked if the dollar figure given by Mr. Majewski is greater
than, the same as, or less than the figure for a traditional, noncharter school
student. Mr. Majewski replied that the calculation of the tuition is based upon
our own students' cost. There are certain exclusions in the calculation. It
does approximate the instructional cost for our students. Director Haytmanek
asked how many special education students are in the charter schools. Mr.
Majewski stated that he estimated that approximately 50 of the students out of
419 would be special education students.
Director Amato, concerning the $2,900,000 increase in employee benefits, asked
what percentage of the Collective Bargaining Agreement (CBA) over and beyond what
the new CBA agreement will contribute to offsetting that increase. A new
agreement with a bargaining unit has been signed. That has been increased very
minimally. Mr. Majewski stated he is anticipating about $200,000.
Director Williams asked if the average cost increases are figured on a yearly
basis. Mr. Majewski stated there are many components to that. Even salaries and
wages would have to be dissected into the individual bargaining units or the
individual groups. In looking at even maintenance costs, in the category of
heating, there are the electric increases which are probably about 10 percent,
but it is the prices of natural gas and fuel oil which have really gone up
recently. He stated his fear is that if he provided all those components there
would be so many different components that it may not make sense. Mr. Majewski
stated if there is some way he can give her what she is looking for, he would be
glad to do that. Mr. Majewski stated that he tracks various categories selected
because he knows they have similar characteristics.
Director Williams stated she felt the Powerpoint presentation was excellent, the
best one the board has had, and very comprehensive.
Director Venanzi, regarding health benefits of $2,200,000 per year, asked if she
is correct that next year the same, if not more, is anticipated. Mr. Majewski
replied that presently the average medical CPI is very similar to our average
increase. Unless something is done to change the cost structure of the system,
it is reasonable to assume that the cost increases being experienced now, on
average, will continue.
Director Venanzi asked if being self-insured is the most economical choice. Mr.
Majewski replied, "Definitely." Smaller groups are prone to swings. They can
have one large case that could damage their budget. However, with almost 2,000
lives, the district is a very large group and will average out, which is why,
when talking about the average increase per subscriber being close to 10 percent,
that is about the average medical CPI. We are average. We could not do better.
If we were not self-insured, we could do worse. The district pays a retention
fee and negotiates that. They locked in a rate that went down last year and
locked into it for two years. The negotiations are very difficult. What is not
factored in is, since the district pays as claims come and are not paying a
retention, we are holding onto and investing our money. The money is not being
held by somebody else. We have lower administrative costs as a result of being
self-insured. His concern, if we were not self-insured, is that the district
would pretty much be at the mercy of whoever was now writing the insurance for
the district. He would not have the same flexibility to negotiate the rate as
now, to structure it in a way that makes sense for the Bethlehem Area School
District.
Director Venanzi stated she is disappointed that employee contribution wasn't
upped more when looking at $9,000 a year and it's less than $500 that an employee
has to pay. They wouldn't be paying that anywhere else.
Director Venanzi asked Dr. Lewis about his statement in the summary that the
budget is reflecting funding necessary to continue the central office
reorganization plan. She asked if that includes new people. Dr. Lewis stated
the reorganizational plan extends well beyond cabinet. Those positions are in
existence; nothing is being added. In the next line the technology positions are
reflected. Although they are part of the overall reorganization of the
technology arm, they are not in that bullet. They are broken out in the SKILL-21
and replacement initiative bullet. There are no new positions in this budget at
the administrative cabinet level.
Director Heske remarked that the budget presentation was an excellent job, much
easier to understand even than previously, and he thought Mr. Majewski did a
great job previously. However, in view of the Act 72 situation, he thinks for
the next budget we should look at what an Act 72 budget would look like. In
particular, if the district wanted to avoid referendum and stay within the
guideline, there would need to be significant cuts. Plus, the ten exceptions
could be analyzed that were provided. For instance, you know how much special
education has increased and what the likely increase will be next year, and how
it would work to get any money out of that exception. The other thing he thinks
everybody should be aware of is the total amount of mandates that are unfunded.
He would like to see exactly what No Child Left Behind costs the district that we
get no funding for. The charter schools have already been identified. There are
a lot of things required which we have no control over; we simply pay the bill.
He would like to see those itemized and totaled so everybody can look at it.
Director Koch stated when she attended the federal meeting, NSBA was asking that
local school boards list No Child Left Behind as a line item. They had a formula
to be used to be able to break it down. There is a certain percentage that the
federal government was supposed to have promised as opposed to what they actually
have paid. They asked that that amount be listed as a federal education tax.
She thinks it would be useful to have when going through the Act 72 hearings.
She agrees with Director Heske.
Mr. Majewski told Director Koch that he appreciates the comments she gave him
about the budget and the Powerpoint. However, he wanted to point out that it was
not all his effort. One other person was involved a great deal, Kathy McCann,
his assistant. Director Koch stated she thanks her because she has been asking
for years, for some of the board who are challenged when it comes to all these
charts, pictures are needed to make it clearer. The presentation was great.
Director Rowe stated she attended a seminar recently where discussion was about
best practices. In the area of budgeting, two things stood out. One is already
accomplished in that the past trends are studied. The other is that we should
also be projecting forward. She thinks that is being done in the district's Act
72 analysis. Another item she thinks would be informative to the public was
comparing some key numbers to other districts in our area. Tonight a millage
comparison was presented. Director Rowe stated she thinks it would be
informative to know where we stand compared to similar districts on some key
percentages. Mr. Majewski stated that work is done on an annual basis by someone
other than himself. He stated each district has its own focus; therefore, it is
not always a fair comparison. He can provide such information that is
accumulated by the IU. Dr. Lewis remarked that the information is usually on
final budgets.
Dr. Lewis stated that President Craig asked him to announce to the board and
public that he is currently running a meeting on Act 72 with other board members
from other Northampton County school districts at the IU.
Director Koch announced that at 7:30 tomorrow morning, at the Troxell building, a
Lehigh County meeting on Act 72 will take place.
Director Koch asked Mrs. Kostem if the board will be able to get a listing of the
18.5 teaching positions to be added and if the positions have to do with the
requirements of No Child Left Behind. Mrs. Kostem stated that generalized
information is on page 65. She stated the positions are driven almost
exclusively by enrollment. One exception to that is a .4 guidance counselor
included at the elementary level to make one more elementary school be covered
totally by a guidance counselor. There is a request for what is being
tentatively called a "dean of students" position to assist at the freshman
center. The freshmen are moving to the old Northeast. One administrator from
Liberty High School is going there. Another individual will be assigned to
assist that person in the organization and day-to-day working of that school.
That is beyond what would have been needed because of enrollment increases.
Director Leeson stated she noticed that there are 18.5 new teacher positions. If
she is correct, there are 330 new students. That seemed to be a large number of
positions per student. Mrs. Kostem stated the district's ratio, if you look at
the number of teachers the district has to the number of students, is pretty
close to what we run. In an overall look, 17 students per teacher doesn't
translate into what happens in each classroom, but does translate into the total
number of teachers. There are a number of teachers such as guidance counselors,
nurses, reading specialists, not individuals who have their own class load per
se. IST is another example at the elementary level. School psychologists,
speech therapists, home/school visitors are individuals that, if you look at the
total average, contribute to that. Dr. Lewis stated that another mitigating
factor is that the move to the Liberty Freshman Center had some scheduling issues
which were addressed. He stated that certain grade levels will require more
teachers per student to operate. Middle school is the most intensive, high
school second most intensive, and elementary is the least intensive in terms of
the ratios. Mrs. Kostem stated that at the elementary level one additional
special education teacher, one additional section of kindergarten, an additional
section of grade two, three more sections of grade four, and two sections of
grade five are built in. Those are scattered among the 16 elementary schools.
Director Leeson asked if this included full-day kindergarten. Mrs. Kostem
replied that the district does not fund any full-day K positions. All full-day K
positions are paid for by the Pennsylvania Block Grant.
Director Leeson said she noted the 1.17 mills increase for employee benefits.
She thinks we need to keep the budget in mind when approving contracts. She
stated that in January when Mr. Majewski provided an analysis of the financial
position, he showed some of the trends and things that might be happening. One
item discussed was that the financing of our construction projects would probably
fall short and the district would need to look for additional financing. She
stated that we have the fund balance of $10,000,000 and it is creeping up to
eight percent. She asked if it is possible for the district to target that money
to cover the differential between costs of construction and monies borrowed at
this point so that there would not need to be another bond issue in the near
future. Mr. Majewski replied that he fully expects that the district will use
several million this year to reduce that. He is expecting that the fund balance
will be closer to $7,500,000 as of the end of this year. In this budget, we are
planning to apply $3,500,000 of that. Mr. Majewski stated that when he made that
presentation he took into consideration whatever designated funds could be used
for capital expenditures. Director Leeson asked for clarification and asked if
he is saying that the district can afford to take the $3,500,000 out and that he
is intending to take more money out to cover the shortfall. Mr. Majewski
replied, "No." He explained that the general fund is being looked at. If
everything follows through as anticipated, the district by the end of next year,
will be down between $3,500,000 to $4,000,000 in general fund. With the size of
our budget, he would not recommend reducing that further because it is a fairly
small percentage of our total budget. What has been done over the last couple of
years is that the district has been able to designate some monies in a capital
reserve fund now. Those have already been separated and not part of this
analysis. It is intended to be used to reduce any type of borrowing. When he
stated that the district would have a shortfall, that included those funds.
Director Williams asked if there have been comments or questions by the public or
parents about the rifle program. She remarked that at a recent conference they
were told that all extracurricular activities benefit students. While she is not
personally a fan of rifle, she wanted to ask about it. Dr. Lewis replied the
only comment he heard was last evening when it was used as an example of, "Had we
not had to send out Act 72 applications, could we have saved rifle?" The PIAA no
longer sponsors rifle. Our teams have had to travel on the northern ridge to
compete. There is a handful of schools. The trend has been for districts to
eliminate rifle. Mr. Villani stated there are two reasons why it was suggested
to be dropped. One is that besides Liberty and Freedom there are only three
schools in the entire Lehigh Valley that sponsor rifle: Emmaus, Southern Lehigh,
and Salisbury. Other than those three schools, our rifle team travels all over
the northeastern part of the state to compete. The transportation costs are
significant. The second reason is that the space presently known as the rifle
range at Liberty is more than likely going to be used for some classroom space.
With all the construction, it is also being deemed it might not be an area
throughout part of the construction that is safe for persons to be. It was
almost an opportune time with the amount of schools that have cut rifle and also
the fact that the rifle range area is not going to be available for practice.
Director Venanzi asked how the astronomical increase in approved private schools
on page 47 in the amount of $570,000 came about. Mr. Majewski stated that is one
of the areas he has been segueing for months. It is not a growing number of
special needs students, but a special need population that is becoming more
expensive. It is not because the district has placed the students there. These
are children going through agencies, very needy children that are being
institutionalized outside of the district. Usually they are not regular
education students. The cost of the program is what the district will be
charged. The programs are very expensive - $20,000 or $30,000 a year. Part of
what has occurred is that it is another area where we did not have those same
needs in the past. This year it won't be over budget, so it is almost like
looking at two years worth of increases. Dr. Lewis stated that is one of the
reasons administration advocated joining the Colonial Academy as a charter
member. Mr. Agretto has analyzed these costs. A great majority of these
students will be able to be serviced locally. Mr. Majewski is right. It doesn't
take a lot of students to ratchet that number up. In some rare cases, a single
student could be a $100,000 expense.
Director Koch stated that in one of the law suits involving special education
students the courts found it was a great idea to just mainstream a lot of
students whose parents didn't necessarily want them to be mainstreamed. She
asked if that has taken place in our district yet and increased our costs. If
you place these students in the mainstream, there are times special
accommodations must be made for them. Mr. Majewski stated there may be some
costs; however, if a portion of the time is in a classroom with a teacher there,
it is a less expensive alternative. You may need to involve some aides.
However, when looking at a fraction of an aide compared to a student who is
institutionalized, it is generally less expensive to mainstream that child.
Director Koch asked if we have classes within the district for those children
that would still be low cost compared to placing them in a mainstream situation.
Dr. Lewis stated that partial hospitalization of classes would cover the
extremity of the continuum that we handle. These are the children who often
require 24-hour residential service. Dr. Lewis stated the district has not been
directly affected as a result of that law suit but by virtue of the fact that Mr.
Agretto has come to Mrs. Kostem and he concerning the need for an aide to get a
student through a particular situation. It is probably a less expensive fix than
should something explosive happen with that youngster. Mr. Majewski further
explained that those children who have impacted on this budget are not being
controlled by our special education department. These children are being sent
there by county agencies.
Director Leeson stated in the last couple of years the district has gotten
involved in some very expensive technology initiatives. She stated that much of
these initiatives are funded with operational funds and not funded by the grants,
and asked if that is correct. Mrs. Lutcher stated that is correct. Director
Leeson asked how much the two additional positions will cost. Mrs. Lutcher
replied, "$78,000." Director Leeson stated there was an increase on page 41 of
$1,079,000. Dr. Lewis explained that $450,000 needs to be backed out of line
item 440 which will read $110,000 as of this evening. Director Leeson stated we
are now down to $620,000 additional money. She stated she also saw an increase
in technical services of $92,000 on page 74. She asked if technical services and
information technology are related. Mrs. Lutcher stated that under 140 salaries
some salaries were moved into the proper category and there is one more support
technologist in the budget for next year. The reason for that is at this point
there is not full coverage of a support technologist at both high schools. There
is one person at Liberty and a part-time person at Freedom. The support
technologist for next year will help to cover Freedom and the Freshman Center.
In addition, there is a very large increase in rentals and leases at $110,000 for
replacement of routine classroom computers. Supplies on 610 is a large software
increase because teachers are not using Microsoft Office products. It is
increasingly difficult for teachers to communicate with central office and other
professionals outside of the district. In addition, in the same line, is an
allocation for an improved email software. Line 750 is an increase to add file
servers. Line 760 is replacement of other existing file servers, backup
hardware, and lab replacements at the high school. Line 780 - Infrastructure is
expansion of the network due to voice over IP phone system, growth in schools,
and wireless expansion. Director Venanzi commented that none of this has to do
with the initiative. Director Leeson stated that she was not only focused on the
initiative, but on all of technology, and two additional positions in the
SKILL-21. Dr. Lewis and Mrs. Lutcher stated there are no new positions in
SKILL-21. Mrs. Lutcher referred to page 74 listing an additional technician for
an increase in repairs. Some of those repairs are from the SKILL-21. A lot of
repairs are also from throughout the district. There are currently four people
in technical services: two dealing with phones, audio-visual, electrical,
clocks; one deals somewhat with our schools but primarily is assigned to the
Education Center and dining services, working primarily with the PC computers;
one technician devotes his time to Apple repair. This technician right now has a
backlog of approximately 65 machines that are non SKILL-21 in need of repair.
The department is asking for an additional person to work in that capacity. Also
included in the budget is an increase in communications equipment, software, and
supplies for repairs. The equipment replacement is because the machines that the
technicians use have not been replaced for several years.
Director Leeson stated when she went back to last year's budget and 2002-03
expenditures, she didn't see a line item for information technology. She
remarked that she doesn't know if that is being pulled from other areas or just
increased the expenditures in that area by $1,500,000. Mr. Majewski stated that
one of the budgets in the past, ICT, has been renamed. It has been brought under
the umbrella of Information Technology. It is not additional money. Director
Leeson stated that when she goes back the budget was only $492,000 so it has
increased rapidly and there is a huge million dollar increase basically in
technology without the SKILL-21. Mr. Majewski stated the servers being replaced
were bought quite a number of years ago. Technology funds were more readily
available from the state during the big technology push. Now, the servers are
worn. This is not something that can be avoided much longer without having a
system the district is dependent upon crash. Mrs. Lutcher has done a terrific
job in looking for other sources but the state does not have that as their focus
anymore. Dr. Lewis added that he makes no secret that he has endorsed
technology. He is proud to say that every teacher in the system is now using
technology and will soon be using a very new student information system to gather
information, analyze information, share information with parents. The focus was
also to deal with what had become some obsolescence. A well-meaning bond issue
10 years ago spending about $9,000,000 to $10,000,000 generated tremendous
numbers of systems that had been gathering dust. So there was a planned
initiative to go through replacement. Technology has changed radically - the use
of PDAs, the use of wireless. Every one of our buildings has been done in the
last three years which gives our students a heads-up in terms of their
universities which are all wireless. He thinks it is the right thing to do for
our children. Director Leeson told Dr. Lewis that he will also hear her talk
about some of the other programs. It is not a question of not wanting these
programs. It is a question of funding everything and picking and choosing what
the district will fund because she doesn't think the district can continue to
just fund everything. We have to judiciously look at each of the programs.
Director Koch stated that maybe she is missing it somewhere, but she is having
difficulty finding exactly where the laptop initiative cost is listed. Dr. Lewis
directed her to page 41, line item 440 - rentals and lease, the item that has
just been adjusted. The amount is $450,000 on the laptop and $110,000 on the
replacement. Director Koch said she would really appreciate something that
breaks down what was paid for the laptop initiative, grant money received, what
it is going to cost in the future, and makes it clearer to understand.
Director Leeson asked if the grant money is not used for the laptop initiative,
if it could be used in other areas, and, if so, what other areas could it be used
in. Dr. Lewis stated some of the money is nondesignated. The state designates
large pools of money and hamstrings the district. If money is coming in from
multiple sources, for example for tutoring, and the district is maximized with
tutoring services offered, if that money can be spent for software, that software
can tutor. Monies have been allocated from that fund to tutor students. These
computers would be allocated to be used by sixth graders who would use them after
school. That fits within the description of one particular fund. There are
strict designations on spending. Grade six is permitted use of the dollars. The
EETT money is technology directed. It must either be spent on this technology or
some other technology. One-fourth of the DCED money has been used to buy
curriculum products, keeping that expense out of the general fund. Needs have
been maximized in that designated area. He, Mrs. Cintron, Mr. Villani, Mrs.
Lutcher, Dr. Nelson, Mr. Majewski, and Mrs. Kostem examine these funds, trying to
maximize the use. The one thing the district does not want to do is not be able
to use those funds and have someone at the state level comment that the district
is complaining about Act 72 or some other funding formula but not using the funds
given. In two of the funds, money could be moved towards tutoring initiatives,
but, frankly the district is doing the maximum amount of tutoring.
Director Heske added that he found on the recent NSBA conference something that
he thinks offers some significant potential. One of the districts he visited is
selling services to the city, police department, a state fire prevention agency,
and other entities that don't have enough use of technology to justify a
technology service department in their technology program. The technology
department in this school district is meeting 20 percent of their budget via
revenues produced through contracts with the agencies they are servicing. It is
not only using technology for the students, but using the technology to produce
revenue for the district. Dr. Lewis stated he knows there is some partnering
occurring in the state with libraries. One question he and Mr. Majewski
discussed was whether or not there is legislation that prohibits the district
from being competitive. IU 16 was challenged on providing services and usurping
the private sector market. He will ask Mrs. Lutcher to investigate if we may be
able to provide some services to some nonprofit entities.
Director Venanzi asked if the first page of the summary showing 1.78 mills is
accurate. Dr. Lewis stated it will be adjusted. He stated he would like the
press to reflect this, because it also received the earlier version. On the
first page of the letter of transmittal it will read, "that additional revenues
of 1.38 mills" and has been reduced by $1,000,000 which is a combination of
retirement adjustment, funneling out of the laptop initiative into the grant
area, "equaling 1.38 mills or a 3.99 percent increase making a total of 35.97
mills."
Director Venanzi asked for the increase in the average household. Mr. Majewski
stated a $50,000 taxable assessment at this millage increase translates into an
additional $69 in real estate taxes.
Director Rowe, referring back to discussion about competing and technology
services, asked if district day care competes with other day care providers. Dr.
Lewis stated he thinks the technical utilities services was being debated, not
the fact that the IU might sell a service to the general public as much as sell a
service like become an internet service provider for a community or a cell
monthly access. In the case of the IU, they were challenged on providing
software solutions. Day care is a community service. He would equate it to
nothing different than the district providing tutoring services. Mr. Majewski
added that the day care service is a unique service because a lot of it is
designed around our academic programs. It is not something any other child care
provider would benefit from but is very beneficial to parents of our school
district.
Director Rowe stated it is worthwhile to look at some creative solutions to some
of these problems. One thing Director Heske didn't mention, she thinks it is the
same school district that is actually producing electricity. Director Heske
replied yes, that they are energy independent. They can't under the law in
California, have the capacity to produce all of their electricity. They must
leave five percent with the utilities because if something goes wrong with their
plants, they must rely on the utility. They have been able to become pretty much
energy independent. Mr. Majewski pointed out that they are probably in a
geographic area that lends itself to solar panels or windmills. He believes they
used what resources are available to them. Director Heske stated that they have
done so.
Director Koch asked what amount the district would be over, if it had to abide by
referendum and only had a certain percentage that could be increased. Mr.
Majewski stated it would be a little over three percent, not including any
approval for exclusions. Dr. Lewis stated we would be about one percent over.
Director Koch stated if we found out after putting it on referendum that people
did not want to vote that in, we would have to eliminate certain items from that
budget. Mr. Majewski said that is correct. Director Koch asked if
administration could give a list of the items that would have to be deleted and
see if there is anything on the list that we might be able to eliminate without
having an extreme impact on our educational program. Dr. Lewis replied that the
district would have, in essence, a potential exclusion on debt service on the
2005 bond issue that has just crept into the budget which is $1,700,000 which
would place the district below the index. He pointed out that the district's
argument all along is that it has always been right on the cusp of this index.
He doesn't want to give a false pretense because he doesn't trust the index. He
thinks the district has made strides to manage its debt, manage its fund balance,
be creative in budget initiatives, to look at alternate ways. He stated his
answer is that we are already there.
Director Leeson stated she thinks the district does a fairly good job of managing
its money, but challenges it to do better. She stated we have a sizeable revenue
increase and she would like to see what a zero increase budget would look like.
Mr. Majewski stated that it would require $3,400,000.
Director Leeson asked Dr. Lewis if he or Mrs. Kostem can tell her the cost of the
new administrative structure versus the old administrative structure including
the supervisory positions. Mrs. Kostem stated she assumes she is talking about
the positions she will speak of. One is the director of information
technologies. That has been an additional position to cabinet. There have been
four additional positions into the curriculum department: reading, math,
science, and English/language arts. The cost of those five positions in the
budget estimate for next year is approximately $457,000.
Director Leeson stated she is also interested in knowing the cost of the expanded
SPARK program. She knows that some of the funding has come from accountability
grants. Dr. Nelson stated the expansion of the SPARK program is all funded by
grants. In the general fund budget is $592,862 which covers eight teachers and
seven assistants. The additional four assistants and two teachers for the
expansion is covered in the proposed budget by $194,389. The total budget for
SPARK is $787,251. Mrs. Kostem wanted to make it clear that the second added
part is from PA Accountability Block Grant funds.
Director Leeson asked what the additional cost to the district is of the full-day
kindergarten. Mrs. Kostem replied that, as she said earlier, the district is not
funding any all-day K classes. Director Leeson asked about space. Mrs. Kostem
replied that for most of these classes the same was done as her example at
Lincoln. Lincoln was going to have three sections of kindergarten. That would
have taken two rooms. They ended up with one room being used for all-day K and
the other being used for two sessions, so they still used two rooms. Director
Leeson pointed out that the district rented at Holy Ghost. Mrs. Kostem stated
that was done because of another issue. Donegan did not have the space to house
its five sessions of half-day kindergarten. They did not have the room at their
building to keep their kindergarten. It was not the fact that the all-day K came
on board. Director Leeson asked even if the district had funded the six half-day
programs, if that would have been done in three classrooms. Mrs. Kostem stated
that is correct. She explained that there are two full-day kindergartens and
three half-day kindergartens. Two classrooms are used for the two full-day and
the three half-day classes use two more classrooms, a total of four. When the
classes were located at Holy Ghost, some auxiliary pieces were needed because
they needed a room for large motor movement, for lunch to be served, etc. Had
they been at Donegan, those auxiliary pieces would not have been necessary, so
actually the need for classrooms to place the kindergarten in did not expand that
much. There is the small cost of supplies such as paper and pencils. In this
year's budget the board has approved a teacher assistant which was added. This is
a person who lets people in and out of the door and answers the phone, not
because of all-day K, because of being offsite. That assistant would have been
necessary even if the program was only a half-day program at that site. Mrs.
Kostem stated that the district invested in all-day K, for the most part, only
because somebody else is funding it for the district.
Director Venanzi asked Mr. Majewski, in looking at the fund balance in the past
eight years, if he really feels comfortable going to 3 1/2 to 4 percent. She
stated we never like to keep it at a huge amount, but the minimum has been 5.6
percent. Mr. Majewski replied that he feels comfortable at a higher level;
however, he believes the staff has done an accurate enough job of budgeting our
expenditures that there will not be many surprises. It happens. However, the
level of comfort he has with the knowns or the unknowns is fairly high. Unless
something changes with our environment and the state and federal requirements
which can happen, then he would be more comfortable with a higher level of
contingency because there would be greater uncertainty. He believes we can
manage with what we have right now quite successfully.
Director Leeson stated that the district has always taken the cost of capital
improvements out of bond funds. According to Mr. Majewski's financial position
report, the district no longer has that bond fund to take the money from. Mr.
Majewski said that the district still has some capital funds; however, he is
anticipating that by 2007 there will be a need to replenish those funds, and
anticipating that at some point the district will start another construction
project at Broughal Middle School. Director Leeson questioned if money is
available in the funds for ongoing improvements usually done in the summer up
until 2007. Mr. Majewski replied that he can manage those costs. Director
Leeson asked if he is anticipating that when the district gets financing for
Broughal a little more will be added for those ongoing improvements. Mr.
Majewski stated he would not say that the district is looking for financing for
Broughal as a portion of the financing is already done. When the remaining
financing necessary to do Broughal is completed, then some additional money would
be requested for capital improvements that would be necessary over the next
several years.
Director Leeson noted a reduction in the Academic Academy, academic intervention,
reading recovery, and secondary summer school. Mrs. Kostem stated there is a
reduction of one teacher assistant at the fifth grade Academy on the basis of
less enrollment. Dr. Lewis stated there was a general supply reduction based on
their historical expense of about $14,000. Mr. Villani stated that there are
also grant funds that support the Academy. One other reason the intervention
monies was lowered is because of the amount of funding being received. No
services are being reduced due to these reductions.
Director Leeson asked if there is night school at the high school. As she
remembers, last year it was in question. Mr. Villani stated it is called Credit
Acquisition and is after school. A session ran in the second semester based on
enrollment. The first semester was not offered because there was not sufficient
enrollment.
Director Leeson asked what the difference is between curriculum enrichment
activity and academic intervention. Mr. Villani explained that curriculum
enrichment activity covers many of the contracted field trips for various grade
levels, academic competitions. Director Leeson questioned whether these come
under conferences. Mr. Villani replied that the competitions do not. Director
Leeson stated that on board meeting agendas DECA and History Day are listed under
conferences. Mr. Villani stated that some of those come out of both sources.
Director Leeson stated, in summary, that she thinks we have a large increase in
revenue, many new initiatives that are expensive, and it appears the district is
moving aggressively into technology. She is asking to look at a less aggressive
approach, particularly in technology, and reduce some of the spending there. She
would want the administrative structure to be reconsidered. She wants to look at
ways of reducing the budget and bringing it down to a zero increase. Mr.
Majewski stated that administration will continue to look. He would be very
uncomfortable with reducing the technology area. Mrs. Lutcher has explained
about the voice over internet, infrastructure, the telephone system which is at
least ten years old and needs replacement. This is an area where an investment
of funds could be a huge cost savings. Ten years ago the phone system was
replaced at a cost of about $900,000. With some of the infrastructure money the
cost would be a fraction of that plus some of the equipment. If some of these
items were removed, it really could be more expensive in the future because large
pieces of equipment need to be replaced. Items of this type have already been
skimmed down, trying to only retain those items absolutely necessary for current
operations.
Director Leeson stated she is still looking for the cost savings in technology;
every time she hears cost savings, it costs the district more. Dr. Lewis stated
the administration will do what the board directs. If there is an area the board
wants looked at, he would ask, "What is the pleasure of the board?" A 1.38 mill
increase has been given with administration's recommendation on the use of fund
balance with the assessment of revenues. He asked if there is a direction the
board would like administration to go relative to the proposed budget. Director
Leeson said she would like to see a target of zero increase. Dr. Lewis stated
that would mean $3,400,000 of reductions. There are only certain places
available to reduce in that amount: SPARK program, CA/MP program, class sizes,
staffing reductions. Technology would be impacted.
Director Koch remarked that in the past it was useful where several alternatives
were studied; for example, a $3,000,000 cut, $2,000,000 cut, and $1,000,000.
Perhaps within the $1,000,000 area some places to tweak costs can be found. She
thinks what Director Leeson is looking for is areas where the district may be
able to tighten the belt. Director Leeson wanted to state that she is not making
a recommendation for what to cut, but should the laptop initiative be cut, that
money could be used elsewhere. Director Koch stated that even though the rest of
the board might agree to this list, it does not mean that the board is agreeing
to any cuts at this point. Dr. Lewis suggested that cutting the grant-funded
laptop initiative will not permit the district to use the money outside those
designated areas in those two grants. The district is adequately funded in those
areas. Director Leeson stated she does not want to see class sizes increase and
essential programming on the cutting block before seeing items like the
administrative reorganization and the laptop initiative. Director Williams
stated she is not looking for a zero increase because she thinks that is
unrealistic. She thinks it would be realistic to consider perhaps .99 percent
since administration has already been able to reduce the budget by various pieces
of new information this evening.
Director Haytmanek asked Mr. Majewski if Act 72 were enacted at this point, if
this budget would still not trigger a referendum. Dr. Lewis stated that he is
correct. The exclusion of the $1,700,000 would bring the budget down below the
three percent trigger.
Dr. Lewis said that he did a quick calculation with Mr. Majewski on the reduction
of one percent. That would be just under a million dollars and would be in line
with what Director Koch is suggesting. If the board wants the administration to
see how close it can come to a million dollars of reductions, he thinks that
would be more realistic. Director Koch asked for $1,000,000 and $2,000,000 in
reductions to be researched, but polled the board and the majority voted no.
Director Koch then asked that a list of $1,000,000 in reductions be researched.
The majority of the board members voted yes; Directors Leeson and Venanzi voted
no. Dr. Lewis stated that the administration will bring a prioritized list of
$1,000,000 in reductions.
COURTESY OF THE FLOOR TO VISITORS
The following person addressed the Board of School Directors.
1. James Kritis, asked the cost of the proposed 18.5 additional proposed
teachers at the secondary level. Mrs. Kostem said the secondary level is
11.8 teachers. Mr. Kritis said that while he was teaching at Freedom High
School, particularly in the last 10 years of his teaching, the department
chairman only taught half a day, teaching two classes on the block schedule.
At one time their teaching load was reduced because they were evaluating
teachers. They no longer evaluate teachers. He sees no justification for a
department chairman to teach half a day and sit on his butt for half a day.
He knows what they do. Department chairmen were notorious for setting up
schedules where they only had seven, eight, nine, or 10 students in a class.
Eleven-and-a-half salaries are a significant sum of money. There are seven
department chairmen at Liberty High School and seven at Freedom High School.
As far as he knows, they are only teaching half a day. There was one
restructuring person at Liberty and one restructuring person at Freedom
teaching only half a day.
Dr. Lewis stated he wanted to clarify for the board that a full load is
three. He believes they are teaching two and three; it has changed. Mrs.
Kostem said that in a year, they are to teach six courses. The major
departments teach five instead of six. They have one-sixth of a schedule
free for department duties.
Mr. Kritis said, as he sees it, there is no reason why a department chairman
cannot teach three classes on the block each semester, picking up an
additional 14 classes at least one of the semesters. Maybe that 11.5
additional teachers at the secondary level could be reduced.
Mrs. Kostem said that she mentioned the major departments teach five out of
six. There are department chairpersons who teach six out of six. In the
departments where there are not as many individuals, they do not have one
block off and are paid a stipend to be a department chair. These are in fine
and practical arts.
Mr. Kritis said he is suggesting that maybe some way could be found to reduce
that 11.5 additional teachers at the secondary level.
LES BEAR - INTEREST RATE MANAGEMENT PLAN
Mr. Majewski said that recently he challenged Les Bear to do something he didn't
think he would be able to do. In this environment, just as the board challenges
the administration to try to find ways to cut money, the district had gotten
financing which was the best rates and structure possible. He called Mr. Bear to
see if he would find a way to save the district a few bucks. Much to Mr.
Majewski's surprise, he came back with a plan he believes could save about
$200,000 a year in 2005 and then in 2007 another $200,000.
Mr. Bear remarked that it was a challenge. Part of the service rendered to the
board is to constantly look for opportunities to enhance the district's debt
service and manage it in a better way. Act 23 passed in 2003 enables school
districts to enter into such transactions as a basis swap. It involves the two
issues entered into in 2003 locking in interest rates for the capital program.
The first part was the 2005 bond issue that settled on January 4 for about
$55,000,000. An interest rate was locked in for that transaction. Also locked
in is another $55,000,000 committed for the capital project to be entered into on
or about January of 2007. Again, interest rates are locked in at levels not seen
for about 40 years. Since that time, interest rates have increased about
one-half of one percent. That is a significant amount of money the board has
committed to but has saved compared to the conventional rates of today. Now, the
attempt is to enhance that a bit with the basis swap concept. The way the
forward starting swaps worked was that the district would enter into an agreement
with a counterparty, a very large third-party entity, and they would pay the
district a certain percent of LIBOR. LIBOR is London Interbank Offered Rate -
the European market for the taxable market. In turn, the district pays BMA -
Bond Market Association, which is the variable tax exempt rate. On top of that -
those two kind of wash themselves out - the district pays a fixed bond rate which
becomes the net cost of that transaction. That is fixed. To enhance this
transaction, it was stated go back to that concept, counterparty pays some
percentage of LIBOR, district pays BMA, then the counterparty, on top of that,
with another transaction, would pay an annuity or a premium.
Mr. Bear explained why counterparties would ever want to do that. What makes it
work is that they need additional cash that feeds their systems. The
counterparty world in the swap world is about $250 trillion. It is a very, very
large part of our economy. What makes that work is the constant feeding of
additional cash into that program. That is what this transaction would do. It
would feed the system. The counterparty becomes entrenched in enhancing his
portfolio and will be able to invest at a much higher rate than we can envision
ourselves. What makes that work is more money feeding that system. If we were
to take the 2005 and the 2007 bond issues, that enhances it by $110,000,000 which
is obviously a very significant number. Page four of Mr. Bear's presentation
shows how the exchange of rates might take place. The district would pay BMA and
then conversely the counterparty would pay back to the district 68 percent of
LIBOR. In the last 15 years, the average of the relationship between BMA and
LIBOR is about 68%. On top of that, the counter would pay the district an
additional premium or an annuity. On the 2005 bond issue that would be .38
percent and on the 2007 .4 percent.
Mr. Bear reviewed page 7 of his presentation which summarizes the information.
If the historical average of 68 percent, the level of cash flow back to the
district can be increased or reduce the net debt service payment. Currently, the
district can save about $500,000 between the relationship of the two rates using
a 10-year average. With the basis swap on top of that, the cash flow can be
improved over the life of those bond issues for 2005 by $6,000,000. The net
savings to the district would become about $5,400,000 just for the 2005 issue.
Using the 10-year average, the 2007 bond issue will gain an additional $6,300,000
of savings or net $5,800,000. Adding the two together is in excess of
$11,000,000 of savings for the life of the bond issue on $110,000,000, a
substantial amount of savings.
Mr. Bear stated these are ideas that have been used at the county level in this
state for a number of years. It is in the infant stage for school districts, but
Act 23 is relatively new. Possibilities are being seen on how to manage debt in
a better way than ever dreamed about.
Mr. Baer stated in the fiscal year budget being worked on for next year, the
district can save about $192,000 using the 10-year average for the 2005 bond
issue.
Director Leeson stated that Mr. Bear is using the model of the 10-year average.
She asked if it is correct that there has been an anomaly in the last five years
where the BMA is seen at 71 percent of the LIBOR rate at this point, so
projections using the five-year historic rates would not be as rosy. Mr. Bear
said that what happened in 2001 caused the two markets to become simply out of
whack. With that event, with the terrorist attack, those two markets almost
traded flat to one another. That would be a bad thing. Now, we are back to more
historic times. If Mr. Majewski had challenged him about eight months ago with
this concept, it certainly would not have been as lucrative. Now, the
relationship between BMA and LIBOR is just about right on 68 percent. Director
Leeson stated she sees that from 2002 to almost 2005 the anomaly was still
occurring. It was not just a one-year blip. Mr. Majewski responded that she is
right that it wasn't just a one-year blip. However, not too many can remember
the last time the Fed had a funds rate of one percent. The last couple of years
really was something that was unique in the history. In doing the review, it was
known that it had to correct itself and it quickly did correct itself. The
market by itself does a wonderful job of self-correcting. Mr. Majewski stated
his only concern at this point is if the district ever went to something called
the "flat tax." He doubts that would occur for many reasons. He is very
comfortable that we will remain at somewhere within historic levels. In
addition, the way this is structured, a little extra security has been factored
in. A way has been found to reduce some of that market risk and still be able to
provide significant decrease in debt service. It is always the goal to look at
trying not just to get savings, but to keep in mind the fiduciary responsibility
to the taxpayers to do something without risking the finances of the school
district.
Mr. Bear stated that even in almost the worse-case scenario of the one-year
average, the district would save on the 2005 issue $1,700,000 and for the 2007
issue $2,000,000. It enhances the transaction almost in the worse-case scenario.
When you take more historic norms, it really enhances.
Mr. Majewski explained that many hours of discussion have taken place including
considerations of possible downsides. Even on the downside, this structure of
the transaction is favorable for the school district. It is far better structure
than what the district currently has.
Director Haytmanek stated that the advantage accruing to the district is
certainly on that ten-year average being referred to. He questioned the thing
that brought those two markets closer to parity was the terrorist attack. Mr.
Bear said what really caused the market to become indifferent is shown in page 5,
almost exactly lining up to September 11, 2001, where there was the dramatic drop
of the relationship down to 30 percent. Then, immediately in a spike of close to
100 percent, the tax exempt market was almost immediately on top of the taxable
market which is quite unusual. When the Feds fund rate went down to one percent
as we had many months ago prior to the seven increases in interest rates, that is
what occurred in 2002 and the early part of 2003. Director Haytmanek questioned
if something turned it down again last year. Mr. Bear said in the middle of
2003, very close to normal times, there was a euphoria that things were going to
be successful in Iraq, that we would be exiting sooner than expected. The market
rebounds to that. You can see how it bounced right back when it was realized
that that was really not going to happen.
Mr. Majewski commented that we all try to surround ourselves with people who know
more than we do. He believes that Arthurs Lestrange is the best public financing
department of any organization in this country.
Mr. Bear said that he would like to come to the board at an action agenda night,
present a resolution regarding the interest rate management plan, and then within
four days after that the district could be involved with the 2005 issue in the
market as shown tonight. Mr. Majewski stated that if it is the will of the
board, he would like to proceed on this path. It is not additional funding; it
is improving the current debt structure so the district can take advantage of
some additional savings, not just in one year of debt service, but ongoing.
Director Leeson asked about the downside to this financing plan. Mr. Bear
responded by stating that with all financing plans there is a degree of market
risk and basis risk; however, these short-term risks balance out throughout the
term of the financing. Mr. Majewski further added that a change in the federal
tax structure to a flat tax is also a risk to be considered with this financing
plan.
ADJOURNMENT
The meeting adjourned at 9:30 p.m.
Attest,
Stanley J. Majewski, Jr.
Board Secretary
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