As you may recall, about eight months ago, Villagers learned that Danville schools face some serious transportation issues due to protected tax levies. The Danville Community School Corporation notified the Indiana Department of Education that it will petition to end bus transportation for Danville students in three years, with the hopes that legislation would be passed that will provide financial relief from the effects of protected tax levies.
That hope now appears to have come to fruition.
At the Danville school board meeting on Aug. 18, those in attendance learned that some special legislation has come down the pike, allowing a way out for a small handful of school corporations.
With a little bit of research, I learned that the special legislation in question was Senate Bill 143 that became House Bill 1062 that became Public Law 120 that affected Indiana Code 5-1 and 6-1.1. You’re welcome to view those sections of the Indiana Code yourself, but it made my head swim to try to make sense of it. I had enough difficulty tracking the bills’ progression into law (where’s Schoolhouse Rock when you need it?!).
Fortunately, I also found a document prepared by Indiana Senator Sue Landske of Senate District 6 that provides a much more basic and understandable summary. Scroll down to page 38 of the document, and you’ll find this passage (italics added):
Effective: March 25, 2014
Code Citations Affected: IC 5-1; 6-1.1
Public Law Number: 120-2014
Local government finance. Provides that for all political subdivisions, the maximum amount allowed for an operating balance for a debt service fund is 50% of the budget estimate for annual debt service payments from the fund for debt originally incurred before July 1, 2014, including refinanced debt, and 15% on debt originally incurred after June 30, 2014. Permits a school corporation that experiences at least a 10% loss to the school corporation's transportation fund due to circuit breaker credits in 2014, 2015, or 2016 to use a proportional circuit breaker credit allocation for that year. Permits a school corporation that experiences at least a 20% loss to the school corporation's levies due to circuit breaker credits to use debt restructuring by adopting a resolution before January 1, 2019. Specifies that if a taxpayer appearing at the public hearing files a written objection to the proposed restructuring and a sufficient number of people request a petition and remonstrance process, the bonds may not be issued unless more petitioners than remonstrators sign the petition.
The critical passage in Senator Landske’s summary is this one: “Permits a school corporation that experiences at least a 20% loss to the school corporation's levies due to circuit breaker credits to use debt restructuring by adopting a resolution before January 1, 2019.”
This applies to Danville schools since the corporation has lost 26.7 percent of its funding due to circuit breaker credits, or protected tax levies, and it allows Danville to use debt restructuring.
Why is this important? Because Danville schools have a callable 2005 debt service bond.
What’s a callable bond, you might ask? (Or maybe I’m the only financial dimwit in the crowd, because I had to look it up.) It’s a bond that can be called, or redeemed, by the issuer prior to its maturity.
This type of bond is typically called when interest rates are significantly lower than they were when the bond was originally issued. So the school corporation can “call” the current bond and then reissue it at today’s interest rates – which, as we learned at the school board meeting, are historically low right now.
It’s basically like refinancing your home at a lower interest rate. With a home refinance, you pay some fees, and you often extend your loan, but in the short run, you lower your monthly mortgage payment and in the long run, you save a ton of money.
The same concept applies to callable bonds.
As luck would have it, Danville can only call its bond once every 10 years. Recall from a few paragraphs ago that the debt service bond in question was issued in 2005. We’re fast approaching 2015.
So here’s the school corporation’s plan: call the 2005 bond, restructure it at a lower interest rate, and reissue it. The corporation will then have some fees to pay and an additional two years of payments on the bond (it could have added up to 10 years of payments).
After all the dust settles, however, the corporation will still be paying the same amount on the bond, even with the fees and the two additional years of payments, but since the bond will be at a much lower interest rate, the estimated savings top $3 million.
Count your lucky stars, Danville parents: the transportation problem is solved…at least for now.
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