Here’s how District 65 plans to pay for the 5th Ward School: Committee backs company to handle $44 million in funding

The Evanston Skokie School District 65 Board of Trustees is expected to receive a formal proposal from its finance committee on Monday, May 23 to award a contract to PFM Asset Management for the financial management of more than $44 million in rental certificates. which will fund the new school in the fifth ward.

If approved, the contract would start the next day.

Raphael Obafemi, District Finance and Operations Manager, made a presentation at the May 16 meeting of the Board’s Personnel, Buildings and Grounds and Finance Committee, along with the Request for Proposal, or RFP, from Superintendent Devon Horton.

Obafemi told the committee that PFM was one of five companies invited to submit a proposal for “the investment of proceeds from rental certificates and the management of arbitration rebates,” according to the documents. In addition to PFM, three companies responded: Wintrust Investment Management, PMA Asset Management and Raymond James Investment Service.

The RFP asked companies for strategies for managing “proceeds from General Obligation (Tax Limited) Rental Certificates, Series 2022 in the amount of $44,008,180.45.”

While approximately $40 million of this total is for the construction of a new Fifth Ward school, the remaining $4 million will be used for capitalized interest or costs associated with borrowing to build an asset at term such as school, Obafemi said.

Obafemi also said that to pay that $4 million in capitalized interest, the district will use a company to help invest those funds to allow it to pay the first year of interest on time.

PFM Asset Management primarily manages funds for public government entities, with 95% of its clients being school districts, municipalities, water districts and parks.

In December 2021, PFM was acquired by US Bank through its subsidiary US Bankcorp Asset Management. At the time, the press release announcing the sale stated that PFM would continue to “operate as a separate registered investment adviser” and that it had over “$125 billion in assets under management and over $44 billion dollars of assets under administration”.

Eric Thole, head of US Bancorp Asset Management, said in the statement that PFM is known for its work in the public sector: “PFM Asset Management offers its clients a variety of product offerings, including investment pools local governments, outsourced investment manager services and separately managed accounts in fixed income and multi-asset class strategies. »

On the same day as the committee meeting, Horton sent a letter to parents in the district announcing the new school, which began: “After 53 years, we are thrilled to return a neighborhood school to Evanston’s 5th Ward.”

The email went on to say that the school is expected to open for the 2024-2025 school year, and it explained the Creative Lease Certificate funding plan the district is using to build the new school. He read:

“The estimated construction cost is around $40 million. We are pleased that the costs are fully covered through the issuance of lease certificates and without raising taxes or placing a financial burden on our community. Lease certificates are long-term financial commitments used exclusively to finance new construction and must be repaid from the district’s operating budget (using existing funds for debt repayment).

“In simple terms, the issuance of lease certificates means that the district leases the building to the bank and will make the payments. The district will pay $3.2 million per year over 20 years. Once all payments have been made in full, title will pass from the bank and the district will have full ownership of the building. Given the District’s solid financial situation, we obtained a fixed interest rate of 3.48% despite unfavorable market conditions.

“Lease certificates would be reimbursed through the district’s operating budget using transportation savings resulting from a new neighborhood school in the 5th Ward. More than 500 students will no longer have to be transported by bus to other schools, resulting in significant savings in annual transportation costs. These savings will be reused and used to make most of the necessary debt service payments.

There are many more details in the 160-page “official statement” filed with the Securities and Exchange Commission, a document required for any public offering of municipal securities to inform potential investors of the risks and benefits.

He explains that :

  • Raymond James & Associates was hired by the district as a councilman and prepared the statement.
  • Chapman and Cutler of Chicago has been retained as the district’s bond advisor.
  • The lease is held by Zions Bancorporation, NA, Chicago.
  • The $3.2 million annual payment is the amount the district expects to save after eliminating its buses.
  • The filing, which also contains the district’s 2021 annual audit, shows that the school currently has a strong financial position and a good financial maintenance record. The rental certificates have been assigned an Aa2 rating, which is the third highest long-term credit rating assigned by Moody’s, meaning that it considers the certificates to be high quality fixed income securities with credit risk. very weak.
  • The Illinois State Board of Education assigns each district a financial rating ranging from one to four, with four being the best. District 65 went from the watch list in 2016 to 3.9 in 2021. From 2018 to 2020, it was at 3.8.
  • “The certificates were offered for sale by the District in a competitive public sale on March 29, 2022. The highest bid submitted at the sale was submitted by Mesirow Financial Inc., New York.”
  • The district awarded the contract for the sale of the lease certificates to Mesirow for the price of $44,338,917.95. This figure reflects the face amount of the certificates, $38,315,000.00, plus the initial issue premium of $6,300,935.40, and less the subscriber’s discount of $277,017.45.

The report also cites some warning signs:

  • “Although preliminary costs have been projected by the District’s consulting architects, not all construction contracts have been awarded by the District. No guarantee can be given that the cost of carrying out the project will not exceed the funds available. »
  • He also warns that Illinois finances are extremely poor, including debt repayment on pension funds, and that this could affect the project.
  • And another danger looms if there are further problems with COVID-19.

Summary of the funding structure

In an interview with the Roundtable, Obafemi said that while the district can pay off the $44 million debt over time using transportation savings, the district must start paying interest on the larger amount. late this year.

In order to have enough to pay the interest on the loan, he included the interest as part of the borrowed money, known as interest capitalization.

If selected, PFM Asset Management will handle the arbitration for the district. Obafemi explained that a government entity can borrow money as a taxable or non-taxable instrument; this money is non-taxable.

For investors, he continued, tax-free instruments are attractive because they don’t have to pay federal tax on the money they make from the investment. Instead of borrowing money and leaving it in an account, the IRS allows government institutions like the school district to invest that money in their project through a process called “arbitration.”

“Arbitration means you won’t borrow money so you can earn interest instead of using it for a project, it’s equal interest that you are allowed to earn,” Obafemi said. “[PFM’s] The specialty is keeping ourselves honest to make sure we don’t violate that section of the IRS rule that pertains to arbitration management. They monitor and they give us a report every month to make sure that we are spending the money according to a given schedule. So we don’t just earn interest, we use the money for the project.

It was unclear how much PFM would earn from this contract or how its fees are structured.

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