By STEVE SOUTHWELL
In May, voters within Lewisville ISD will go to the polls to decide whether to approve $737.6 million in bond financing for capital projects in the district. While that dollar figure is large, the level of debt both before and after the election are very comparable to other local districts and districts of similar size to LISD.
Previous articles have explained the process by which the Facilities Advisory Committee evaluated the district’s facilities and needs, and proposed the 2017 bond program.
The Lewisville Texan Journal has obtained current debt information from the district as well as forecasted issues and tax rates for the bond package if it passes. Here, the LTJ explains what the impacts will be if it passes, and how the district compares to other local school districts.
Quick school finance primer
Texas school finance is way more complicated than we can hope to explain here. But to understand why bonds are used, it’s helpful to at least have a simplified view of the system.
In Texas, school districts have two major budgets with separate funding sources and legal expenditures. The larger of the two budgets is the maintenance and operations budget which pays for things like teacher salaries, utilities, supplies, transportation, and basic maintenance. The smaller one is the interest and sinking fund, which is used to pay off debt for the purchases of land, buildings, and equipment with useful lives of several years to decades.
That M&O budget is funded by local property taxes, the State of Texas, and to a much smaller extent the federal government. Local property taxes are capped by the state at $1.04 unless local voters approve more. Lewisville ISD tried to raise that rate to $1.06 in 2010, but voters rejected it, and with shortfalls in state funding, the district had to reduce its teaching staff with contract buyouts for hundreds of teachers.
Many taxpayers believe that when their home values go up, the district gets more money, but that is not the case. The Texas Legislature switched to a formula in 2007 that cut the M&O tax rate in every school district by about a third, and set state aid to districts at a fixed amount per student. The formula actually uses weighted average daily attendance, but for simplicity, what you need to know is that as the school district’s property tax collections go up, the state sends a smaller contribution to offset it.
Under certain scenarios, local tax dollars not only reduce state aid, but can flow to the state for use in other school districts. Many school districts sued the state, arguing this is an unconstitutional statewide property tax, and that it takes away all local meaningful discretion on tax rates.
The I&S fund, on the other hand, is entirely funded by local taxpayers via the I&S portion of the tax rate. If property values go up, there is a little discretion to lower the rates, so that the district collects just enough to pay that year’s debt payments and set aside a reserve just in case of an economic downturn or other emergent situation. Beyond a point, any rise in property values is not a windfall for the district. It can only be used to pay off existing debt, and the rate has to go down if too much would be collected.
In Lewisville ISD, that was the situation for the 2016/17 budget year. Not only did property values grow, but the district refinanced some existing debt at lower interest rates, saving money and lowering required payments. The school board dropped the I&S portion of the tax rate from $0.4367 per $100 of valuation to $0.38.
State law does not allow that money to be used in the M&O budget at all.
There is a relationship between the M&O and I&S portions of the district’s budget. Investments in new buildings and equipment can drive savings on maintenance and utilities, compared to inefficient older facilities. Conversely, sometimes new facilities require new personnel and add new costs.
Each year, property owners get a tax bill from the county that includes their city, county, and school district taxes. Lewisville ISD’s current combined tax rate is $1.42 per $100.
School districts borrow money by selling bonds. Bonds are similar to a mortgage, but instead of having a single creditor like a bank, the bonds are sold in financial markets to investors. They pay the district the face value of what the district needs to borrow. In exchange, the district promises to pay back the amount it borrowed in yearly payments, plus interest.
Investors like to buy school district bonds because the State of Texas guarantees that the investors will get their money back. The interest they earn on the bonds is exempt from federal income tax.
Just like a prospective homeowner’s bank would check a credit score before writing a mortgage on a house, bond buyers consult credit rating agencies like Fitch, Moody’s or Standard and Poors to see how creditworthy a school district is. Lewisville ISD’s most recent rating from Fitch is AA+, but because its bonds are guaranteed by the state’s Permanent School Fund, they are rated AAA, the highest rating offered.
These high credit ratings allow school districts like Lewisville ISD to borrow the money at lower rates than other borrowers. Current forecasts use conservative estimates of 3.75% for any bonds sold in 2017, and 4.5% for bonds sold in subsequent years. Hilltop Securities, the company assisting Lewisville ISD with the bond sale has written that market conditions now are actually for lower rates than these.
For long-term assets like buildings, Lewisville ISD pays back the bonds over 20 years. It uses much shorter-term bonds for things with short lifespans. For instance, the proposed bond package calls for 99.1 million for technology, so the district’s Chief Financial Officer Michael Ball has set up the repayment schedule so that $99.1 million in principal is paid back in the first five years.
Ball says that Lewisville ISD’s short repayment schedule on its bonds is the most responsible borrowing he has seen in his 20 years in school finance. He said that other school districts finance bonds for longer.
In Texas, in order to sell bonds, a school district must first get approval from the voters. Once the voters approve an amount, the school district then figures out how much it needs to borrow each year to finance the construction and other projects it needs to do.
Each year, before a district can sell bonds, it must first get approval from the Texas Attorney General by proving that it can pay back the money from that bond sale and all prior sales without raising its tax rate higher than $0.50 per $100 valuation.
Current and future debt loads
Lewisville ISD currently owes about $1.09 billion in bond debt. Much of that is from the 2008 bond authorization, but voters also approved bond elections in 2005 and 2001 and years prior. The currently proposed bond authorization is for $737,550,000.
It would be incorrect to add the two amounts and say that Lewisville ISD will owe $1.82 billion if the bond election is passed.
The reason is that Lewisville ISD will not sell all of the bonds at once. Current forecasts call for selling some each year for the next five years. The school district also continues to make the payments on its existing debt at about $117 million per year. Its current schedule has it paying off all of its existing debt by 2030.
If the forecast sales and payments provided by Lewisville ISD are correct, then the district would hit its maximum outstanding debt amount in 2019. That number would be approximately $1.43 billion.
These amounts are larger than most voters regularly deal with, so it can be useful to compare school districts, and look at the amount of debt per student and the ratio of debt to the property values.
In the chart above, showing Lewisville ISD and some of the surrounding school districts for comparison, Lewisville is towards the lower end of the group with debt of $20,399 per student. If voters approve the bonds, and they are sold as forecast, then debt per student would reach a high point of $26,676 per student in 2019, which is still on the low end of the group.
Student enrollment growth is highly correlated with debt per student. In districts with rapid growth, more schools have to be built quickly. Lewisville ISD had 3.84 percent growth between 2010 and 2015.
It is important to note that these figures were based on data from 2016 property tax values, and debt information from the Texas Bond Review Board. The other districts may take on more debt or pay off debt in the coming years, so this is only valuable as a snapshot comparison.
Another helpful way to look at debt is as a percentage of taxable property value. Right now, Lewisville ISD’s debt is 3.84 percent of the district’s total taxable property values of $30 billion. It is forecast that by 2019, the district will have $36.6 billion in taxable values. The higher the taxable values, the more ability a district has to pay off debt. Higher taxable values mean lower tax rates needed to pay off the debt.
Lewisville ISD is in the middle of the comparison group, which ranges from 1.36 percent for Carrollton Farmers Branch to 6.65 percent for Denton ISD. Even though LISD’s debt will be going up, it is currently forecast that its debt-to-value ratio would go down to 1.67 percent due to rapid increases in taxable property values.
Tax rates are set each year by the Board of Trustees, usually in August. By this time, the appraisal district has a certified tax roll showing how much property value is available to be taxed.
The real estate market in North Texas has been on a rapid rise in recent years. Lewisville ISD forecasts its value growth at 9.5 percent for the coming year, and 6 percent the year after, declining to a conservative norm of 2 percent for the remaining years. If these growth rates hold, and the bonds are sold on the schedule that Ball and the district forecast, then the district would raise taxes slightly in the first year from $0.38 to $0.387. In 2019, it would go up to $0.4210, and climb a bit each year until it peaks in 2022 at $0.4465.
The forecast then shows the tax rate dropping a bit each year, coming back near the current tax rate around 2028, then taking a steep drop. History suggests it is likely the district will need another bond election in 8-10 years to take care of needs that develop after the bond authority is exhausted.
Senior citizens over 65 who have filed for the senior citizen exemption with the Denton Central Appraisal District will not see an increase in taxes, because their rates are frozen.
Uncertainty is met with oversight
Financial markets, interest rates, property values, enrollment growth and construction costs, all key to accomplishing the bond program’s objectives, have uncertainty. A bond program is built on assumptions and forecasts, but situations can change.
The district’s elected trustees must individually approve each bond sale and each construction project or major purchase. Ball, the district’s finance staff and consultants, and their construction staff will have to assess all of the factors each year and adjust the pace of the bond sales or projects either to avoid spending too much at once, or to take advantage of opportunities that may arise.
At the meeting on Monday night, April 10, the board of trustees cancelled a package of construction projects previously scheduled for this summer. Those projects would have updated some campuses using some of the remaining bond money from the 2008 authorization. However, Ball told the board that he felt that the costs of the work were higher than they should have been, and that the projects should be rebid. Because of the timeframe for the projects that have to be done during the summer, they will not be able to be done this year, and will have to wait until next year.
With the number of projects in the current program, it is likely there will be shifts like this through the years that could affect the forecast debt and tax rates to a small degree.
At least two of the projects proposed with the bond program have been controversial to Lewisville residents. The plans to retire Hedrick Elementary, and the plans to relocate College Street elementary have drawn opposition. While the board and administration are likely to prefer to stick to the plans approved by the FAC, it is at least possible they could still modify plans based on political changes or stakeholder feedback.
The 2008 bond program did have changes along the way. For example, the district had planned to build two new middle schools, but only built one. It had not planned to rebuild Lewisville High School. That project became necessary when updates needed to be done, but asbestos was found, and it increased the cost to the point where it was more cost-effective to rebuild.
For more information
The Lewisville Texan Journal put together a spreadsheet with all of the above information including comparisons of districts, paydown schedules for current and proposed bonds, all of the charts shown here, and links to sources for the information.
Lewisville ISD provided a chart showing forecast future borrowing, tax rates, and payments.
Lewisville ISD has a chart showing a comparison of its debt load with other school districts.
The Texas Bond Review Board has a searchable listing of school district debt.
For insight into Lewisville ISD’s student population and growth rates, you can review the 2016 Demographic Study.
Lewisville ISD has put together an informational website about the bond program here.