Board agrees to use cash defeasance to guard against ‘wild swings in levy’
Seizing a chance to minimize future levy increases while still trimming the tax rate for the 2015-16 year, the Grafton School Board on Monday agreed to use $600,000 from the upcoming budget levy to pare the district’s debt service.
The board unanimously approved a cash defeasance plan that officials said is designed to stabilize the annual tax levy.
The plan, suggested by the district’s financial adviser Robert W. Baird & Co., calls for using an increase in state aid to prefund existing debt and reduce the levy needed for the 2016-17 budget.
“It’s always good to pay off debt. We need to protect our taxpayers from wild swings in the levy,” Supt. Mel Lightner told the board.
Lightner and Kristin Sobocinski, the district’s director of business services, both recommended the cash defeasance approach, which the board was told is being used by a number of area districts.
In a report to the board, Sobocinski said that July 1 estimates indicate the district will receive a larger than expected increase of $960,000, or 18%, in state aid.
That doesn’t mean the district will receive additional funds, Sobocinski said. However, the aid hike — combined with increases in districtwide property valuation and enrollment due to the addition of 4-year-old kindergarten — is expected to allow the district to decrease its levy by more than $600,000 for the 2015-16 fiscal year, she added.
Although the district could use the levy reduction to focus on a tax-rate cut for the upcoming budget, Sobocinski said that could mean a bigger price to pay next year.
“With an anticipated increase in equalized value and higher revenue limit authority, this could result in a boomerang effect of a spike in property taxes for 2016-17,” she said.
In addition to averting fluctuations in the tax levy, cash defeasance would provide interest savings to the district.
“Essentially, the district would levy an additional amount that would correspond to the increase in state aid in 2015-16 to prefund existing debt,” Sobocinski said.
“This would also reduce the levy needed for the 2016-17 year.”
Cash defeasance is also looked at favorably by credit agencies in rating school districts, Sobocinski said.
Using current projections and a cash defeasance of $600,000, Sobocinski said, the district would need a total levy of $16.92 million for 2015-16 spending, down $39,175 from 2014-15.
Based on a projected 2.5% increase in property valuation, the district’s tax rate would be $11.14 per $1,000 of equalized value, down 31 cents from 2014-15.
For the owner of a $250,000 house, that would mean $76.26 less in taxes to support school spending.
The owner of a $300,000 house would pay $91.51 less in school taxes.
Sobocinski said that if the board chose not to use $600,000 in cash defeasance, the projected tax rate would be $10.75 per $1,000.
“If I’m a homeowner in Grafton, I’m excited that there will be a levy decrease,” Lightner said.
“But we need to be cautious about the impact of future budgets. This is a good planning tool for us to use.”
Board treasurer Paul Lorge voiced support for the cash defeasance approach.
“If we do this, we can pay off 7% of our debt early, and we won’t have the wild swing,” he said.
Caution is also needed, Lightner said, as district officials continue to explore ways to upgrade school facilities in preparation for a possible referendum in spring 2016. The Citizens Facilities Committee has met several times to discuss conditions and consider cost estimates for upgrades ranging from $19.5 million to $60 million.
The committee will make a formal presentation to the board in October, and a final decision on whether to hold a referendum is expected to be made early next year.
Sobocinski said Monday’s decision doesn’t mean the board can’t change its approach this fall. Updates to state aid, the levy and tax rates will be included in the budget presented at the annual meeting Sept. 28, she noted.
After that, the board can review the figures before finalizing the levy Oct. 26.