Is now the time to pay the school district debt to the retirement system?
The Janesville School District has a similar situation, except that the balance is in the millions of dollars.
The district has made the minimum payment on its “accrued liability” to the Wisconsin Retirement System for about two decades. The result? The district will owe more next year than it does this year.
If nothing changes, the district’s $16.92 million liability this year will have ballooned to nearly $22 million by 2026.
Nearly every other local governmental unit—cities, counties, villages and towns—incurred this liability in the early 1990s when the state Legislature increased retirement benefits.
The city of Janesville and the Milton School District, among many others, paid the liability off early.
All the other school districts in Rock County have paid it off or are accelerating their payments, said Janesville schools Superintendent Karen Schulte.
Janesville has done nothing.
A consultant briefed the school board on the situation in January 2009 after board member Kevin Murray raised the issue, but nothing was done.
Former Superintendent Tom Evert retired in February, and former business manager Doug Bunton retired in June, which might account for some of the inaction.
But Murray has brought up the issue at numerous board meetings over the past year with no visible effect. He tells board members that without a change, his 2-year-old granddaughter will be paying off this liability when she’s 50.
Murray said three other board members favor some change, but that’s not a majority on the nine-member board.
New district CFO Keith Pennington said he had intended to get the issue on the board’s agenda this month, but a more urgent budget problem gobbled up his time and the board’s attention. Now, a board discussion is tentatively scheduled for January.
Meanwhile, another year is passing, and the district is making the minimum payment of $829,968. The state assesses the interest at the end of the year. This year, the interest is $1.25 million. So the district will owe more than $17 million in 2010, an increase of $425,000 from what it owed in 2009.
The city of Janesville paid its liability off a few years ago by increasing payments and then borrowing money, said Herb Stinski, the city’s former finance director.
The cost of borrowing money was lower than the state’s 7.8 percent interest rate on the WRS liability, so the city appears to have saved a lot of money.
The city structured the loan so as not to affect taxes, Stinski said.
The math looks simple, but the school district’s Pennington is not ready to agree that paying off the liability faster is the right thing to do.
One possible complication is the district’s bond rating. Pennington said he needs to find out if taking out a “hard debt” loan to pay off the “soft debt” liability would harm the district’s bond rating. A lower bond rating means the district would pay higher interest charges in future bond issues.
According to a December 2008 district memo from Bunton to Evert, a consultant reviewed the situation in 2000, “and it was determined there was no advantage to the school district borrowing funds to pay off the unfunded liability.”
Bunton wrote that if the school board was interested, he would recommend an independent consultant to come up with a borrowing plan. The board held an information session a month later but never acted.
Pennington said the issue is not as simple as it might seem.
“You also have to consider, do you have the cash flow to support (paying it off) and remaining cash flow to support other needs,” Pennington said.
Schulte said she’s frustrated that the district doesn’t have a plan, but it’s up to the board to tell the administration how it wants to proceed.
Stinski, now a member of the WRS Board, has been prompting Murray on the issue. He said it really is as simple as it seems. The district probably can borrow money for interest in the 5 percent range, Stinski said, raking in savings when compared to the state’s 7.8 percent rate.
Stinski said there’s a slight risk to paying off the liability: The Legislature could pass a law to make the liability go away, or the state could lower the interest rate. But the state studied the situation this year and made no change to the interest rate. Another interest-rate review is not due for three years.
With the losses the state Employee Trust Fund took in the stock and bond markets over the past two years, and given that many others have already paid off their liabilities, there is little incentive for politicians to make changes, Stinski said.
While accountants might say the liability is not a hard debt, Murray said those words don’t change one fact: “You have to pay it back.”
Murray notes that the board is expected to be desperate to find budget savings in the year ahead. “And if we can save a half a million dollars in interest, there’s some.”