As townspeople continue to debate the merits of a new elementary school online and in this paper, town committees have begun to examine how they could best pay for it. There is good news in the latest numbers, but the inevitable jump in taxes for most homeowners would be a heavy lift.
On Monday morning, the five-member Capital Planning and Investment Committee (CPIC) had its first look at the consequences of several schemes for financing school and other debt through fiscal 2029. The models were prepared by Selectwoman and CPIC member Alice von Loesecke, Town Administrator Tim Bragan, and Finance Director David Nalchajian, with help from the town’s bond counsel.
The good news is that the town appears able to pay for a new school as well as six other major capital projects in its five-year plan without endangering its stellar Standard & Poor’s AAA credit rating. The latest scenarios also show how contributions from town and school funds during the first five years of the new school’s debt service could dramatically lower the projected peak tax increase attributable to the new school to between 11.5 percent and 13 percent of fiscal 2018 bills, instead of the widely cited 16 percent of early estimates.
But no matter how the numbers are run, paying for the new school plus six other capital projects would be expensive, requiring a total tax increase of 12 percent to 14 percent over the current fiscal year bill, an increase that would begin in 2021 and last through 2023 before leveling off and then starting to fall in 2026. For example, the owner of a $560,000 single-family home—the median assessed value of a Harvard house, according to Press calculations—would see a peak increase in his or her annual tax bill of roughly $1,300, or $110 per month before declining.
The worst-case scenario
These new projections, provided to the Press by von Loesecke on Tuesday, assume the town’s cost to replace Hildreth Elementary School would fall between $35.1 million and $35.8 million, a number provided to the Press last week by School Superintendent and School Building Committee Chairwoman Linda Dwight. In what von Loesecke described to the Press as a “worst-case scenario,” the town would first borrow the higher amount by issuing a 1-year bond anticipation note (BAN) at 3 percent interest and then replacing it with a 25-year municipal bond at 5 percent. Lower interest rates or earlier bonding could lower the cost of financing. The scenario also envisions that the School Committee and CPIC would partner to contribute $2 million over five years toward principal and interest on the loan. A further assumption is that the six major projects in the five-year capital plan will be approved by voters: an expansion of Hildreth House, construction of a new DPW facility, development of a new town well, an ADA-accessible front entrance for the old library, and the purchase of two fire trucks. They do not include the annual increase in the levy limit allowed by Proposition 2½ that the town typically adds to the prior year’s levy.
Whether a new school is built, however, depends on Article 25’s approval by a two-thirds majority of voters at Annual Town Meeting Saturday, May 5, followed by a majority vote on a ballot question at Town Election May 8. But meanwhile, Bragan has been urging the selectmen and the school, finance, and capital boards to meet and hammer out an approach that all four committees could support to help voters understand the financial impact. That meeting is scheduled for Tuesday, March 27, at 7 p.m. in Town Hall.
“It is complicated!” von Loesecke wrote in an email to the Press. “We are hoping that after we choose a funding option next Tuesday there won’t be as many variables, so it will be much easier to describe the impact to everyone.”
CPIC deliberates
At their Monday meeting, CPIC members grappled with three questions: What would be the best way to finance the new school? How much could CPIC contribute from its Capital Stabilization and Investment Fund to pay down a portion of the debt each year? What further steps could the committee recommend to further reduce the tax burden?
CPIC Co-Chairman John Seeley said that after reviewing the various scenarios, he agreed that issuing a one-year, short-term BAN followed by a 25-year municipal bond was the most cost-effective approach available, an assessment shared by his colleagues. While the monthly payments on a 30-year bond would be lower, the additional five years would cost the town another $4 million. A 25-year bond issued at the start of the project would be the least expensive option, Nalchajian observed, but is most likely not an option because federal law requires 10 percent of the bonded amount to be spent within a project’s first year. Von Loesecke said the School Building Committee estimated that between $3 million and $4 million, roughly 10 percent of the total loan, would likely be needed to pay first-year construction bills, but the committee is awaiting a cash-flow projection from the project manager, Tom Murphy of NV5, to be certain.
As for the town’s AAA bond rating, von Loesecke told committee members that although school and other debt could raise the town’s total debt service to more than 15 percent of its operating budget—a potential red line for Standard & Poor’s—other factors, such as the wealth of the town and its highly regarded management controls, acted in Harvard’s favor.
Taking the sting out
Much of Tuesday’s meeting was devoted to discussion of how to take the sting out of higher taxes by using money in the capital fund for principal and interest payments during the most expensive first five years of the project. Seeley said that his own back-of-the-envelope calculations had convinced him that CPIC could recommend a contribution of $1 million spread over four or five years. The School Committee is already considering a $1 million contribution and at Monday’s meeting discussed how that amount might be spread over five years. But the committee has not yet voted on the matter (see “School board ponders putting Devens money toward new school” in last week’s Press). The School Committee has the authority to earmark some of the annual payments Harvard receives from MassDevelopment to educate Devens students, but the capital committee has no such authority over the town’s Capital Stabilization and Investment Fund. The committee can recommend how fund dollars are used, but only Town Meeting can decide.
Nevertheless, Seeley estimated Tuesday that the fund would have a balance of $2.5 million at the start of fiscal 2019, a number confirmed by Nalchajian. Free cash, money remaining from the prior fiscal year, is expected to average $700,000 per year for the foreseeable future. Provided the town continues to deposit free cash in the fund each year, there should be enough money to contribute to the school project and continue to pay for the several smaller capital requests the committee receives each year. Seeley suggested that CPIC could also use capital fund money to pay cash for a three-phase, $900,000 plan to improve town roads starting in fiscal 2020, as well as the $600,000 purchase of a fire truck in fiscal 2023. Removing both from the debt schedule would help lower taxes in the critical years between fiscal 2021 and fiscal 2026, when town debt would be at its highest.
Large fund balances a risk
Teresa Jardon, one of two citizens-at-large on the committee, said she was concerned that leaving large balances in the capital fund for any length of time would draw the unfavorable attention of voters. When the capital fund balance exceeds $1 million, as is currently the case, she said, taxpayers may push back, asking why the town isn’t paying down existing debt or making a larger upfront contribution to the school project. Von Loesecke responded by noting that using cash to pay off small debts whose interest is 2 to 3 percent when there’s a big debt on the horizon whose interest would likely approach 5 percent didn’t make financial sense. And emptying the fund would hinder the town’s ability to pay for the other capital requests the committee can expect in coming years. Seely agreed, noting that this year’s expected $3 million-plus capital fund balance has allowed the capital committee to recommend that all fiscal 2019 nonmajor projects, which total $684,798, be paid for with capital fund savings. “We should do as much as we possibly can,” said citizen-at-large CPIC member Nate Finch. “I don’t want to have money in the bank and people leaving town.”
In addition to worrying about the large capital fund balances of recent years, Jardon said the committee should expect to be asked at Town Meeting why capital funds were being used for the school project when the town was already borrowing up to $35.8 million to support it. Von Loesecke responded that a capital fund contribution should not be seen as tied to a specific project; it should be seen as a contribution to the entire debt schedule, she said. One could say, “We’re taking on the debt for the Hildreth House for the first four years,” she said. Or, “We’re paying for the DPW building for the first four years.”
CPIC Co-Chairwoman and School Committee member SusanMary Redinger agreed: “Free cash [in the capital fund] is the people’s money,” she said. “We’re giving it back to them … using it in the best possible way to smooth the debt.”
