One more illusion

by Loren Martell

Ilustration by: T. Heinonen
Ilustration by: T. Heinonen

Yes, I’m back with the Red Plan — not out of love, hate or popular demand.  The Red Menace is being resurrected because it remains news.  What happened ten years ago once again dominated the discussion during the March, 2019, school board meeting.   

The March meeting actually started off a fairly nice note, with a group of student musicians playing a mini concert for the Board.  After that, things moved along at a pretty good clip by school board standards.  During some of the meeting’s business — votes to accept department grants and other routine items — I leaned back and let the pronouncements, pontificating platitudes and general verbosity of our elected leaders recede into the background, like mosquitoes outside a screen door.

Eventually, however, the evening’s relatively smooth ride reached that vexing spot where grit often starts crunching in government gears: the Business Committee.  The budget issue that sparked a lengthy Board debate this evening was, on more than one level, Red Plan-related.  Despite all the narratives emanating from the group that has controlled our school district all these years, the shabby condition of the district’s finances is directly related to its huge, misguided facilities investment.  In spite of millions more pouring in now from a big jump in local tax revenue and more money projected from a spike in State aid, ISD 709 is STILL projecting a budget deficit for 2020. 

The dire condition of the budget described during this evening’s discussion was astounding.  Without all the additional funding, ISD 709 would have been facing a boardroom massacre.  I’m not sure enough cuts could have been made.  If our improvident district hadn’t been bailed out by millions more in operating revenue, with its next two-year teachers’ contract already signed and locked in, I believe ISD 709 would have careened into statutory operating debt.  On the first day of the new fiscal year — July 1st — the money problems of our public school district would have started getting more attention from the State of Minnesota.

 
    Hard to undo the handiwork of fools 

Of all the risks run during the Red Plan’s high-stakes gamble, the most foolish of all was implementing a financial scheme that robbed money from the district’s general fund to pay for facilities.  This ill-conceived scheme was a sure-fire recipe for financial disaster, yet the human race has a mystifying penchant for perpetuating irrational behavior.  Sometimes making a foolish move only tempts us to keep laying one loser scam on top of another, as we try to find our way out of trouble.  

During this meeting, the Board debated an Administration recommendation to reduce the amount of money (now about $3.5 million a year) coming out of the fund to pay Red Plan debt in the short term.  Administration’s theory was that this move would “free up” about $700,000 a year to help ease the budget crunch.  In order to achieve this goal, the recommendation was to extend payments out six years longer.  It is important to note that freeing up $700,000 over the next ten years ($7 million total) was not going to reduce the amount of money eventually coming out of the general fund to pay Red Plan debt.  No debt was being retired.  In fact, the cost of refinancing and restructuring the debt actually added $4.3 million more to the total amount that would eventually be drawn from the operating budget. 

Those money worries, however, would be shifted to the shoulders of a school board ten years from now.  As I’ve pointed out several times previously in this column, the Red Plan has reduced the district’s budget to a shell game.  
Business Committee Chair Sally Trnka did not attend the Business Committee meeting the previous week, but apparently had watched it on YouTube.  She started off the questioning, asking Administration for a clarification of the cost of restructuring this debt--a figure that had been kept so much on the down-low during the Committee meeting, I’d had trouble picking up the exact amount as well.  

Bureaucratic obfuscation continued to cloud this meeting, which I assume explains how the Duluth News Tribune erroneously reported that the proposal the school board was considering would cost “nearly $500,000 more in the long run…” 
The paper’s reporter apparently heard the CFO talk about an “additional investment” of  $493,000, then somehow missed subsequent statements.  
To her credit, member Trnka pressed Administration on the precise cost of this financial maneuver: “My question is: if we are extending this by 5 to 6 years, what will this cost — how will this impact the students who will be in our schools in those 5 to 6 years?”

The CFO, Kathy Erickson, responded in the kind of gauzy lingo used at the Committee meeting the prior week: “The extension of the bond payments would just be shifting those obligations just for those extra years, allowing us the opportunity to have access to the $7 million, currently, in the first ten years.  So, in those out years, that obligation continues to carry on.  But, using those dollars in the first ten years would help us provide stability to keep moving forward, so as we continue on with those debt payments in those future years, hopefully we have done what our obligations and our needs are, so that we can continue to pay those future payments and have those plans so there would not be a negative impact on future years.”  

Unsatisfied, member Trnka followed up: “I’m still struggling with the answer to my question…Can you put this to me in really clear language?  So: if I buy a car on a ten-year loan cycle versus a fifteen-year loan cycle, I’m incurring additional interest costs for those additional five years.  Can you maybe use that analogy to help us understand?”

Apologizing for all “the numbers involved,” Erickson replied that an approximate cost figure was $493,000.  “That is what we would consider the investment--the additional investment, that we would have to be making in value, to access the $7 million now, versus not having access to it.  In a sense, we’re making revenue available to us to utilize now — and, in order to do that, we’re extending that debt instead of taking out a loan, per se, in order to create some fiscal stability in the district…We don’t have very much room for error in our upcoming budget, because we currently do not have a large (reserve) fund balance.  And for us to have this ability to make sure that those things that need to be met, we can meet--to give us fiscal stability, this gives us that tool.  So, that is the purpose for bringing this forward, tonight.  So, I hope that helps clarify.”  

Readers can judge whether or not this explanation clarified anything, but the bottom line definitely remained obscured.  If it wasn’t for the persistence of Board members Trnka and Sandstad, I don’t think the true bottom line in all of this would have ever been publicly revealed.  
Sandstad stepped up next, to pry open the bureaucratic code:  “I just want to clarify what I heard.  So, in today’s dollars, the cost of restructuring the 2009B (bond debt) is $493,000, and, over the course of this, through 2036, that $493,000, with interest, turns into about $4 million.  Is that what I heard you say?”

From what I gathered between the lines, members Sandstad and Trnka had made some inquiries prior to this meeting, because obviously $4 million wasn’t brought up in the previous explanation.  
Put on the spot publicly, the bond broker answered: “That is correct, yes.  The total difference in payments as a result of restructuring (this debt) would be about $4.3 million.”
According to the Red Plan’s financial documentation, the remaining outstanding debt on the 2009B bond is $30,943,600.  $4.3 million added onto that debt equals a 13.9% increase, not a bad profit margin for the bond people, but another loser layered onto a whole series of fiscal losers for ISD 709.  

Pay you Tuesday, for a hamburger today   

Our school board dove into this extended debt debate, with arguments pro and con.  Member Kirby responded to member Trnka’s auto-purchasing analogy: “Tell me if I’m wrong, here — but you could buy your car for ten years, but have no money for gas, or you could pay a little bit (obviously, a relative term) over a longer period of time, and have money for gas.”  

On the other hand (certainly applicable here,) you could find yourself out of gas a decade down the road, with six more years of payments on a ten-year-old car.
Member Sandstad began her comments by thanking “our CFO and the business team,” for searching out “strategies to increase our available revenue, to address long-standing budget issues.”  She said she appreciated that the Board was “coming to a point where we’re finally ready to maybe have some harder conversations about things that do need to change in our district’s budgeting for the long-term.” 

Everyone could hear her building up to an objection, which arrived this way: “With that said, I disagree with the proposal, because I do not want to impose the extension of these payments onto the district, ten years from now.  I think all of us agree that we wish we were not burdened with the $3 million we’re having to spend — $3.5 — out of the general fund…I understand that (the debt on the 2009B bond) is related to facilities money, and I still don’t quite understand why it couldn’t have been handled with levy funds rather than general funds, but that ship sailed a decade ago, and I want to make sure that a decade from now, the ship finally arrives at port — I don’t want to say, ‘sank’ — that would be terrible.”  

A ripple of chuckling laughter went through the boardroom.
“But, on behalf of our future Board, in 2031,”  Sandstad continued, “who will have a great party — having paid off this debt! — I can’t support this restructuring — especially at a cost of $4.3 million.  And so, I know we’ll have to look elsewhere for dollars, in order to balance the current budget, and I’m prepared to do that.”

“Well stated, member Sandstad.”  Member Gorham, generally a man of few words, stated.  He also thanked the “efforts that have gone into this thinking,” but added that the “long-term cost for me, right now, is just too much to take on, thinking of the future.”

Member Trnka spoke next.  She said the Board had given the CFO a “clear directive” to be as “creative as possible,” and that she appreciated the district’s top money manager was trying “to present us with a balanced budget, and that’s really difficult given our current fiscal state.”  She also expressed misgivings, however, about the plan being presented: “I’m just really struggling with taking on this additional debt,” and stretching out payments “longer than (they) already are.”  She pointed out that the district will be looking at maintenance issues on all the Red Plan buildings, and worried about additional debt making it difficult to “approach facilities management and how we pay for it.”  

Member Oswald asked for more clarification of the numbers, and the bond broker repeated earlier claims by the CFO that “a $493,000 investment today would get (access to) seven million over the span of ten years.”  The long-term costs however did not seem to sway member O, initially.  

“The point I’m getting at, unless you can convince me otherwise, is that it doesn’t seem worth it.”  

Member Lofald next jumped out of the gate, filled  with conviction that this fiscal move was legitimate and propitious for the district: “I feel like our budget, right now, is in crisis.  We have no reserve funds to lean back on.  We can all make analogies…We can all talk about car loans and gas money and I think about the same thing.  I think about if I had a medical crisis right now in our family, and I needed to access money somewhere.  We’d be looking for every place, if it meant I could get an extra $200.  I’d be looking at refinancing.  Now, granted, I wish I had lots of money in reserve, but I don’t…I also would tell you I have a lot of respect for our CFO--that doesn’t mean that none of us do — but I actually think that we have a really good team, and I trust that you (our crack financial team) would not let us go down a path that you could not live with…”

Of course our current Superintendent was part of the crack team that led prior Boards down THIS path, and he’s clearly now having trouble living with it.    
The student representatives on the board asked what the freed-up money ($700,000/year) would be used for, and “what methods will be employed to ensure our district does not fall into future debt, if (the Board) agrees to follow through with this extension?”

“I can’t say it ties to anything in particular,” the CFO said about the extra money.  “I wish I could say in specific what that could mean.  It just becomes a tool in regard to helping us balance the budget.”  
As to question # 2, she said: “I think what we have seen in history tells us that every single year we have a lot of uncertainty.  And where we are right now is from multiple years of having to make very difficult decisions…And so, I don’t think I personally can give any assurances…”

The Superintendent added that every year the district has been in “reduction mode,” and forced to balance that reality with a “list of needs that we’re looking at.”  He talked about how hard it has been to keep saying, “No, we’re not going to do that.”  He said that year after year the district “has put off buying buses; we’ve put off buying cafeteria tables; we’ve put off buying technology — any number of things…The need that we have, as a district, is great.”  

The obvious tradeoff of using $700,000/year to meet that great need now is that it denies others the same luxury in the future.  The $4.3 million long-term cost of this fiscal move effectively erases 6 x $700,000 some future Superintendent won’t have to work with. 
Mr. Gronseth will not be the Super affected.  He has already announced he will depart ISD 709 in 14 months, when his current contract expires.   
The surprise of this evening came from member Oswald, who did a pivot and was the swing vote in a 4-3 Board approval of the plan.  Before the vote was taken, member Sandstad made one more plea, in opposition:  
“There’s been talk of ‘savings’ and ‘investments,’ and I’m sure that we could come up with 700,000 ideas to spend that $700,000 a year.  But I want to clarify that $700,000 (of extra money now) is not benefiting us in the long run.  It’s money we’re borrowing from the future, and any idea of ‘savings’ here is an illusion.”

Every word Nora Sandstad spoke during this debate was clear-eyed and true, and I always take heart from hearing someone speak the truth in the boardroom, even if the speaker is on the losing side — almost invariably the pattern.