Fifth Ward School: Cutting it Close
Also a quick exploration on whether you can pay back lease certificates or not and the governing laws around that
If you look at the Board’s financial investment document from the May 20, 2024 meeting you can see that as of March, they had $43,669,867 in the account that contains the funds from the lease certificate.
But according to the January 2024 resolution, which includes estimates from Cordogan-Clark and shows construction cost of $42,097,914 (there is a separate cost of about $6m for stuff inside the building, a non-construction expense).
I wrote about this the other day, but they’re also doing a staggered construction process, which they still haven’t put out for bid and is now two weeks behind. This adds additional risk to the project that you get started and then realize halfway through you don’t have enough money.
They are cutting it really close. In the past few weeks, I’ve spoke with multiple people in the construction industry who have told me that $498/sq ft for a school is on the low end. With that said, the Lincoln Junior High School in Skokie is 124,800 square feet, began work in 2020, and cost $44.6 million or $356/square foot. But the comparison is kind of apples-and-oranges because at 124,800 square feet, you get economies of scale.
Lease Certificates, Continued…
For those who have been paying attention, I written a lot about the District’s funding, which is using a lease certificate, as opposed to a construction referendum, which is typically required by law. Referendums for construction are incredibly common - you can look at this list from the ISBE from 2006-2016, which includes the failed 2012 Evanston Referendum.
Usually the process works like this:
District wants to build a new school. Board passes a resolution.
They hire an architect and construction manager who collects estimates and begin pricing out the total cost of the construction.
The Board then puts a referendum on the ballot for that amount.
The voters pass (or reject) the referendum and the construction begins immediately and everyone gets paid.
That’s absolutely not what happened here. In this case, they rushed to take the money as quickly as they could, without a firm plan in place. They had no estimates or bids, just some drawings from Cordogan-Clark and a prayer. In fact, the evidence shows that Dr. Horton was aware as early as April 2022 that they didn’t have enough money. Yet, neither he nor Cordogan-Clark disclosed this to the Board. So even back then, they couldn’t have started the project, even if they wanted to.
You can view the legal documents here:
Lease Certificate Resolution (March 14, 2022)
Meeting Minutes (March 14, 2022)
The lease certificate contains a couple statements that we now know to be false;
Proceeds of the Certificates will be used to pay for the Project. The Project includes building and equipping a new K-8 school building in the Fifth Ward and improving the site thereof. The District expects the new school building to begin serving students in the 2024-2025 school year. The new school building will place most students within walking distance of a neighborhood school, resulting in significant transportation cost savings. The District estimates savings of approximately $3,250,000 in each fiscal year. The District currently intends to use the transportation savings to pay the Certificates.
The only reason that the District could use a lease certificate is through the Local Government Debt Reform Act. According to Section 17 of the Act, a public body, which includes school boards, may enter into agreements to purchase or lease real or personal property through installments over a period of no more than 20 years. The specific rules in the statute are:
Debt Limits: The district must ensure that the total indebtedness, including the new lease certificates, does not exceed statutory debt limits (Section 17(b)).
Revenue Sufficiency: The district must demonstrate that it has sufficient revenues to cover the debt service on the lease certificates. (Section 15(d)).
Tax Levy: If the lease certificates are treated as general obligation bonds, the district may need to levy taxes to cover the debt service, which could require voter approval (Section 16).
One thing that’s been talked about, including on this newsletter is whether a District can take out funds that technically meet the above criteria but end up costing significant monies out of the general fund. This is the case with District 65. The $3.25m annual payments are a pretty sizable chunk (2%) of the annual budget and there is very little savings from the bussing ($700k vs the $3.25m promised). Is this permissible under the Local Government Debt Reform Act? For one, if the District needs to levy taxes to cover the debt service, then yes, a referendum is required. But on the other hand, if they just cut services across the board or close schools to make up for it - is that still within the law? I don’t know.
Please leave a comment or reach out to me know if you know.
Can They Take the Money and Pay It Back?
This is the question I am asked the most: can the District take the lease certificate, pay it back and then hold a proper referendum to build a high quality fully-funded K-8 school in the fifth ward?
The answer, if you look at the lease certificate is “sort of? not really.” The document says that they can pay back certificates that mature on or after December 1, 2032.
The Certificates due on or after December 1, 2032, are subject to redemption prior to maturity at the option of the District, as a whole or in part, on any date on or after December 1, 2031, at the redemption price of par plus accrued interest to the redemption date.
So, it seems like that is about half of the certificates that can be redeemed early.
However, this doesn’t line up with the resolution passed by the board, which states that all certificates may subject prior to maturity at the option of the District.
Section 8. Redemption. (a) Optional Redemption. All or a portion of the Certificates, if any, specified in the Certificate Notification therefor shall be subject to redemption prior to maturity at the option of the District from any available funds, as a whole or in part, and if in part in integral multiples of $5,000 in any order of their maturity as determined by the District (less than all of the Certificates of a single series and maturity to be selected by the Certificate Registrar), on the date specified in the Certificate Notification, if any, provided, however, that such date shall not be later than 10-1/2 years after the issuance of the Certificates, and on any date thereafter, at the redemption price of par plus accrued interest to the date fixed for redemption.
It’s not clear to me why these do not not line up. The Board did not pass a resolution to approve a lease certificate with limited redemption, they passed a resolution to approve a certificate with full early redemption. So the certificate doesn’t really even match their own resolution. Sometimes I wonder if the District’s lawyers or financial advisors or the Board or literally anyone besides me even reads these things.
If anyone knows anything about this, or if I am wrong, please leave a comment.
Thank you so much for your detailed reporting. I am just sad watching this unfold. When we look at what is MOST important it should be the education of our children. When I see educational scores lagging of any population of kids, I would have hoped that instead of a new school, that creative, and potentially individualized attention could have been given to those that are struggling. The pandemic offered additional opportunities for educators to identify that some children might thrive with non-traditional learning milieus. Combining some of those teaching techniques with more traditional methods might have been a possibility to boost performance. Perhaps even reaching out directly to families to help them overcome any impediments that may originate in the home that would spill over in the learning environment. Instead we are left with a school that is less than ideal, supplanting limited vital green space and uprooting mature trees in an already very congested area. A school whose construction and continued maintenance is supported only by extraordinary pressure on operating expenses that can only be addressed by cuts to staff, unique and special learning programs, and services. This was a school that any sensible person would not have pursued, especially considering the declining enrollment and deteriorating infrastructure throughout the system. I also worry that this shiny new school would become a beacon with unintended consequences, including the acceleration of city-wide tax increases and gentrification, both of which impact the affordability of that section of the 5th Ward.
Also development projects should refer to all project costs not just construction. Those costs are incurred in a similar time frame as the construction cost and often include big line items like interest, architect and construction management fees as well as all the equipment and furniture in the building. The fact that they haven’t evidenced funds to pay for this is a huge red flag. I think the project is under budgeted by over $10 million including this. Inflation alone easily adding 5% to their already stale estimates.