To mitigate 26 percent increase in project cost

Move money around, pay higher interest rate on bond

Tue, 05/22/2018 - 2:00pm

Lynda Clancy

May 21 in the school district offices of Camden-Rockport’s SAD 28, with financial director Cathy Murphy, bond adviser Joe Coutera, SAD 28 Board Chairman Matt Dailey and Superintendent Maria Libby. (Photo by Lynda Clancy)

CAMDEN — The Camden-Rockport School Board is warming to a fiscal solution following news that the new $26 million middle school project is $5.82 million over budget. At a May 21 special meeting, the board agreed to cut 10 percent from the project, perhaps eliminating the auditorium and new playing fields, changing the roof line, and not outfitting fifth and sixth grade classrooms with a full complement of science equipment.

They also are hoping to sell their $25 million bond at a $3 million premium, using the first bond payment to pay for project costs instead of loan repayment, extend the life of the bond, and other SAD 28 general fund moneys to get the school built within the anticipated timeline — with doors to open in September 2020.

The SAD 28 School Board meets again tonight, May 22, at the Camden Hills Regional High School Lecture Hall, at 6 p.m. for the mandatory annual budget approval public hearing. But this year will be different: The School Board is now, earlier in the day, writing motions to accommodate ideas produced at the May 21 meeting to accommodate shifting money in the SAD 28 2018-2019 budget.

At tonight’s meeting, there is already a proposal to move $275,000 from fund balance to contingency, and to use that money for school construction.

Then, School board Attorney William Stockmeyer is advising to ask voters to approve moving $1.3 million into “other expenditures,” an account that is school board contingency and used to cover myriad operational and capital costs as they arise.

There is also a proposal to use $60,500 set aside to pay for the existing middle school floor that was water-damaged in 2017.

Tonight’s meeting is important because taxpayers are to consider not only a $15.7 million budget to run the elementary and middle schools in Camden and Rockport, but votes will also determine if the first step in addressing the new school cost overruns are acceptable to the taxpayer.

Annual budget meetings are notoriously under-attended, with school budgets hammered out in March and April, formally presented at public hearings in May, and then placed before voters at the polls at annual town meeting, this year on June 12.

The problem

The cost of building a new 84,300-square-foot school has increased 26 percent above what voters approved in June 2017, SAD 28 district administrators, board members and even the bond adviser are scrambling to meet deadlines, including a deadline from the district’s general contractor — if hired — Ledgewood Construction. Ledgewood has advised the maximum that can be cut from the project, as currently designed, is 10 percent; otherwise, it’s a whole new design.

In the original $26 million project budget, construction for the new school, to be built on Knowlton Street, had been set at $22,321,850.

But construction bids returned May 16 came with much higher price tags.

Ledgewood Construction submitted a base construction bid of $28,147,700, while PC Construction Company submitted a based bid of $29,778,000.

SAD 28’s bond adviser, Joe Coutera, was to distribute the bond to approximately 20,000 potential buyers, with a deadline of opening them on May 30, at 11 a.m. That $25.2 million bond is now being considered by Coutera, as well as SAD 28 Attorney William Stockmeyer, of the Portland based firm Drummond Woodsum, as a candidate for being sold at a premium.

This is selling the bond at a higher value, with a higher interest rate; therefore, the return on investment for whoever buys the bond is more. It also means the taxpayer in Camden and Rockport pays more to finance the project by extending interest rate payments over the course of the decades.

This would be attractive to buyers given that the district is considering pushing the life of the bond from 20 to 21 years (the state of Maine does not allow bond paybacks to go beyond 25 years, Stockmeyer told the school board), meaning more money returned to the bond buyer over the long term.

In taking this approach, the district would also delay its first bond payment by one year, freeing up approximately $1.3 million of cash to put toward the new school construction.

It is a complicated formula and depends on whether the market actually wants to purchase a premium bond from SAD 28 (Camden-Rockport taxpayers).

The entire project is funded by Camden and Rockport property owners. The state is not funding anything.

The proposed solution

To cover the 26 percent project cost increase the proposed solution is to:

1) Cut 10 percent ($2.6 million) in costs from the project, removing features, such as the auditorium, new playing fields, and fifth and sixth grade science equipment.

2) Raise $3 million from selling the bond at premium, and then turning that money immediately back to the project. This, in effect, is raising the interest rate that is paid back over the bond lifetime, and placing more of a fiscal burden on the taxpayer to pay it back.

3) Delaying the first bond payment of $1.3 million and turning it back to project payments, but making the first interest payment (anticipated at $750,000)

Bottom line for the taxpayer

According to SAD 28 Finance Director Cathy Murphy, the formula as worked out this past winter had it that SAD 28 would borrow $25.2 million through a regular bond, and ultimately, over 20 years, pay $8.6 million in interest. That was based on a 3.5 percent interest rate.

That would make the total new cost of the bond approximately $34 million.

However, if SAD 28 secures a $3 million bond premium, then the interest rate payments will increase by $1 million, making total interest payments of $9,597,875 and a total project cost to be $34.5 million.

There is another $1.1 million to be added to both figures, given that the district also tucked that money into capital reserve over the years to help pay for the new school project.

Where to cut, how to proceed

The SAD 28 School Board convened in the conference room at district offices at Lions Lane for a two-hour meeting Monday night. The first hour was spent analyzing the problem and discussing how bonds are structured.

Superintendent Maria Libby submitted various scenarios to the board, saying: “There’s noting critical about these scenarios, but are some ways to skin this cat.”

While Oak Point architects and Ledgewood contractors are meeting with school administrators to value-engineer the project, some school board members insisted that they wanted to be included on the decisions of what to cut from the project.

Board members wanted to know why the bids came in higher than budgeted.

The architects responded that electrical bids had been higher because no subcontractor expressed an interest in the job.

Site work is considered costly, itself carrying a $3 million price tag because the soils are challenging, they said.

Also, the labor market is tight, steel prices and material costs are 25- to 30 percent higher than two years ago.

Stockmeyer and Coutera said the spring has been challenging for other building projects, including schools.

There was little conversation at the meeting about cutting square footage of the existing design, and most board members agreed they wanted to forge ahead with the project as planned. They were advised by the architects and Stockmeyer that building costs could increase by another $400,000 to $500,000 within the next year, given market conditions.

“Delaying does not help us,” said Oak Point Associates architect Rob Tillotson.

Stockmeyer said the market is “resettling at this level,” and warned it may be higher in the future.

He advised the board to be transparent with the public and said, “ there a way to achieve the project in reasonable financial parameters,” and decisions could be made with the board’s discretion as opposed to going back to the voter.

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