Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Hello, Iszamines. It is still Thursday, January 15. It is 04:03, and we are on our last piece of testimony for the day. We are hearing the report of the State Aid Preschool Construction Working Group. I think we imagined we were going to get started on this a little bit earlier. Please do not worry. This is not the last time we will talk about this. It's just the first time we will talk about this. And I hope our two witnesses perhaps can join us again in the future when we go a little bit, have a chance to go a little bit deeper. But thought it would be helpful to start with an overview of the work that you all were able to do. I know that this is maybe the third or fourth iteration of a school construction working group that we have had. And this committee is particularly interested in existing debt as we work towards solutions for managing that and then maybe transitioning that into a path forward for school construction. So I'll turn the floor over to you two, and thank you very much for your patience and for joining us.

[Rich Werner (Vermont State Board of Education)]: You're welcome. Oh, go ahead, Mike. So anyways, just I I I reluctantly got to chair the committee for a little bit. It was very and it was a really interesting group. There was a lot of lot of information. We did not have a lot of time to work on this. So what we did was we focused on your request, the request of the legislature to talk about the legacy debt. And I think I'm gonna go really quick and just say we did not really have any answer. We felt there we gave some thoughts and some ideas and some considerations for the legislature to use if they should decide to do some consolidation. We felt that I I think a real quick summary, and then I'm gonna let Michael speak to most of it because a lot of it came from him, is when you look at the legacy debt, it is not it wasn't a shouldn't be a huge roadblock to having some consolidation, and it shouldn't be thought of as a bad thing, because if there is a lot of the, more recent, debt is stuff. It was to help out with some construction in in, you know, better facilities that could maybe work into the future and also instead of being an unknown, it's a it's a known debt for what you have. The report just I think we have five or six considerations but has the committees had a chance to review the report or at least look at the summary and I would do I'm going to defer to Michael to talk about the the legacy debt. A lot of it was it came from him and and his his research and then if there's any other questions, I'll jump in but I'm going to mute myself and let Michael take over.

[Rep. Emilie Kornheiser (Chair)]: Before you mute yourself, will you introduce yourself for the record?

[Rich Werner (Vermont State Board of Education)]: Oh, I'm sorry. My name is Rick Werner. My name is Rich Werner. I live in Dover and I am on this state board, state school board, and I was asked by the chair of the school board, state school board to serve on this committee. I from Dover, Dover had some debt some we were I think one of the original groups that borrowed money back in the 70s for a building that we're still utilizing plus we did a pretty big addition in the early 90s that we paid off through Act 60 and I we I have a construction company and a property management. We do construction excavating not on a a big commercial place but for several of the resorts and condos. So I do have some building experience and some experience with the finances of that.

[Rep. Emilie Kornheiser (Chair)]: Great, thank you so much. It's really appreciate you joining us and what you summarized. And I, often, a task force has a very strong singular recommendation. And frankly, the legislature often goes another direction. And so the most valuable thing we can actually be offered is sort of those considerations. They give us a lot to work with. So I appreciate that you have them and I look forward to hearing more from Michael. Yeah, and just so

[Rich Werner (Vermont State Board of Education)]: you know too, we do plan, we will be meeting shortly to kind of go now in the future what there would be for recommendations, and we'll start working on that later this winter, and we will hopefully have some more stuff for you towards the end of your session.

[Unidentified committee member]: Great. Thank you. Yeah.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: And as Rich mentioned, you know, we tried to comprehensively lay out the options for sort of addressing legacy debt. Not all of them are created equal. I think you can kinda see that in the pros and cons that are associated with each option. Those that have more pros are obviously more favorable. So I'll I'll spend a moment kind of at the end of these slides talking about the three that are probably most feasible. But I thought it'd be useful to give a little bit of background to contextualize how big this issue is, which I think in the scope of a very, very large ed fund is is actually quite modest.

[Rep. Emilie Kornheiser (Chair)]: I think that's a very exciting part of your findings.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Yeah. Yeah. Well, you know, sometimes it's good to just put the numbers on paper. So I if I'm allowed here, I'll share my slides that I believe you all have. There's a few points here that speak to some of what Rich just said. So I've shared this for five years now, but this is school construction, the history of school construction as known by the Bond Bank plus Burlington and Windham. What you see in this is that the orange line represents inflation adjusted numbers, adjusted for CPI, not necessarily construction inflation, which might make this look a little bit different, but a huge amount of building in the 70s. And then as Rich mentioned, in the 90s, my understanding is there's some growth in the school age population at that time. There was aid and there was a decent amount of construction at that point. So sort of David Epstein, who also worked with us, characterized this as schools built in the 70s or rather 60s and 70s. Then you have additions in the 90s and then just not that much activity since then other than in recent years, which are that activity is obviously very highly concentrated. To the point, Rich, I think another really key finding or discussion we had as a group was this concept that debt is sort of not necessarily a negative in in is not a negative value. Like if you have debt, that means that, you know, likely the building was being kept up with in terms of repair, replacement, you know, modifications for modern student learning. And one of the reasons that this is so valuable is demonstrated by this chart, which is Northeastern, but this is producer price index for non residential construction goods. And so it's not a perfect index as to what construction looks like in Vermont. In fact, it probably underestimates the scale of the change that we've had. But it certainly shows you here the first conversation I had on this topic was February 2020, right before COVID, or rather right before the declaration of the pandemic. And since that time, prices by this index are at 43%. So if you had taken out debt, back in 2019, you would have paid a fraction of what you'd be paying today for the exact same project. And so that's why a lot of this legacy debt is actually, again, kind of a good thing in a perverse way. So here's a look at the bond bank in terms of what all of our data is showing, it's showing bond deals that we're aware of that are in our portfolio plus Winooski and Burlington to the extent they have their school districts out there that have, you know, like loans with private banks. We're not aware of, we don't track that necessarily. Although I think this represents, you know, 95 plus percent of what's out there. But the first graph here, what you're yep. Seeing Go ahead.

[Rep. Emilie Kornheiser (Chair)]: Do you mind explaining why Winooski and Burlington are sort of slightly outside of the dataset just for I feel like that's helpful context for folks.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Yeah. So with Windham's project, they took a loan with USDA that they received their commitment letter on that right around February, March 2020, which, or actually that might've been a little bit later, but regardless their rate is less than 3% and they received a forward commitment. So that was a really excellent outcome for them. So they, their construction loan is with USDA. Burlington's school district issues, you know, they're a component unit of the city of Burlington. So they issue their bonds through the city of Burlington, which has a very good rating. And so for Autonomy, there's no reason that they necessarily need to use the bond bank. And so they sort of do their own debt. And then for everyone else, the bond bank is helping them finance their bond.

[Unidentified committee member]: Thanks.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: So this picture is debt service over time. The 2026 numbers are a little bit misleading. There was out of the great recession, some special bond programs that had a sinking fund and sort of a bullet maturity. So kind of don't pay attention to that because there are funds on hand to pay that. That would have already been part of Ed fund payments. But what you see here is just under $50,000,000 in annual debt service for outstanding debt at this date in time. And I think this is really important because it obviously compares to 1,600,000,000.0 in Ed Fund sort of operating related costs. And, and, you know, it's just really a fraction. And in fact, our, our portfolio, the, the median amount of budget that is occupied by debt service is like 1.8% or so. And nationally for similarly sized school districts, that's about 5.5%. So it doesn't tell us anything we know other than that, you know, we have underinvestment in these facilities. This is what what- Yep, go ahead.

[Rep. Emilie Kornheiser (Chair)]: Are you about to talk about annual, sort of what annual payments look like? Is that what this next chart is?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: That's what this is. This is aggregate annual payments. The blue is Chittenden and it's organized by county. So the blue is Chittenden County, which is no surprise. That's where Burlington, Winooski, Milton, Colchester have all passed on successfully. Same, these are just the raw numbers. And then I thought this was pretty interesting. We spent some time talking about this summary. So it's a comparison of debt per county as compared to school age population in that county. And again, we already have intuition around this. Chittenden County sort of jumps off the map as 68% of the outstanding debt compared to 25% of the population. But at the same time, the denominator in this should be a lot higher because we have so much under investment in schools. So Chittenden County is probably an example where this is what it looks like when you're keeping up with facilities and everywhere else is not. There's some outliers in Franklin County due to some successful passages of bonds there, and then again, in Windsor County as well. But what I think I'd like the committee to focus on is the middle column here. So if you remove the 10 largest debtors from from our analysis, your residual is only $72,000,000 And that's really, I think, what we're talking about when we talk about legacy debt. You know, you sort of remove Burlington, Winooski, CVU, and you're just not left with that much that is remaining that would be up for consideration. And so I think that was a, you know, a really important part of this analysis. And I don't wanna sort of diminish the the materiality of $72,000,000 But again, in the context of an annual $1,600,000,000 Ed fund, you know, that's quite small. So that Yep, inform go ahead.

[Rep. Emilie Kornheiser (Chair)]: Can you Overlaying the removing the 10 largest debtors with how soon that debt will be retired?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: The yeah. We can kinda see that up here. So the

[Rep. Emilie Kornheiser (Chair)]: I'm sorry. It's the end of the day, so my thoughts are not very linear.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Yeah. So the the definitely, I I think you're the the point you're sort of thinking about here is outside of the 10 largest debtors, does that for that 72,000,000, does that mature in relatively short term? And the answer is yes. And that is demonstrated here. So green and blue are Chittenden County and Franklin County, which are newer projects. And you see they go out much further than everything else. And so these other colors that are sort of stacked up here, you see most of it's pretty much amortized by 2,036 or so. So to your point, yeah, the that pays off relatively soon.

[Rep. Emilie Kornheiser (Chair)]: Thank you. And our

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: school district generally amortizes very quickly. We see borrowers typically do twenty to twenty five years and up until recently, that was mostly level principal payments. So they're paying the same amount of principal each year and debt service step down each year, which is why you see the shape of this going downwards. So it all amate including Burlington. Burlington, I think only went out twenty years with their debt issuance and so that amortizes quite quickly as well.

[Unidentified committee member]: Mark, on this slide that you have right there in front of you, that one by town or by school district?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: This is an interesting one. So the one caveat to the point we made about debt being good given construction cost inflation is that the vintage of the debt does kind of matter. If you have debt outstanding that was issued fifteen years ago, that's like pretty good, but you've probably mostly depreciated those assets that you financed. Whereas if you issued debt four years ago, that's really terrific. That's kind of the best situation. And so thinking about different ways, if it was something you wanted to pursue to help out or remove or to fees legacy debt, looking at the vintage of the debt might be one methodology for that. And so that's what this demonstrates. One of the, you'll see in the recommendations, one of the interesting findings we have is that if you were just to say, okay, listen, we're going to, we're just gonna eliminate up to $5,000,000 of debt for each school district as an equitable, easy to understand policy, that cost would be about $53,000,000 and would eliminate the debt from all but 13 districts. And it just speaks to the fact that there's not that much debt, and that actually is shown here. There's not that much debt on the balance sheet of most school districts, and a little kind of goes a long ways. Like the previous task force reports that have been out there or committees or whatever you wanna call them, Just Sorry. School's school's school's letting out. School's letting out.

[Unidentified committee member]: Yeah. Yeah.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: One thing that is very important is that and the treasurer's office made this point and has made this point previously is that we don't think it's appropriate. You know, we've we've talked sort of about how the bond bank can leverage the state ratings quite a bit more than the state can directly. And so even if and that goes both for new construction as well as the excuse Hang on.

[Unidentified committee member]: Yeah.

[Rep. Emilie Kornheiser (Chair)]: Anyone is welcome on this call with us. It is a public meeting. Children, pets, right?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Yeah. There there's some public comment here. Hey, good. I'm on the I'm on the call. Okay. Sorry. So this issue is quite personal for me. Hey, girls. Thanks. And and and so sorry. Losing my chair with that. And so it's important that it be, an appropriation rather than debt sponsored payoff of any, legacy debt. So I think that just about covers it. I'm, obviously, I'll answer questions with Michael on mute at this point.

[Unidentified committee member]: Hey, Michael, before you move on, if coal fixture shows what, 32,000,000 in debt, but they passed their bond vote for a 100,000,000. So is that just how much they've issued so far?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: That's right. They're phasing the project, and so we'll see that over time.

[Unidentified committee member]: Okay. So how long are they phasing it? Two, three years?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: I think it's longer than I think I'm going off memory here, but I think it's four to five years. And it's a little bit different because it's a campus situation, whereas Burlington was just one and Wounded Sea were both kind of one facility.

[Unidentified committee member]: Yeah. Okay. Thank you. So in the previous slide where you had debt by school district, it was also not included in that. Is that right? By county?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: That's right. Yeah. This is only issued, so not authorized, but unissued.

[Unidentified committee member]: All right. Thank you.

[Rep. Emilie Kornheiser (Chair)]: Michael, did the committee talk about the inventory of sort of construction need and how relevant it might or might not be in this current moment?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Well, we're really thinking about, and this might be a question for Rich, but really thinking about that, addressing that next. This was the first charge of the legislature. I think I would observe that one of the challenges for us is not exactly knowing what the policy direction is on new construction, be it Rhode Island, I believe, had a mantra of newer and fewer or, you know, sort of like whatever the policy objective is, I think that would inform how you how you sort of think about prioritizing certain projects. The bond mech is very mechanical in terms of our interest. We wanna see lowest cost. We wanna see the state's rating be protected. And so those are our considerations, but that is one observation that came out of some of the preliminary discussions.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Feel like I saw a hand. No, I don't remember. Do you still have a question?

[Unidentified committee member]: Yeah, I think I do. Sure, I'll ask it. Thank you very much. So, the percentage of debt Profont has as a whole compared to the amount that we're spending in

[Rep. Emilie Kornheiser (Chair)]: the Ed fund every year,

[Unidentified committee member]: Did I understand you saying we're kind of under investing in our school buildings?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: For sure. I think that's I can definitely make that conclusion both from the debt

[Rep. Emilie Kornheiser (Chair)]: and Hopefully that's the controversial opinion.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Yeah, yeah, as well as I was gonna say the facilities assessment study from a few years ago.

[Unidentified committee member]: So my follow-up question to that is, are there statistics that you have a percent that seems reasonable or what?

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Yeah. I've been I I briefly mentioned it. I briefly mentioned it, but for similarly sized schools, national medians from Moody's, who's a rating agency, John 5.5% of budget that is occupied by debt service. We're for those that have debt, which is not every district, we're at less than 2%.

[Unidentified committee member]: That's right. Sorry. Thank

[Unidentified committee member]: you.

[Rep. Emilie Kornheiser (Chair)]: Any other questions? Thank you both so much. Enjoy your families and your office mates. Think we'll have you back soon and really grateful for all the work that you have done and are continuing to do. Thank you.

[Michael Gaughan (Executive Director, Vermont Bond Bank)]: Great. I was happy

[Rep. Emilie Kornheiser (Chair)]: to