Vermont Legislature SmartTranscripts:

[Michael Gaughan]: Now we're live.

[Seth Bongartz (Chair)]: We're live, okay. So we're live everybody and today we're just following through and hearing from a couple members of the advisory board on state aid for school construction. This was commissioned by this committee, walked through the legislature a couple of years ago and we had the report I don't know which order two would like to go in this. It doesn't matter to us I don't think so whoever wants to go first.

[Dave Epstein]: Think Michael will start with his

[Seth Bongartz (Chair)]: slide deck and together. Okay you guys will do it together.

[Michael Gaughan]: We have a little routine here we practiced earlier this morning.

[Dave Epstein]: That's fine.

[Seth Bongartz (Chair)]: So before we do that, we'll introduce the committee and then you identify yourselves for the record. Senate Education Committee, hold on January 7, Over there, we have one member absent who has, I think, what's going on, what everybody's getting, sort of the flu or cold or whatever, home for the day. But next to what would have been Senator Ram Hinsdale, have:

[Nader Hashim (Member)]: you, Nader Hashim from Woodland County. Thanks, Lee.

[David Weeks (Vice Chair)]: Good afternoon, Weeks representing Rowland County.

[Seth Bongartz (Chair)]: I am Seth Bongartz from the Bennington Senate District.

[Terry Williams (Clerk)]: Terry Williams, also representing Woodland County.

[Seth Bongartz (Chair)]: Steven Heffernan, Addison County District. So then if you could just introduce yourselves for the record, the name, town, the fact that you're from the task force are from the advisory board.

[Michael Gaughan]: I'll start. Nice to see everyone again this year here. Michael Gaughan, I'm the executive director of the Vermont Bond Bank, Burlington resident. And I suppose for you Senator Bennington, former National Development Council Grow America employee

[Seth Bongartz (Chair)]: some So years

[Michael Gaughan]: yeah, pleasure to join.

[Dave Epstein]: Hi everyone, I'm Dave Epstein. I'm an architect and principal at Trucks Collins. We're an architecture and interior design firm in Burlington. I live in Shelburne. We do work all over the state and a little in New Hampshire and other places, working on school projects. So I've been involved with the, trying to get a school construction aid program reinstated for about eight years now, and I have both experience at that level, but also boots on the ground working with individual districts throughout the state.

[Seth Bongartz (Chair)]: So I'd like to have some slides you wanna try to get up.

[Michael Gaughan]: Yeah, let me start with that. And I should say I've joined David in this effort going back to really, I think the first conversation I had on this was January or February 2020. Obviously, some things came to disrupt that conversation, but we yeah. This has been a perennial topic, obviously. Lots of deferred maintenance. I just sent a request to get the ability here. Okay, great. Okay, so the bond bank's role here is that we are the primary entity by which the financing for school districts is occurring. And that has been the case. It was in fact, you know, many of you I've spoken with in the past, but there are some new members. But in 1970, well, 1969, 1970, the bond bank was really created to facilitate school financing. At that, you know, as you'll see in a moment well, here, why don't I just give some context to it, actually. This is the history of school bond issuance in Vermont, starting the inception of the bond bank and our first deal was in 1970. On an inflation adjusted basis, that first transaction was our largest ever. And that was because there had been a large amount of school construction in the 60s. The local banks had done the financing for that, but were you know, different regulatory environment, different capitalization. And the story is they didn't have the willingness to provide long term financing. So you see some vestigial parts of this in statute where you can roll a bond anticipation notes for up to ten years and that's driven by the what was occurring in the sixties. So there's a bit of a capital crunch and that was the genesis for the creation of the bond bank. We pool loans together, issue municipal bonds that are credit enhanced by the state and then get a great rate for every community in the state, highly equitable in terms of access. So fast forward fifty years, it's not a huge surprise to us that we have this large amount of deferred maintenance, given, you know, the largest amount of investment in schools was back in the late 60s. So, and then we see, is, I guess a note for all of the slides I'm about to present. This is the bond banks data, our portfolio data, our history, as well as Burlington and Winooski to the extent that there are private bank loans out there with other schools that we're not aware of, they just aren't reflected. But I do think this is 90 plus percent of the picture of school debt out there.

[Dave Epstein]: You'll notice that in the 90s, there's a little bit of a spike, and that was related to a population increase. What we see, we see a lot of schools built in the late 60s, added to in the 90s, often though no renovations done to the work done in the early late 60s, early 70s. And you can see now we're on this the next thirty year cycle now.

[Michael Gaughan]: Yeah and what's,

[Seth Bongartz (Chair)]: sorry go ahead. Since you sort of started this discussion, how did the schools, the districts that built schools in the 50s, how did they finance them? If you will, because there was no bond bank.

[Michael Gaughan]: Great question. I'm not sure is the short answer. If you go and you look at, there's a disclosure website called the, from the Municipal Securities Rule Making Board called Emma. And if you go back and look through Vermont's history, periodically, there were public bond issuances for schools outside of the bond bank, really hasn't occurred since the 90s and 80s. Up until really around the great time of the great recession, maybe a little bit before, the municipal securities business was a little bit more lucrative than it is now. And so you can make a fair amount of money doing a very small bond deal, whereas that's not really the case anymore. And certainly not with the bond bank looking out for our towns. We keep it pretty tight. So yeah, my sense is it was a combination of banks and bond deals. Okay. So what's happened in the time that David and I have been speaking to members of the various committees about school construction in 2020 is that there's just been crazy cost inflation. And I think this just sets the stage for where we are now and getting ahead of this issue as soon as possible. The bond bank keeps borrowing rates really low. We borrow at a double A plus tax exempt rate, whereas, which is well below construction inflation, and is really relevant to the conversation, both with what to do with the legacy school district debt, as David will explain in a moment, but also obviously going forward and trying to get ahead of things so we can save money in the long run. But I wanted to use this as a jumping off point for a point David has been making that's really important to the work of the committee.

[Dave Epstein]: Yeah, one of the things that talked about in the committee was that it almost felt like the premise for our first, this first report was, you know, what to do about existing school district debt as if it was posing it as a negative. And one of the things we talked about was that, could turn that argument on its head and say, well, if a district has taken care of their building and they've invested in it, then that's a positive thing that they did, and that you, just like if you were a commercial, you were buying commercial real estate, you wouldn't wanna buy buildings in bad shape, you wanna buy buildings in good shape. So if you're merging with a district that has taken care of their buildings and has some debt, at least it's a known quantity, and it's not an unknown quantity, and you can see here that with the rampant cost escalation, know, it's like, take for example, a project we were involved within, their project was $57,000,000 it would cost $120,000,000 to do that today, and that goes up every year by four or 5%. So, we talked about quite a bit was that, debt isn't necessarily a negative thing. Now, maybe politically sensitive and emotional, but in a dollar and cents ways, it's not necessarily a bad thing.

[Michael Gaughan]: Thank you, David. Yeah, that was a point that had some resonance with the committee. In terms of existing school debt and its overall size, this just gives you a picture of total aggregate debt service with the caveats that I mentioned before per year. 2026 is a little bit of a outlier. There were some post great recession special bonds called qualified school construction bonds that have a sinking fund associated with them. So this debt service looks artificially high, but generally you're talking about just under $50,000,000 that's occupied in debt service from the Ed Fund. And while that's a lot of money, it's also a fairly small amount in comparison to $1,600,000,000 that's going out to schools from the Ed Fund. And so I think this is the first slide of many that'll just speak to, this is an important issue, I'd say in the grand scheme of things, legacy debt is not really the huge cost driver. Definitely gonna be debt going forward. But that said, the debt is not equally distributed. So let's take a look at that. This just gives you the raw numbers on the next page. One note is, you know, the bond bank really is doing our best to keep rates low. Our weighted average interest costs on for school debt in the portfolio is 3.7%. And a lot of that was because of us being smart about how we issued bonds during the period of zero interest rate policy from the Fed. That environment's obviously going to change. That's not necessarily going to be the case going forward, but on a relative basis, we keep it pretty efficient. So I think this is probably one of the most powerful tables we put together. You know, we went through a couple of iterations of looking at the numbers with the committee. And this one I thought was impactful. Obviously, I think it's well known that Chittenden County has been successful in passing bonds in Burlington and Colchester, Milton and Winooski. And that's certainly reflected in here where you see a concentration of overall school debt that's well above their percentage of school age population. There's also some concentration in Franklin and Windsor Counties that have also had successful bonds. But I think the takeaway point really from this slide is if you strip away the top 10 largest borrowers that are out there, you are only left with $72,000,000 in outstanding debt, which is just an extremely small amount and doesn't tell us anything we don't know. Our median amount of debt service as a percent of budget is about 1.8% or so. And national medians for similarly sized schools are about 5.5%. So that just speaks to the level of deferred maintenance, which we all know about and have known about for several years. But in terms of addressing this problem, not this problem, but in terms of addressing this issue, it's just relatively small. Even baking in the more recently approved bonds. Just have an amount of debt that is, you know, a modest amount of the overall Ed fund. But this does give you a sense of its distribution. And so in the scope of the report, we endeavored to lay out the potential options in the event of consolidation, how you would treat legacy debt. Not all of them are created equal. David can speak to that. I think a couple observations on those. We just wanted to really lay out all the possibilities, didn't really provide a recommendation, but certainly precedent has been that under a consolidation that has occurred to date, the bond bank simply changed the obligor name of the debt from the old district to the merged district and sent, you know, had a new place to send the bill. So that's one avenue. As we've discussed in several task force reports over the last couple of years, we think it's really important alongside the state treasurer's office to preserve the state's rating, bond rating that is because the bond bank can leverage that rating in multitudes. And the way you facilitate that is by making sure any state assistance for construction aid, whether it be prospective or retroactive with regard to legacy debt, is to provide that school aid on a reimbursement basis, which is what Rhode Island has done and avoids that debt being considered net tax supported debt of the state. So, you know, the bond bank really benefits from the state's rating, but we have the ability to leverage it several times more than the state code without an impact. And certainly the state has a lot of competing demands other than schools. So that's another option. And then the third option, which was kind of interesting that we discussed, and there are others, but I think these are the three main ones, was that, you you can pick some number. We looked at $5,000,000 and just say everything, you know, dollars 5,000,000 and below, we are going to pay off. And, you it's quite equitable. And what happens if you do that at a cost of 54,000,000 is that you eliminate the debt from all but 13 districts because the amounts are relatively small. So you just take that issue off the table. And I'm not suggesting that's the right way necessarily. It's just kind of interesting that a fairly small investment, again, to the size of the Ed Fund could really take this issue off the table for a lot of districts. What is important in that case is that the money that is used to the fees or remove the debt, not be a bond debt from the state because it starts to get kind of complicated and more expensive based upon the redemption features of our bonds as to how you defees or or legally remove that that debt. So so it'd be important that it would be like an appropriation because you have a lot of flexibility that way. So, yeah, those are kind of the main points there. And then I know David has some thoughts on on how we look at the various options as well.

[Dave Epstein]: I just wanted to thank you Michael. Go ahead is

[Seth Bongartz (Chair)]: there Just a to make sure we understand it when you talk about just paying off the 5,000,000 in debt I think you explained it but I didn't not sure I understood it.

[Michael Gaughan]: Where does that

[Seth Bongartz (Chair)]: come from? Who pays off Let the

[Michael Gaughan]: me give you a visual aid. So we, I guess in our survey of options we kind of just said, okay well the state through the ed Fund could, you know, provide this one time appropriation from whatever means and, you know, pick some number. And you can see here, this is the list of outstanding debt per school district. And you have to go up pretty high on the list until you get to a school that has more than $5,000,000 So, you know, if this is really a political issue, a concern of school districts, you could eliminate the debt from a whole, you know, three fourths of the schools that have debt by picking a number like $5,000,000 and $54,000,000 don't get me wrong, that's a ton of money, but that is quite modest in scope of the overall ed fund. So it's just one potential approach. The other approach, and I should say the other approach, which I didn't really cover is you could pick some year, some vintage year. David spoke to the fact that debt is not a bad thing because of the construction cost inflation. It means you have a well taken care of facility. But if you have older debt that is, you know, approaching the maturity of the underlying loan, then it's not gonna be as valuable because it's sort of depreciated during that time. So another way to look at it might be to say, okay, well we're gonna remove debt from the balance sheet of schools that was issued in, I don't know, you know, 2009 or prior. Pick your number. But this is a look at the vintage of outstanding debt that's out there.

[Seth Bongartz (Chair)]: Thank you.

[Dave Epstein]: So I just wanted to, I think Michael did a great job of kind of laying out what the options were. I just wanted to say a few things, provide a little context into the committee. As Michael said, they weren't all equal. We did not, there was concern in the committee about providing a recommendation until we knew what the new districts looked like, because there was concern about some unintended consequences. For example, if a wealthier district was paired with a less wealthy community, would that cause an undue burden on that less wealthy community? But what we did agree on was that if you're merging districts and communities are benefiting from that asset, then they should contribute to the debt repayment for that asset. So, if like say, South Burlington is in a district with Burlington, attends the Burlington High School, you don't get the benefit of a brand new school without contributing to the debt payment. So, you know, and then I think there were other, you know, unintended consequences until the new districts, until the committee felt like, until they could see what the new districts looked like, was difficult to make a recommendation, but I would say that, one, we definitely, options one, two, and three were really the ones that people were talking, and four and five felt like they were added just to kind of round out all of the options that we could iterate. I think, one issue to think about when you're considering that is what about retroactive? What about the Burlington, Swinuskies, Colchester's, is the new school construction program going to provide some debt relief for those communities? One of the things that's happening right now in the state, we see a lot of our clients is there's a lot of standing on the sidelines and waiting, and people are not moving forward with taking care of their buildings as much as they would like to. One of those reasons is they're waiting for a school construction aid, they're hoping for school construction aid, and I've tried to explain to them that, there's gonna be a priority system, there's not enough money for everybody to get, maybe a long time or the state policy may not support the improvements of their, the improvements they wanna do may not be supported based on policy considerations. But anyway, there is a lot of waiting and the other, the cost of an app, there's I have a client, I won't reveal names, but ten years ago, started working with them. They wanted to renovate their high school and it was a $20,000,000 project and we're still working with them and now it's an $80,000,000 project. So I think the other, you know, so I think retroactive debt repayment assistance could help, you know, if if that was a, if that was a goal to to get districts to move forward, that could help. Obviously, the fact that capital construction counts towards the per pupil spending, we hear a

[Michael Gaughan]: lot

[Dave Epstein]: of discussion regarding trying to avoid that fiscal cliff and that limiting the amount of work that the schools can do. So anyway, those are just some things to consider when I think when you think about what this whole debt conversation is part of a school construction plan.

[Seth Bongartz (Chair)]: So would one district make it really easy?

[Dave Epstein]: One district for the state?

[Seth Bongartz (Chair)]: Yes.

[Dave Epstein]: Yeah, that's what Hawaii is. Hawaii is one district for the entire state. Yeah, I thought

[Seth Bongartz (Chair)]: somebody was a superintendent over there, and they said it,

[Dave Epstein]: having five They days didn't

[Michael Gaughan]: worked. I think our perspective, and I'm just speaking for the bond bank here, not the committee, is that it's very hard, David has spoken about this. It's very hard to exactly know what the policy objectives are for our next piece of work, is really trying to build structure around the unfunded state aid program. But from the bond banks perspective, it's all about cost. And so regardless of where the lines are drawn, I think we're just really interested in advancing projects to start moving ahead as soon as possible on this huge sort of silent liability. We are interested in having a really frank discussion about the overall depreciation level of the existing schools. It might be the one area where we're going to talk about things other than just then, you know, debt and numbers. But it really, I think is a is gonna be a important discussion about, you know, if that has an FCI of 65, 70% or higher, do we build new? And you know, is there some and where do we build new? And is there some sentimental value associated with that existing asset? And so those types of questions are almost agnostic to the district in some ways. It's really about the age of the facility and its overall utilization. And, know, maybe it's in a new district, maybe it's not. But that's certainly where we're going to be focusing our attention.

[Seth Bongartz (Chair)]: So you've done a lot of this work, I think, anticipating, am I right about that? You've been sort of anticipating mergers in larger districts as you're thinking about paying off the debt so the next merger is possible.

[Michael Gaughan]: Yeah, it was part of our legislative mandate for this group is that the first report needed to come up with ideas around the legacy debt. I don't know that that's where we would have started individually, but that is what we're required to do.

[Seth Bongartz (Chair)]: I will state that for me this has been a poor roof because I hadn't realized that the amount of debt out there is really as small as it is in the I guess if I really thought about it probably would have because I knew the construction actually happened along the real construction happened quite a while ago, the 50s, 70s to the 90s. Right. So

[Dave Epstein]: Yeah, our next task as a committee now is to put sort of flesh on the bones that are in Act 73 that talk about a framework for a school construction program. And one of the things I think it's a little bit the cart before the horse, because what we really need to be effective is to understand what the policies are going be. Are we going to create regional comprehensive high schools? Are we, you know, is it a Rhode Island mantra of newer and fewer, or is, you know, what is the strategy? What is the policy goals? Because the school construction program really is a program that implements those policy goals and incentivizes behavior that aligns with those policy goals. So, we're looking forward to having that conversation, but I think we were feeling like we're gonna need some good interaction with your committee, with House Ed, and with the agency of education to really understand what those goals are.

[Seth Bongartz (Chair)]: What does your next report do?

[Dave Epstein]: I think it's been six months or so, I don't really know.

[Michael Gaughan]: Yeah, don't recall. December 15 was our first major date that we had to be concerned about. Yeah,

[Seth Bongartz (Chair)]: and so you're a little bit at the mercy of waiting for us to you really can't do too much until you understand where we're actually going.

[Dave Epstein]: Yes. Yeah, I think we can, there are some parallel work we could do that is, could, you know, like for example, if we're, the framework talks about 20% state participation with different incentives, and it talks about what those incentives might be, and one of them might be sustainable design, energy efficient design, and I think that is agnostic of school size, district size, classroom size, but there's some of them that are gonna be more keenly tied into those types of policy objectives.

[David Weeks (Vice Chair)]: So, as I went, we went around the state talking to different school districts and some, you know, I I didn't hear anybody actually say it but I I did got the implication that, you know, we shouldn't waste any money on the school because it's, you know, added on and added on. We have so many significant problems. So you guys didn't categorize these schools that way. Just the figures that were there, the monetary amounts, is that what you figured would have to be put into them? Or is that just what bonds they've they have right now for debt?

[Michael Gaughan]: This is exclusively what debt they have outstanding. The task force, there was, David help me here, I think 2023, 2024, it's all blurring together, you know, was the statewide facilities assessments, which are, you know, outside this committee's work, but that was very helpful to understand the overall depletion levels of those assets. And David talked about parallel work, certainly we're going be hyper focused on that threshold for what you keep and where you start new.

[Dave Epstein]: Right. Yeah. In that report, from the the task force, which both Michael and I were on in '23 and '24 was talked about the idea that 65% FCI, what that means is that 65% of the building is depleted or depreciated, so that you might start to consider replacing the building, it's sort of the old car analogy, when you stop putting money into your old car, and so that, but these are, it was a report that was a series of recommendations, and I think there's a lot of great work in that report and a lot of sound reasoning, but there's no What's that?

[David Weeks (Vice Chair)]: The guy report is three years old, but it's out there?

[Dave Epstein]: Well, two years old. Yeah. Out there. It's on the website, I believe. What's that?

[David Weeks (Vice Chair)]: It's a good story. Okay. In two years probably that data has probably changed?

[Dave Epstein]: Well you know, the FCI is a simple ratio of the costs to renovate the building over the cost of replacing the building. So those costs tend to rise together, and so the the the the nice thing about that, the way they do it is that it it often the ratio doesn't change and the percentage doesn't change because both numbers are rising in a similar way fashion or at a Yeah, similar

[Michael Gaughan]: the biggest change would probably be reinvestment. There just hasn't been that much of it.

[Seth Bongartz (Chair)]: Right. Yeah, that has, yeah. So the good news is we have very little debt to lend, it's just all of us are fully depreciated. Yeah. He should be happy about that. Yes. Has actually been really interesting and very helpful so thank you for your work. Thank you. And we may be back in touch as questions come up. Thanks Yes, for the work.

[Michael Gaughan]: Yeah, thank you so much. Nice to see you.

[Dave Epstein]: Thanks for your time and yes, definitely use us as a resource. Anything we can do to move move the ball forward, be happy to participate.

[Seth Bongartz (Chair)]: Okay, thank you.

[Dave Epstein]: Thanks for

[Seth Bongartz (Chair)]: your time.

[Michael Gaughan]: Take care, bye bye.

[Dave Epstein]: Yep, thank you very much.

[Seth Bongartz (Chair)]: And with that, we're actually done. We so until we do an errand tomorrow on the test works report, soon as soon as we have a certain level, it hopefully will come down to Google and read your report. K.