School interest money depleted

The Sisters School Board suffered its own version of "shock and awe" Monday night when it learned that bond interest earnings it had expected to give back to the taxpayers may be less than a quarter of the $900,000 anticipated.

"I am astounded," said Board Member Jeff Smith. His sentiment was clearly shared by his four colleagues.

"This is a devastating surprise," said senior Board Member Bill Reed. "We are $800,000 in the hole. We made a promise to the taxpayers..."

The promise he referred to was a compromise fashioned after three months of sometimes acrimonious debate during the last three months of 2001. The board at that time had been told that the district could expect to earn about $1.9 million in interest on the $20.5 million in bonds that voters had approved to build a new high school.

That interest would accrue on bond sale income the district would invest until it was needed to pay construction expenses.

Two board members, Reed and Glen Lasken, wanted to spend the interest on facilities and equipment for the new high school, a conventional use of such income throughout the state. Two others, Heather Wester and Steve Keeton, resisted that idea, urging that the money be used instead to pay down bond principal.

Smith was the man in the middle.

He engineered a compromise under which the board agreed to use $1 million to augment construction funds and reserve the remaining $900,000, or whatever it turned out to be, to pay down the debt.

But the board learned Monday night that actual earnings have turned out to be about $800,000 less than had been projected.

Facilities Manager Bob Martin told the board that, counting interest earnings and all other revenue sources and subtracting all known obligations for the project, the district will have about $225,000 left in its high school construction fund.

District Business Manager Diane Shelly blamed the shortfall on two factors:

• Good weather enabled construction crews to do far more during the winter of 2002-2003 than had been expected, finishing the school about four months ahead of schedule. That made it possible for the district to open the building when the current school year began in early September.

But it also meant that the district's invested bond income had to be sold before maturity to meet the contractor's need for funds.

This reduced anticipated interest earnings by about $180,000.

• The district's investment banker, Seattle Northwest Securities, bought premium bonds with the proceeds from the high school bond sale but the district did not take into account the cost of the "premium" when calculating potential interest earnings. That difference ended up being about $600,000.

A premium bond offers a higher interest rate than an ordinary bond but also costs more at the outset.

The investor pays, perhaps, 110 percent of the face value when purchasing the bond, betting that the higher interest will more than make up for the higher initial cost.

Charles Carter, the district's financial advisor who is based in Lake Oswego but has no connection with Seattle Northwest, helped Shelly explain some of these intricacies.

During the meeting, Lasken, who is now the board's chairman, was outraged.

"This was a promise made and we relied upon it to our detriment," he declared.

An attorney himself, Lasken said he would consult with the district's legal counsel to see if the board has any legal recourse.

Eric Dolson, who was not on the board at the time the bond interest debate took place, said the board several times "came within a hair of spending that money. Had we spent the whole $1.9 million, who would be held responsible?"

Dolson, publisher of The Nugget, also pressed the issue of who in the school administration knew that the earnings would be less than expected because of cashing in investments early.

"We sat in construction meetings as late as August (2003) and were told that a certain amount of interest would be available," he said.

"Somebody knew we didn't have the money we thought we did."

Keeton, who is no longer on the board but was in the audience during the discussion, agreed that "as late as last summer we were talking about maybe $2.2 million" in total interest earnings.

Smith concurred, saying: "We need to determine who knew what when."