News and Opinion from Sisters, Oregon
News and Opinion from Sisters, Oregon
Sisters area taxpayers won't get $900,000 taken off their bill for the new Sisters High School as they were promised by the school board.
In a letter to patrons of the Sisters School District released this week, the board explained in detail how a misunderstanding about the amount of interest money available from school bonds meant that the $900,000 promise could not be kept.
The letter also explains a $202,000 cost overrun on the high school project (see complete text of letter on page 33).
Regarding the interest money, the letter states: "The interest problem began with a lack of understanding about the difference between gross interest and net interest (it has also been identified as the difference between cash flow and interest, or the difference between bond investment cost and principal).
"At a school board meeting on October 8, 2001, the superintendent told the board that there was approximately $1.9 million to $2.1 million of interest that would be earned from investing the bond money over the period of time it would take to build the new school, and this interest was available for the project. After a long and acrimonious debate lasting several weeks, the board elected to return $900,000 to taxpayers and spend $1 million on the new school.
"Unfortunately, the statement that there was $1.9 million in interest was incorrect. While our investments showed a gross interest return of $1,972,887, the school district had to pay a premium to achieve a higher gross interest. This was the right decision, earning the district more money, but it meant the district paid $18,210,927 for investments that had a principal face value of $17,600,000."
Another $180,000 was lost through early redemption of bonds triggered by an accelerated construction schedule.
"The total drop in expected income, $611,000 plus $180,000, or about $791,000, will come from the $900,000 promised to taxpayers. This would have likely been discovered earlier had the board insisted on a complete and thorough accounting of all income in sufficient detail," the letter states.
The board took responsibility for both the failure to deliver on the interest money promise and for the cost overrun, which was attributed to "lack of adequate detail in record keeping and poor communication" and the board's failure to insist on "a full and complete spreadsheet that met industry standards for detailing monthly expenditures."
The cost overrun is covered by additional income that was not included in budget summaries, according to the board.
School Board Chairman Glen Lasken said the board released the detailed accounting "to provide an explanation to our taxpayers as to what happened in the course of this project" and to "assure the public that we have left no stone unturned in investigating the matter."
Lasken said he expects disappointment that the interest money to pay down the bond is gone.
"There may be some people who are angry about that," he said.
Lasken also said it is important that the public recognizes that there was no misappropriation of funds and no wrongdoing attached to the shortfall in interest money or the overshooting of the budget ceiling on the project.
"I don't think anyone in this process is shirking their responsibility and attempting to hide," Lasken said. He expects that people "will appreciate that we're being open and honest about the process."
Noting that the board has been divided over issues surrounding the high school project, Lasken said that "all of the players who were involved in this process have come together to agree and make a united statement."
The letter is signed by current school board members Lasken, Bill Reed, Jeff Smith, Eric Dolson and Tom Coffield. Former board members Heather Wester and Steve Keeton also signed, as did former school superintendent Steve Swisher, business manger Diane Shelly and construction project manager Bob Martin.
To the Sisters Community, staff and taxpayers of the Sisters School District:
As many of you know, the Sisters School Board discovered in December that funds were not available to fulfill a promise to return to taxpayers approximately $900,000 of interest earned on bond investment money for the new Sisters High School.
After weeks of research, interviews with staff, legal counsel and our bond underwriter, the board has come to several conclusions.
There are actually two issues. The first concerns the shortfall in interest income. The second concerns a cost overrun on the new school.
The interest problem began with a lack of understanding about the difference between gross interest and net interest (it has also been identified as the difference between cash flow and interest, or the difference between bond investment cost and principal).
At a school board meeting on October 8, 2001, the superintendent told the board that there was approximately $1.9 million to $2.1 million of interest that would be earned from investing the bond money over the period of time it would take to build the new school, and this interest was available for the project. After a long and acrimonious debate lasting several weeks, the board elected to return $900,000 to taxpayers and spend $1 million on the new school.
This $900,000 would not have gone out to each taxpayer in the form of a check. It would have reduced the yearly tax over the life of the bond by a small amount, or it would have reduced the tax in one year by a more substantial amount.
Unfortunately, the statement that there was $1.9 million in interest was incorrect. While our investments showed a gross interest return of $1,972,887, the school district had to pay a premium to achieve a higher gross interest. This was the right decision, earning the district more money, but it meant the district paid $18,210,927 for investments that had a principal face value of $17,600,000.
The difference, about $611,000, should have been deducted from the gross interest to arrive at net interest earnings. With other unanticipated income, there was $1,361,960 of net interest earnings available to the project, not $1.9 million.
The Administration and the School Board did not understand this distinction at the time of the debate over the interest. Our investment counselors did not correct this misunderstanding until October of 2003, after nearly all the spending decisions had been made.
A second investment interest shortfall of about $180,000 was the result of early investment redemption. The new school was originally slated to open in January '04. Instead, we were able to open in September, '03. The accelerated construction schedule meant we had to turn our investments into cash sooner than expected.
The Board was not advised that the early opening of the school would result in a reduction of interest income. In fact, information from our investment counselors suggested we would earn more by redeeming the investments and putting the money in the local government investment pool.
The board believes opening the two schools together four months early was a huge benefit to the district. Attempting to move both the Middle School and the high school over Christmas break in a few weeks during the type of winter we have had would have been exceedingly difficult and disruptive to educational processes.
The total drop in expected income, $611,000 plus $180,000, or about $791,000, will come from the $900,000 promised to taxpayers. This would have likely been discovered earlier had the board insisted on a complete and thorough accounting of all income in sufficient detail.
The second issue concerns the cost overrun. The board pledged to build a school for $21 million, plus approximately $500,000 to renovate the old high school, or about $21,500,000. Instead, the project has cost $21,702,064. The board has been asked by the public where the district will get the additional $202,000.
The board has determined that the additional $202,000 went mostly for school district overhead for the project, including salaries, office space and other expenses. These were never included by the superintendent in the original $21.5 million cap for the project, nor were they on budget summaries of "owner cost" presented to the board while making spending decisions.
It is important to note that General Contractor, Kirby Nagelhout Construction Company, did provide a complete accounting for their portion of the project, and that construction exceeded all expectations for thoroughness and professionalism. The school district in fact received about $111,000 back from Nagelhout in unspent contingency money.
The School Board did not match that level of professionalism in managing its own expenses. Specifically, a full and complete spreadsheet that met industry standards for detailing monthly expenditures was not kept nor provided to the board for "owner costs."
Instead, the board was presented with a brief cost summary , and even that ended in May, 2003 when staffing available for the project was reduced.
Unfortunately, this information was not complete and at no point did it include overhead incurred directly by the district for managing the project. The result was that the board authorized spending approximately $202,000 more on the project than communicated.
Fortunately, there was additional income, also not included in the budget summaries, designated to cover these expenses. This income was described early on to the board, but not detailed in budgets. The income offsets the expense. Therefore, no money from the general fund will be required.
This does not absolve the board of its failure to demand reports that met the standard of practice for a construction project. At the time the board was accused of micromanaging. In retrospect, the board believes the charge of micromanaging was unfounded and the lack of adequate detail in record keeping and poor communication led to the current situation.
It is important to note that everyone involved, board and staff alike, had what they believed were the best interests of the school district in mind when they made decisions about this project.
It must also be recognized that savings from the general contractor, efforts by the board and staff to curtail expenses and a change in the scope of work at the middle school, meant that the final project came in less than one percent above the initial estimate. The entire overage is covered through project related financing.
We have an exceptionally beautiful and functional high school, and a wonderful middle school. However, we will not be able to fulfill our pledge: no money is available to return to taxpayers.
The Sisters School Board deeply regrets the misunderstandings, errors and omissions that were a part of this project. However, with this review, we have determined that no further action is warranted. We would like to thank the community and staff for their patience as we resolved this difficult issue.
Sincerely,
Sisters School Board:
Glen Lasken, Board Chair
Bill Reed, Board Vice-Chair
Eric Dolson, Director
Jeff Smith, Director
Tom Coffield, Director
Former Board Members:
Heather Wester
Steve Keeton
Former School Superintendent:
Steve Swisher
District Business Manager:
Diane Shelly
District Construction and Facilities Project Manager:
Bob Martin
Jim Cornelius is editor in chief of The Nugget and author of “Warriors of the Wildlands: True Tales of the Frontier Partisans.” A history buff, he explores frontier history across three centuries and several continents on his podcast, The Frontier Partisans. For more information visit www.frontierpartisans.com.
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