WHITMAN – Borrowing for the proposed Whitman Middle School will be done through a level principal approach the School Committee voted 8-1 following a joint meeting with the Select Board on Tuesday, Oct. 17.
That approach calls for a larger first-year payment of $8 million – $3 million in principal and $5 million in interest – in order to greatly reduce the annual payments for the rest of the 30-year loan. With a level-debt bond, the town pays $6.2 million not only for the first year of the bond, but for all 30 years.
School Committee Dawn Byers voted no, because, she argued a level-debt structure with even payments was the more affordable option for taxpayers. Member Glen DiGravio was unable to attend the session, which will be rebroadcast on WHCA-TV and posed on its YouTube Channel.
The town must approve the issuance of debt for the Whitman Middle School project at both the special Town Meeting on Monday, Oct. 30 and at the Saturday, Nov. 4 special Election ballot in order for the current MSBA project to move forward.
The town’s share of the $135 million project is $90 million, with the Massachusetts School Building Authority funding $45 million of the cost.
“Understanding that these are not going to be exact numbers because we’re not there yet, we’re trying to give the taxpayers an idea of what’s to be expected to the best of our knowledge,” School Committee Chair Beth Stafford said. “It’s not going to be great and easy either way, but – and I won’t be here for the 30 years, I’m sure – I have to look at the future, too, for the town of Whitman, just as I look at the future for the children with a new school.”
She had initially been in favor of the level-debt structure, but hearing about the savings to the town changed her mind.
“I’ll find a way,” Stafford said.
The School District has also added website, wmsproject.org, providing information, videos, schedules and more about the project.
The $5 million in interest would be the same payment owed in the first year of the bond, but only $1.2 million of the principal would be paid that year under the level debt method.
“Basically, [on the level-principal approach], we’re paying more principal up-front and it’s working the interest down over the life of the loan,” Select Board member Shawn Kain said. “If you add the difference between the two over time, it’s about $19 million difference.” A level-debt bond, in other words, would cost the town an additional $19 million in interest on the life of the bond.
Town Administrator Mary Beth Carter said the cost of that $19 million difference to the average homeowner with an average assessed valuation of $420,530 over the term of the bonds will be $4,385.51 more under a level debt structure than they would under a level principal structure, projected on an estimated rate of 5.5 percent. She stressed that figures discussed are estimates based on $90 million in borrowing with an interest rate of 5.5 percent, on the average assessment on a home valued at $420,530.
“I do not recommend the level debt service structure for the Whitman Middle School project borrowing,” Carter said. “I recommend the level principal structure.”
The town can seek to refinance a bond structure after 10 years, Carter said. Kain noted that after 10 years the principal will have been paid down by about $31 million under a level principal – but only by $17 million under a level debt structure.
“That’s exactly what we did with the high school,” School Committee member Fred Small said. “It saved the towns on the assessment, while not lengthening the term at all.”
Carter said that both the district and the town share the same financial services firm advising them, Unibank, but each works with a different representative. The town’s advisor has stated that he cannot think of any reason why a municipality would choose a level debt structure over a level principal structure for a building construction project due to the “significance in interest,” Carter said.
School Committee member Dawn Byers said she “could think of every reason why we should not go level-principal, because at this moment, every taxpayer probably thinks both options are probably out of reach for them.”
She pointed to her own mortgage, which is level debt for 30 years.
“Maybe that’s not the best practice for municipalities, but we can look at the last decade, and I don’t see that some best practices have been followed here,” she said. “To now want to follow the largest jump, the most significant increase to our neighbors and ourselves, puts this building completely out of reach.”
She argued that a level-debt approach was a more stable approach.
“I’m hopeful the school department will do as it has done in the past and work with the town to choose the more fiscally responsible debt service structure for the Whitman Middle School project borrowing,” she said.
“If approved, the district will be the borrower of the debt for the Whitman Middle School project,” said Carter. “They will be what I consider to be the conduit for the borrowing for this project. The town votes to approve this project and the town votes to pay the debt through an assessment from the W-H Regional School District each fiscal year.”
The town will make the payments as a debt exclusion – debt outside the levy voted by the town, with the district making the payments to the issuer.
Both short-term borrowing called bond anticipation notes (BANs) and long-term borrowing, or bonds, with interest rates for each based on the district’s bond rating, not the town’s.
“It’s your decision to decide but [Stafford] wanted to talk to us about it – to decide which method of borrowing we would use for the new Whitman Middle School,” Select Board Chair Dr. Carl Kowalski said.
Carter and Kain prepared a presentation about the value of level principal borrowing over level debt borrowing.
“We’re very fortunate to have a town administrator who was a treasurer-collector for a long time,” Kowalski said.
Using information from the financial consultant the town has been working with, Kain outlined the difference between the two borrowing methods.
The Select Board recommended the level-principal method.
“What the level principal means is you take [the rounded-off] $90 million, which is how much you have to borrow and you divide it up into 30 years,” Kain said. “That’s $3 million a year – that’s the level principal.”
In the first year, the town would be paying the interest – at 5.5 percent – is about $5 million for the amount being borrowed. Carter compared a level-debt structure to a fixed mortgage in which, while the debt payment each year remains constant, reducing the early-year principal payback in order to lower principal and interest payments on the front end, but the level of outstanding debt-to-interest costs stay at a higher level, increasing interest costs over the term of the bond.
“Level principal pays of the outstanding principal faster over the term of the bonds and thus reduces interest costs,” she said.
Because the towns payment declines over time, the assessment to each homeowner will decline over time with level principal. Whereas with level debt the Town pays the same amount every year and assesses that amount to the taxpayers. For example (average homeowner with a 420K house) in year one might save $329 with level debt, by year 30 they pay an extra $569.
Stafford said that is a $26 difference between the two bond structures for the first year.
“In the beginning years, you’re paying less with level debt than you are with level principal, just the first 10,” Carter said. “People have to realize that that difference they see when the first year is quoted as a comparison is only in year one.”
By the eleventh year, however, the level debt structure is costing more than the level principal structure.
“With each year, you can see how it’s getting smaller with each year,” Kain said. “The reason it’s getting smaller is because, you’re still paying the $3 million principal, but the interest is getting slightly smaller each year.”
On the last year of the bond, the town would pay only about $3,150,000 in principal and interest to finish off the debt.
With a level-debt bond, the town pays $6.2 million not only for the first year of the bond, but for all 30 years.
“We also have to think about how it’s going to fit in line with some of the other projects,” Kain said of the school borrowing.
A rumor circulating in town, arguing that the school district can “use the next year to redesign the project as a grades six to eight school without an auditorium can stay in the MSBA pipeline” and still receive funding, is not accurate, school officials have stressed in public forums.
The MSBA has confirmed that the project scope and budget are locked in following the board’s approval and that the MSBA has never allowed a district to substantially change a project after a failed vote or continued a project to move forward under the same statement of interest. If a debt exclusion ballot vote fails the district has 10 days to update the MSBA on the failed vote and any re-vote must be for the same project.
The district would have to submit a new statement of interest and begin the MSBA process over again, with any changes or build any alternative plan at the district’s expense with no MSBA reimbursement.