News Release - Mayor Richards Releases Letter Sent to School Superintendent, Union President

City of Rochester

News Release

(Fri., August 5, 2011) – Mayor Thomas S. Richards outlined a temporary solution to the Facilities Modernization Plan (FMP) funding impasse in a letter sent today to Rochester City School District Superintendent Dr. Bolgen Vargas and Rochester Teachers Association President Adam Urbanski. (The letter is below).

Mayor Richards will propose to City Council that the City issue bond anticipation notes (BANS) to fund the planning phase of the FMP, with the understanding that any expenses associated with the BANS will be paid for from the proceeds from the eventual Rochester Joint Schools Construction Board (RJSCB) issued bonds.

One possible outcome to this action could be an increase to the current $119.1 million Maintenance of Effort (MOE) mandated payment to the RCSD. The FMP was never intended to either increase or decrease the MOE. The current MOE represents 70% of the City’s tax levy and any increase is unacceptable to the City.

In order to protect City taxpayers from a MOE increase, Mayor Richards says the City will no longer be able to do the yearly bonding for capital improvements the City now performs for the RCSD. Any further capital improvements undertaken by the district will have to come out of their operating budget. The RCSD cannot issue bonds and must rely on the City to do so.

“We are prepared to return to the procedure that has worked well for years that has allowed RCSD to appropriately borrow for capital needs and to make decisions about the appropriate balance between debt service and operating expense without impacting the MOE,” said Mayor Richards.

In the letter, the Mayor stresses that no longer bonding for the district is not desirable solution for the City, the District or for teachers and students. Said Mayor Richards, “... the current circumstances are not working well for any of the parties. I invite you to join me in getting whatever changes are necessary at the State Education Department or in the FMP statute to correct the problem and to continue working together to maximize the positive impact of the FMP on Rochester City schools and school children.”

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News Media: For more information, contact Gary Walker at 428-7405.


August 5, 2011

Dr. Bolgen Vargas, Superintendent
Rochester City School District
131 West Broad Street
Rochester, New York 14614

Adam Urbanski, President
Rochester Teachers Association
30 North Union Street, Suite 301
Rochester, New York 14607-1345

Re: Capital Planning/FMP/MOE

Dear Superintendent Vargas and President Urbanski:

Representatives of the City and the City School District (CSD) have held many recent meetings concerning the School District’s Capital Program and its relationship with the Facilities Modernization Program (FMP) and the Maintenance of Effort (MOE) legislation. In this letter, I will outline the recent history relating to these matters, and the City’s perspective for moving forward.

The CSD is not legally authorized to issue bonds and must rely on the City for its borrowing. The long-standing policy has been that the amount of CSD borrowing approved by the City in any single year shall not exceed the amount of outstanding CSD debt to be retired during that year. This policy has resulted in the City approving approximately $15,000,000 in borrowing each year for the CSD.

The total amount of outstanding CSD debt is approximately $225,000,000, and current annual debt payments are approximately $23,000,000. The CSD is reimbursed by the State through building aid for most of this debt. As a result, the CSD’s local share for this debt service is approximately $3,700,000 for 2011-12. This obligation has been part of the CSD operating budget for a number of years.

The capital borrowing policy has been advantageous. It has allowed CSD to systematically plan for capital improvements based on a regular and dependable leveraging of funds. We also believe this relationship to be unique among the three large upstate cities. We understand that neither Syracuse nor Buffalo have significant, routine capital programs with their school districts at this time.

The Rochester FMP was authorized by Chapter 416 of the Laws of 2007. The purpose of the FMP is to renovate up to 13 schools at a cost of $325,000,000. The Rochester Joint Schools Construction Board (RJSCB) was created to oversee the FMP and was given borrowing powers precisely because the State recognized that the City would not be able to provide the necessary funding. The City, CSD and RJSCB entered into a cooperative agreement which provides that the City is not responsible for any FMP funding, including any bonding or local share. The debt service on the FMP borrowing is anticipated to be about $29,000,000 annually, with a local share after state reimbursement of approximately $2,300,000. As a result of the FMP, the CSD will be able to offset some of these costs through energy savings and other cost saving improvements, and to reduce its annual capital program.

The MOE requires the City to maintain a certain level of annual funding to the CSD. The State Education Department (SED) has interpreted the MOE to require constant funding after debt service has been subtracted. As a result, if the CSD debt service increases, the City would be required to increase the MOE by the same amount. Since the CSD will be reimbursed for most of the FMP debt through building aid, an increased City contribution as suggested by SED will result in a double reimbursement to CSD. To accept the SED’s interpretation, you would have to believe that the FMP was intended to increase the MOE annually by $29,000,000, which was never the case and which would be an impossible amount for the City to manage or absorb.

While the City has attempted to manage increases in CSD debt service since the adoption of the MOE, this has not been easy. For example, debt for the Ryan Center has been included in the MOE notwithstanding a specific agreement by CSD to accept responsibility for that debt.

The City proposed a legislative solution that was introduced in the Assembly to simply clarify the original understanding that FMP debt service would not increase City MOE funding requirements. Another bill was introduced in the Senate that would have required the City to assume these costs. Neither bill was adopted.

The SED provided a compromise solution that would limit the additional burden on the City to the local share of the FMP borrowing. This would increase the MOE by approximately $2,300,000 annually starting in 2014-15 and continue, all other things being constant, until 2028-29, for a total of $33,000,000. We believe that this is contrary to all of assumptions that underlie the FMP, and it is not acceptable to the City.

In order to fund the initial planning for the FMP that will lead to a determination of the local share, CSD and RJCSB have asked the City to issue $29,000,000 in bond anticipation notes that will be paid from the permanent financing issued by RJCSB. This planning is necessary in order to be certain of the State debt service reimbursement that is the underpinning of the RJCSB bonds. It is also necessary in order to develop a plan that meets the needs of the community and CSD with a local share that CSD can afford.

While the City has no obligation to undertake this financing and it is contrary to the existing agreement among CSD, RJCSD and the City, we believe that funding the planning is in the best interests of the FMP and using City issued bond anticipation notes (BANs) is the least expensive method. We are willing to issue the BANs with the explicit understanding, as is required by the existing agreement among the parties, that any expense associated with the BANs will be paid from the proceeds from the eventual RJCSB issued bonds, in the first instance, or failing that, directly by CSD.

This BAN funding is being done to avoid a shutdown of the FMP and the resulting delay and increased cost, even though it will initiate a sequence of events that could eventually cause the MOE to increase by $2,300,000 annually as described above. This increase is inconsistent with the intent of the FMP and the City is not in a financial position to absorb this increase to the $119,100,000 MOE that already absorbs 70% of its real estate tax levy.

Given the current state of the interpretation of the impact of the FMP financing on the MOE, we are forced to turn to the only mechanism available to us to moderate the impact on the MOE. Until this issue is satisfactorily resolved, the City will not authorize any further borrowing for any purpose by CSD. This will mean that the annual borrowing program will stop and the type of expenditures previously funded by borrowing will have to be absorbed in the CSD operating budget. This is being done to at least partially offset the anticipated increase in debt service from the FMP that will impact the MOE.

The SED interpretation of the impact of debt service on the MOE has produced a needless conflict between the City, CSD and RJCSD. The impact, up or down, of debt service on the MOE should be removed. It is not the City’s desire to use the FMP to lower the MOE and we do not believe that the FMP was ever intended to increase the MOE.

We are prepared to return to the procedure that has worked well for years that has allowed CSD to appropriately borrow for capital needs and to make decisions about the appropriate balance between debt service and operating expense without impacting the MOE. As already demonstrated by our willingness to issue BANs, we support the FMP and intend to work with CSD and RJCSD to make it a success. However, we cannot do so if it causes the substantial increases in the MOE described above.

As I trust this letter demonstrates, the current circumstances are not working well for any of the parties. I invite you to join me in getting whatever changes are necessary at SED or in the FMP statute to correct the problem and to continue working together to maximize the positive impact of the FMP on Rochester City schools and school children.

Very truly yours,


Thomas S. Richards
Mayor

xc: Kenneth Bell, Chairperson, RJSCB