The prospect of federal tax reform that could mean the loss of $900,000 a year in subsidies to Lincoln Public Schools has prompted officials to move to refinance up to $52 million in bonds before Congress acts.
During the Great Recession, LPS was among local governments that sold Build America Bonds created as part of an economic stimulus package. The stimulus law allowed government entities to sell bonds in which the federal government contributed 35 percent of interest costs.
LPS purchased the Build America Bonds to supplement other bond issues and pay for a variety of building and renovation projects.
Those bonds came with a $900,000 annual subsidy from the federal government to help pay interest costs, one of the ways LPS was able to sell the bonds without raising the tax rate.
Two weeks ago, analysts said the House bill unveiled Nov. 2 could knock out that subsidy.
The West Haymarket Joint Public Agency — the group that built Pinnacle Bank Arena — also stands to lose $3.6 million in annual subsidies from bonds it used to build the arena. The JPA passed a resolution last week asking the federal government to maintain the federal subsidy.
District officials said they need to act quickly, because the tax reform bills also would eliminate local governments’ ability to do “advance refunding” of bonds. Advance refunding essentially means refinancing the bonds at a lower interest rate before their redemption date. The redemption date for LPS' Build America Bonds is 2020.
LPS has used advanced refunding to save millions of dollars in interest over the life of other bond issues, and has in recent years taken advantage of lower interest rates to restructure payments to pay off some bonds early. That has allowed the district to float the last two bond issues without raising the tax rate.
Liz Standish, LPS associate superintendent for business affairs, told the school board Tuesday that traditionally the district has not considered advanced refunding unless it can save at least 5 percent.
The district’s financial advisors estimate savings would be closer to 3 percent — about $1.5 million — but given the federal tax reform efforts, they advised moving forward, she said.
Elimination of advanced funding in the tax overhaul is an effort to increase tax revenue on public building projects.
Loss of the subsidies would be more indirect. The proposed $1.5 trillion tax cut would trigger what's called the PAYGO Act, which says legislation cannot collectively increase the national debt and would require sequestration of an array of mandatory expense programs that include Medicare and student loans — and the bond subsidies.
None of that is set in stone yet.
But Standish said refunding the bonds would reduce the district’s risk of having to raise taxes to make bond payments if the subsidy disappears. The $900,000 equates to about a half cent of annual tax levy.
But she said district officials would only move forward if doing so would result in savings for the district — even if the subsidies stay in place.
“In the end the deal has to save taxpayers money,” she said.
The board Tuesday gave district officials the go-ahead to move forward.
“This is something we’ve been doing very well for a long time,” said board vice president Don Mayhew. “With the added risk this year, we still end up money ahead. I think this is a very intelligent way to do things.”