RESPONSE: D91 financial adviser disputes VanderSloot on school bond

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Courtesy Idaho Falls School District 91

As financial adviser to Idaho Falls School District 91, I would like to respond to the information presented in an Oct. 30, East Idaho News article entitled: VanderSloot: Residents should understand they will pay higher taxes if D91 bond passes.

First, I would like to refute the allegation that “the school district told (Piper Jaffray) what they wanted the report to say” and that “it doesn’t mean folks at Piper Jaffray really think that (no tax levy rate increase) is going to happen. In fact (Piper Jaffray) refused to give us any assurance or even a percentage of probability.”

These statements are not true.

The representatives from Melaleuca I spoke with asked if I would provide a written guarantee that the tax rate would not go up. I cannot provide a guarantee of a future outcome, but not providing a guarantee is certainly not the same thing as “refusing to give us any assurance or even a percentage of probability.” I strongly believe the district’s property tax levy rate will not go above 0.00424 if the bond passes.

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Let me provide you with some detail on how we developed the district’s financial plan. Similar to our work with other school districts throughout Idaho, we started by making a variety of projections and planning assumptions about the future, including changes in market value, estimates of interest rates at the time bonds are sold, the appropriate repayment term, and the receipt of bond subsidy revenue from the State of Idaho. What the district asked of Piper Jaffray was to develop a repayment plan that minimized the taxpayer impact of the bond, which is a very common request for a Idaho school bond election.

The one projection that was focused on in the article was related to market value growth: “the Piper Jaffray bond election planning report shows an estimated 6 percent growth rate is needed in 2018, followed by a 5 percent growth rate in 2019 and 2020, and a 2.5 percent growth rate between 2021 and 2029.” The 6 percent growth rate for fiscal year 2018 (tax year 2017) is an actual result and no longer a projection. Our projection for 5 percent growth per year over the next two years is supported by the uptick in building permit activity that began in 2015. The total value of building permits issued in Idaho Falls during the two-year period covering 2015 and 2016 was 17 percent higher than the value of building permits issued in the immediately preceding two-year period covering 2013 and 2014. There is a strong correlation with building permit activity and market value increases that occurs within two to three years of the building permits being issued. Further supporting our growth projections are the strong year-to-date building permit values for 2017, which have already exceeded 2016 year-end levels.

Looking more broadly at the subject of market value growth, if we apply the growth projections that we utilized in the district’s bond planning model, the long-term result would be a 10-year compound growth rate of 3.33 percent and a 20-year compound growth rate of 1.90 percent both of which are lower than the most recent actual 20-year compound growth rate of 4.29 percent. It is worth noting that the 20-year historical growth data includes a period when the district’s property values declined following our nation’s worst recession since the Great Depression.

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During my conversation with the Melaleuca representatives, I reviewed these data points, yet the article cites “when we talked to the Piper Jaffray folks, we asked them what the probability was that those numbers would actually happen. They’ll just not give you any probability at all.” Although I did not assign a specific probability, I provided plenty of data supporting the projections.

Eric Heringer, Public Finance Managing Director at Piper Jaffray

The one point raised in the article that we all seem to agree on is the district’s communication that the “tax levy rate will not go up.” The district’s property tax levy rate is expected to be 0.00424 this year. If the bond passes, we expect the property tax levy rate to remain at 0.00424. The math is straightforward: If a taxpayer has $100,000 of taxable value they are currently paying $424 in property taxes to the school district; if the bond passes that same $100,000 of taxable value will be levied $424 in property taxes. However, if the value of the property increases by 10 percent to $110,000, the tax bill would also go up 10 percent (0.00424 multiplied by $110,000 equals $466.) The district is focused on the one thing that it can influence in this equation and that is the tax levy rate.

Our discussions with the Melaleuca representatives included other details and background on the tax levy rate projections, which were not discussed in the article but are integral to our bond planning model including: i) conservative interest rate projections, ii) flexibility on the timing and amount of the bond sales needed to meet construction cash flow, iii) the Idaho school bond levy equalization subsidy which would offset slower than projected growth, and iv) the District’s ability to reduce its existing plant or supplemental levy in the future in order to avoid an increase in the property tax levy rate. The bottom line is that the Idaho Falls School District 91 is committed to not increasing the property tax levy rate if the bond passes and it has the flexibility to meet this commitment given the conservative mix of planning assumptions.

A reasonable question to ask at this point is: How much market value growth is needed to avoid a tax levy rate increase? The Oct. 30 article insinuated the district would need every bit of the growth assumption utilized in our model, but that is not the case. All else being equal in the planning model, the district would need to experience 3.25 percent annual growth for the next two years (not 5 percent) followed by 2.50 percent annual growth through 2029.

One thing that I have learned in working on Idaho school bonds over the past 15 years is that very few of our individual assumptions will play out exactly as projected. Some assumptions will underperform and some will over-perform, but if we are reasonably conservative with each individual assumption the net result will provide a dependable outcome. I am very proud of our track record of calculating conservative, not-to-exceed, tax rate projections that have proved to be highly accurate for school district bond elections throughout Idaho including Twin Falls, West Ada, Boise, Nampa, Lewiston and Coeur d’Alene.

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