New Albany-Plain Local Schools
District requests auditors' review on 'bond swap'
For its upcoming audit, the New Albany-Plain Local School District has requested detailed feedback on a controversial "bond swap" refinancing deal that was initiated in 2007.
School board member Mark Ryan said the board has asked the audit team from the state of Ohio and the local audit team from Kennedy Cottrell Richards of Gahanna to further review the deal from a third-party perspective.
The 2007 bond swap agreement, which is known as "synthetic refunding," saved $1.3 million overall in the repayment of bonds, according to district officials, but it required the district to pay more than $6 million in termination fees earlier this year to get out of the transaction.
As part of the agreement, the district sold the right to refinance bonds initially issued in 2001 and 2002 to Dexia Credit Local, a third-party investment company in Europe. The board members at that time -- none of whom are on the current board -- voted to receive an upfront lump-sum payment of $1.1 million from Dexia in exchange for Dexia's right to refinance the bonds in the future.
The interest rate was fixed between 5 percent and 6 percent, and Dexia was to make payments to the district based on market interest rates, which fluctuate, until Dexia could resell the bonds when eligible in 2011 and 2012.
Emmett Kelly, the district's bond counsel, said that in 2011, Dexia had the district recall the 2000 bonds and reissue $8.1 million in long-term notes. The district had to pay the company based on the bond's original interest rates.
However, when Dexia got into trouble because of the European financial crisis, the school board used its rights to dissolve the deal by paying fees of $6.125 million, which was included in the $38 million issued as part of the 2012 refinancing.
The term of the bond remains unchanged. It expires in 2029.
Interim Treasurer Peg Betts said she reviewed the procedure when she was hired in July. She said the bonds were sold at a premium -- $38 million as opposed to $32 million -- which allowed the district to pay the large termination fees "and get away from the risk."
The district's interest rate was lowered in the process to 3 percent, which is a good rate, Betts said.
Kelly estimated the district saved $140,000 in interest rates through the 2012 refinancing.
Betts said she reviewed the district's situation in 2007 and the district was dealing with overcrowding. The district asked voters in May and November 2007 to approve a 28-year, 2.34-mill bond issue to build a fifth- and sixth-grade school and make other site improvements. It was rejected by voters both times.
"I think they were looking for capital," Betts said. "They wanted to get out of a higher interest rate with a non-callable bond."
Since the bond swap raised so many questions, the school board posted a list of questions about the deal on its website and changed its fiscal policy to "ensure that the most cost-effective and practical refinancing option is selected" and "debt refinancing will occur only after a thorough evaluation of refunding opportunities."
The policy includes six conditions to be placed on bond refinancing, the last five of which are linked. They are:
* "Refinancing efforts will be done utilizing traditional methods that do not involve complex interest-rate swaps or synthetic bond refunding."
* "A refinance will occur solely for the purpose of achieving interest-rate savings; and the maximum term of the refinancing bond does not exceed the term of the original bonds; and the minimum net present value savings on the refinanced bond must be at least 3 percent and $100,000; and the realized interest savings from the refinancing will benefit the district, not the underlying borrowers; and the fiscal officer and the financial review and reporting committee shall review and approve the debt instruments prior to their execution."
Information from the local and state audits also could be provided to residents to further explain the bond swap and refinancing, Ryan said.
The district will pay Kennedy Cottrell Richards $16,000 for its auditing work.
Betts said she has not received an estimated cost for the state audit. The district paid $32,189 for last year's state audit.