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Oklahoma City school district claims a $40 million budget shortfall on the 2007 bond issue


Scott Cooper February 5th, 2009

Oklahoma City Public Schools superintendent Karl Springer and school board chairman Kirk Humphreys are unveiling a plan this week to shore up what they say is a $40 million shortfall in the 2007...

Oklahoma City Public Schools superintendent Karl Springer and school board chairman Kirk Humphreys are unveiling a plan this week to shore up what they say is a $40 million shortfall in the 2007 bond issue. The attempted solution involves tapping into unused bonding capacity and extending the maturity of the school bonds.

THE 'SILO' EFFECT
CENTRALIZED TABLE
RECONCILING
SMOKE SIGNALS
RAISE THE ISSUE
A 'MATURE' SOLUTION

In the assumptions made for the original bond issue two years ago, something went amiss, leaving officials to believe the money budgeted to spend wasn't going to keep pace with the money coming into district coffers. Assumptions are also being made to fix the problem.

What is the story behind this so-called shortfall and when was it discovered? Projections, reports and communications shed light on the district's dilemma. In an interview with Oklahoma Gazette, Springer and Humphreys sat down to explain their conclusions and a proposal to right the district's ship. But not everyone agrees with their course.

THE 'SILO' EFFECT
It took no more than two days on the job to suspect the plan had gone seriously awry. On the second day in his new workplace in July 2008, Oklahoma City Superintendent Karl Springer wanted to see the numbers concerning the district's 2007 bond issue.

"I went and talked to one of our employees who was basically in charge of the planning that went into that process," Springer said. "I said, 'Tell me what I need to know about our bond issues.' He said he had a concern about the 2007 bond issue. He had done the planning for the construction. He said, 'My plan was for a five-year construction plan. We based everything we did on a five-year plan.' But he said the funding on that five-year plan is 10 years. The revenue that would come from bonds would take 10 years to get."

Springer said he spent several weeks trying to confirm whether a problem existed. Eric Wenger, program manager for MAPS for Kids, was brought in to look at the numbers. A confirmation came shortly afterward: The amount of money coming into the district from bond sales would not be enough to cover the construction of projects under a five-year plan.

But former school board chairman Cliff Hudson believes the bond issue passed in original form is solvent.

"Because of our experience with MAPS for Kids (2001 bond issue) and my awareness of adjustments that can be made to varied assumptions underpinning the program, I have never felt that the 2007 program would not work," Hudson said.

One of the key questions leading to Springer's deficit conclusion was whether the bond projects were based on a five-year plan.

Going back over the language of the propositions Oklahoma City patrons voted on in 2007 " and rereading the literature the district sent to educate the public along with news coverage of the plan " there is nothing that specifies a five-year plan.

Springer admitted the same: "We could never find any public statement made by the school board that it would take five years to get this done. The thing about that was "¦ it went back to the central problem of not having anyone bring it to the table and say, 'How is this going to work?'"

CENTRALIZED TABLE
The lack of a centralized table coordinating the plans led to what Springer and Humphreys believed was the root of the problem. While publicly there was no mention of a five-year plan, internal district documents show officials at times were working from that perspective. According to a May 2007 memo from district senior facilities officer Terry Wolfe to Interim Superintendent Linda Brown, Wolfe charted his projected costs between 2008 and 2013.

But Hudson said the plan changed when the state started requiring school districts to implement all-day kindergarten. This meant the bond issue was going to have to include construction of 50 new classrooms.

"With this expansion of the plan, the internal use of the term 'five-year program' was dropped," Hudson said. "This was because the costs of the incremental work took the years of implementation of the program well beyond five years."

This appears evident in a May 30, 2007, e-mail from Wolfe to Hudson of a revised PowerPoint presentation on the bond issue. In the e-mail, Wolfe noted the proposal needed altering in order to have a balanced plan. One suggestion from Wolfe was to "adjust the length of the plan upward to allow collection of more moneys."

His presentation included figures showing the amount of bond debt the district could incur for a five- and seven-year plan.

But if Springer's scenario of construction on a five-year plan and funding on a 10-year plan was correct, couldn't the district just have stretched the construction over 10 years?

"The problem was as the length of the construction took 10 years or longer from the time of the bond sale, you had a situation where you had escalating costs over 10 years," Springer said.

In other words, the price of brick and mortar would be higher in 2015 than in 2008, and the plan would not have calculated that factor based on five years of construction. When the final tabulations were done, both the district and the city projected the plan would fall between $40 million and $42 million short.

"I kept looking at it," Springer said. "I couldn't believe there was that big of a shortfall."

The immediate question became how to fix the problem. Springer and Humphreys presented their solution at the Feb. 2 school board meeting.

RECONCILING
But what caused the problem? And how could a district not reconcile how much money it was going to spend with how much money was coming in? Springer said no individual was responsible for the problem.

"As I looked into this, every organization, every department, every entity that was involved in the planning of this had done their work and done it correctly," Springer said. "The finance part of it was perfect. They had done a great job. The work our folks had done for the planning of the facilities was perfect. The plan for the sale of the bonds was great.

"The part that was difficult was it appeared to me there was never a point everyone came in and got around the table and had somebody ask the question I always like to ask: 'Tell me how this is going to work.'"

Springer said at no time did the construction planner and the financier get together and coordinate their numbers. Humphreys described the situation as silos.

"It's as if our construction guys and our finance guys and the bond advisers and the school board all were in silos," Humphreys said. "They were all doing their work. All their scenarios made sense as long as they stayed in their silos. But the silos didn't agree.

"Normally, it would be the superintendent's role to say, 'Explain your construction plan to me; what assumptions are you making?' Then go to the funding guys and ask, 'Do your funding schedules couple up with their (construction) assumptions they're making?' Nobody ever brought the silos together for them to reconcile with each other."

But again, Hudson has a different take on the matter. He said Wolfe and bond adviser John Waldo were very familiar with each other as they worked together on the MAPS for Kids project.

"Terry Wolfe began using Mr. Waldo and his firm for work on the 2007 bond proposal," Hudson said. "Mr. Waldo prepared scores of spreadsheet-based projections for the district for the 2007 bond proposal and Terry Wolfe's May 30 memo to me refers to just one of those sets of projections."

SMOKE SIGNALS
Since 2006, the district has spun like a revolving door when it comes to the superintendent's office " a factor that Humphreys said occasionally created a vacuum of leadership that may have caused communication breakdowns regarding the bond issue.

The first discussion of a new bond issue started when Bob Moore was the superintendent. Upon his departure in 2006, Linda Brown sat in as interim superintendent. The school board hired John Porter in July 2007, and a month later, the board approved putting the bonds up for a vote.

"The bond initiative was an initiative that was sponsored by the board and driven by the board," Porter told the Gazette. "The meetings they had regarding the bond, I think I went to one or two. But I was not to be involved."

Three months after passage of the bonds in October 2007, the turnover started back up as Porter resigned amid controversy. School board chairman Hudson had initiated a private investigation into some of Porter's travel expenses. The two threw verbal public barbs at each other for several weeks, ultimately ending with both Porter's and Hudson's resignations, effective January 2008.

Another seven months would pass before Springer moved in. By that time, the first bonds had already been sold. He said a lack of leadership continuity prevented connecting all the dots on the bond issue.

While Humphreys claims no powwow had taken place to compare numbers, the issue of whether warning signs were sent out is unclear. Humphreys was quoted in a recent story in The Oklahoman saying the May 30 memo from Wolfe to Hudson in 2007 was a warning the bond figures and the construction numbers were not adding up.

Hudson disagrees.

"It is important to understand there were consultants who provided analysis and information to us to build the 2007 plan. Terry Wolfe's May 30 memo refers to just such a consultant's data," Hudson said.

"As to any warning that the program wouldn't work, my answer is that no such warning or suggestion was ever made to me and nor did I hear of one."

RAISE THE ISSUE
Both Springer and Humphreys believe it would have been difficult for some in the administration to raise the issue.

"The district, because of the revolving door of the superintendent, had kind of been in the survival mode," Springer said. "When you're in the survival mode, some folks are unwilling to raise issues. The climate wasn't right for that kind of dialogue."

However, Porter said concerned remarks were exchanged.

"There is correspondence that came from staff that went to the board that raised some concerns we did have," Porter said. "But we did not have ultimate authority over that. The chairman, the bond counsel and the board determined what those numbers would be.

"I didn't know whether it was going to be short, but we did have some concerns about the timing of getting the money and whether that was going to work."

Once Springer confirmed his worries, a meeting took place among the key players of the bond issue and MAPS for Kids, including Springer, Humphreys, Hudson and Wolfe. At the meeting, part of the discussion included whether a problem existed.

"If you asked me what was Cliff's position walking out of that meeting, I would have said, 'Cliff doesn't think there could be a problem,'" Humphreys said, "because he understood there was a 30 percent inflation factor and a 20 percent contingency (built in), and you just have to manage your way through it."

Hudson said that was his understanding: "However, once the costs of the program were compiled, these inflation and contingency assumptions would have been incorporated in the projected construction costs, rather than listed as a separate cost in the bond proposal."

But the inflation rate included in the bond package was skewed, according to Humphreys. He said Wolfe calculated inflation costs for construction, but did not include any inflation for maintenance work.

"When Cliff says there's a 30 percent inflation factored in, yes, there is, on half of it," Humphreys said. "Why you chose to inflate bricks and mortar but not air conditioners, I don't know, but that's what he did."

If the bonds were stretched out to 10 years " as Waldo had done with his figures " there would be money for some construction and maintenance for the first five years. But Humphreys said after year five, there would be no money for any maintenance for the next five years, leaving the district unable to purchase new buses or computers.

"Either we're going to have to use bond funds to do that " and we haven't built any new gyms " and we would have to go back to the voters and raise taxes to maintain our facilities when we haven't delivered what we promised five years ago," Humphreys said. "Politically, that would go down in flames so big. Someone is smoking dope if they think that."

A 'MATURE' SOLUTION
When Springer first confirmed his worry over the bond issue, his initial solution was to scrap the bond issue " use only the funds for the three propositions dealing with maintenance and school buses, and spend the bonds that had already been sold, which was $15 million. The remaining $198 million for construction would have to wait.

But Humphreys believes he has the plan that will save the day. It involves letting the bonds mature over a longer period of time. When a bond is sold, the district can set the period in which the bond will be retired. For the 2007 bond issue, the district had planed to let the first year of the bond retire in four years. Humphreys said if that bond is retired in 15 years, the district can earn more than enough money to cover the shortfall and not raise taxes on property owners.

The key was leaving unused bond money sitting on the table. The amount of the bonds is based on a formula, where a district may bond up to a certain percentage of the district's total property value.

"(The bond adviser) used a 2 percent inflation rate on property values, but for the past decade they've averaged 4.7," Humphreys said. "So I went with a 3 (percent). In five years from now, we can sell all the bonds instead of 10 years from now. Instead of selling $31 million for '08-'09, I've got us selling $80 million. I get $50 million more this spring than five years from now."

The solution is based on getting money to the district as soon as possible to avoid selling bonds many years down the road or not at all. And as Springer and Humphreys believe, the proposal involves better planning.

"The real fault is no one was in sitting in Karl Springer's chair saying, 'Hey, explain your assumptions on construction,'" Humphreys said. "Now in order to make his (bond adviser's) numbers work, we've got to change your numbers. How can we change those numbers where we can get the money quicker? No one ever did that."

But again, Hudson's version of events is slightly different:

"The school district administration participated in the process, beginning with Bob Moore and Terry Wolfe. They were helpful in providing input, ideas and insights. They hired construction, financial and legal consultants to advise us. It was an inclusive process." "Scott Cooper

 
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