Adopting the Wicked Ways of the North
by Alex Saitta
July 25, 2005
The Constitution of South Carolina restricts school board borrowing by:
1) Limiting the amount a school board can borrow.
2) If a school board wants to borrow more than the limit, it must be approved in a voter referendum.
3) A school board can not borrow money to pay for yearly operating expenses.
The Pickens County school board is considering a borrowing plan that circumvents restrictions one and two and similar plans have been used to circumvent the third.
The plan the school board is considering is known as the Greenville Plan, because it was implemented by the Greenville school board. This power grab will forever cut the voters of Pickens out of the borrowing decision, and it will give this school board and successive school boards in Pickens the power to borrow an unlimited amount of money.
Not Invented In Greenville:
As a former bond analyst in New York, I’m knowledgeable of the wicked ways of the north when it comes to borrowing schemes that get around Constitutional limits. Such borrowing schemes were not invented in Greenville, but in New York, and it is the reason that state ranks second in the nation in debt per resident. Pickens and other school districts in South Carolina should not follow in New York’s footsteps.
How the Scheme Works:
The South Carolina Constitution states a school board can not borrow more than 8% of the assessed value of the property in the school district, unless it is approved by a voter referendum. The Pickens school board is near its 8% borrowing limit, so to borrow the millions it seeks to renovate some of its schools there should be a bond referendum. Unfortunately, the Pickens school board is considering a plan that will go around this requirement.
Under the plan, the school board will create a dummy company. The company will not be limited by the Constitution, so via the company the school board could borrow virtually an unlimited amount of money without voter approval. The dummy company will issue millions in bonds, and renovate the schools.
To make the bond payments, the school board will arrange a lease-purchase agreement. The students will use the refurbished schools and the school board will make lease payments to the dummy company. The payments will pass through the dummy company and come out the other side as bond payments to the lenders. After the leases expire and the debt is paid off, ownership of the schools will revert to the school board. Hence the term, lease-purchase.
Although called “leases”, their impact on school board finances will be similar to direct school board debt, and the taxpayer will be on the hook for all principal and interest payments.
Just Like New York:
The Constitution of New York says all general obligation borrowing by the legislature must be approved by referendum. To cut the voters out of the borrowing decision forever and have access to unlimited borrowing, the legislature created “dummy” public authorities (e.g., Urban Development Corporation) that borrow the money on their behalf. In turn, the legislature pays off much of that debt by appropriating taxpayer funds to the authorities or arraigning lease-purchase agreements with them. (Sound familiar?)
Using similar lease-purchase agreements have proven to be the most diabolical way the New York legislature has circumvented state Constitutional borrowing restrictions. For example, in 1990 the legislature instructed the Urban Development Corporation (UDC) to “buy” Attica prison from the state for $200 million. The UDC borrowed the $200 million by issuing 30 year bonds. The UDC gave the money to the legislature in the “sale” and then it was used to plug that year’s budget deficit.
To pay off the bond holders, the legislature leased the prison from the UDC for 30 years. The state’s lease payments passed through the UDC and came out as bond payments. At the end of the 30 years, the state will re-take ownership of Attica. By the way, plugging that year’s deficit will cost New York taxpayers $500 million in principal and interest payments over the 30 years.
If the Pickens County School Board gets into the business of creating dummy companies to circumvent Constitutional borrowing limits, who knows where this will end up?
I am all for improving our school buildings, but I won’t stomp on the Constitution’s borrowing restrictions in order to get the money. I did not swear to God with my right hand to “protect and defend” the Constitution, only later to vote with my left hand to circumvent it.