Leander ISD taxpayers will owe less in interest on bonds for school projects after district officials successfully advocated for change at the state level.

To fund construction projects that keep up with the growing LISD population, the district historically used bonds on which no payment is made until maturity. But after restructuring its debt load, officials decided the district should trade these bonds for ones on which interest payments are made earlier, thereby lowering the long term burden on taxpayers.

A state law blocked the district from making the trade, but Chief Financial Officer Lucas Janda, trustee Pamela Waggoner and LISD’s financial advisers successfully advocated for change at the Texas Attorney General’s Office.

“It’s really such a win for the state and for the taxpayers,” Waggoner said.

District debt LISD’s board of trustees set the fiscal year 2016-17 property tax rate at $1.51187 per $100 of valuation Aug. 25. The tax rate is composed of two portions: the maintenance and operations rate and the debt service rate. The maintenance and operations portion funds teacher salaries and day-to-day expenses.

The debt service portion of the tax rate—at $0.47187—is used to pay down the district’s debt.

The district’s debt typically comes in the form of a bond in which the borrower—LISD—agrees to pay back the principal balance with interest. The terms of the bond dictate how much interest gets paid back and when.

For example, if the community determines the district needs a new school campus, a bond proposal for the cost of construction would be put to voters for approval. Besides capital projects, a bond referendum may also include money for technology, buses, land for future schools, portable buildings and the cost of selling bonds.

If voters approve the ballot measure, the district sells the municipal bonds when it needs funds for capital projects.

Voters last passed a bond for LISD in 2014. Unlike some school districts in Texas, LISD sells bonds by asset type. The district separated its 2014 bond sales into three categories: transportation, which includes buses; technology; and infrastructure—or construction. The district will pay off the transportation and technology categories by 2019, Janda said.

The infrastructure category has a 50-year life span and is typically repaid in 20-35 years, he said.

Types of bonds LISD uses two types of bonds: current interest bonds, or CIBs, which defer payment on the principal until the bond’s maturity but require semi-annual payments on the interest, similar to a home mortgage, and capital appreciation bonds, or CABs, which defer payment of both principal and interest until the maturity of the bond.

In the early 2000s the district’s population was growing, and residents wanted more schools and low tax rates. The district used CABs to fund new construction and keep the tax rate low, said Waggoner, a trustee and former board president.

“Times have changed,” she said.

Advocating for change Four years ago, amid growing concern about mounting debt, LISD made an “aggressive effort” to tackle its debt by hiring Janda as CFO, creating a 10-year plan and restructuring its entire debt load, Waggoner said.

Janda said the district is now using excess tax collections to pay off bond interest and principal sooner.

In 2015, the Texas Legislature passed House Bill 114, which included a statute stating if a district had more than 25 percent of its debt in CABs, it could not issue new CABs.

“Leander ISD was over 70 percent at that point,” state Rep. Tony Dale, R-Cedar Park, said.

The bill was also generally interpreted by school districts and other entities to state that a school district could not refund a CAB and trade it for a CIB—it could only refund a CAB for another CAB if the bond had reached maturity. It also limited the life of a CAB to 25 years. Prior to the bill, state law allowed a 40-year life span for CABs and other school bonds.

Dale, who co-authored HB 114, said he grew concerned that the extensive use of CABs and the associated long-term costs put the school district at risk. The bill was an effort to restrict CABs as a method of financing, he said.

But in its attempts to chip away at the district’s debt, LISD wanted to convert many of its CABs to CIBs, which would allow the district to pay off interest on the loan earlier, when money is cheaper, resulting in less money required from taxpayers overall, Waggoner said.

“This would just be a much better way to save money,” she said.

Waggoner said she, Janda and LISD’s financial advisers agreed the intent of HB 114 was to help districts lower their debt load, so they took the statute to the Texas Attorney General’s Office. Within four weeks, Waggoner said, the office changed its decision about the statute and agreed districts should be able to trade CABs for CIBs.

“It’s really going to be able to pull our debt down tremendously,” she said.

LISD currently has CABs from its 2014 bond for infrastructure that it plans to trade mostly for CIBs, she said.

“We can meet our obligation—[the] tax burden—we can retire bonds [and] we still have room to build new schools,” Waggoner said. “It’s just been a remarkable turnaround in the last four years.”

“Ultimately, Pam’s efforts led to the AG agreeing to a bond refinancing, which will provide approximately $325 million of savings [in interest LISD would have owed on CABs] to our taxpayers,” Janda said. “This is a huge win for schools like Leander ISD and, more importantly, the taxpayers in Texas.”

Dale said he is in favor of allowing school districts to borrow money at lower rates, and he said he is glad LISD is taking action to rebalance its debt portfolio so it has less costly financing.

New legislative issues Despite one state-level win, another funding issue lies on the horizon, which could take millions of dollars from LISD.

Additional State Aid for Tax Reduction, or ASATR, funding became available to Texas school districts in 2006, when the state Legislature cut property tax rates by one-third statewide.  Lawmakers guaranteed school districts would be able to maintain the same amount of funding per student as they would have received before the tax cut because of ASATR funds.

But in 2011 the Legislature reduced ASATR funding and enacted a repeal of ASATR, effective Sept. 1, 2017.

Unless legislators take action in the coming session, several school districts could lose millions in funding to state coffers, including LISD, Janda said.

“There are two problems with the potential loss of ASATR funding: One, the state would be going back on their promise to keep districts whole from their legislation to compress the maintenance and operations tax rate; two, school districts receiving funding below the average ISD will be further reduced and the gap widened for equitable funding per child,” Janda said.

According to the Austin-based Texas School Coalition, which provides research, information and consultation about school finance developments and legislation, only about 200 out of the state’s 1,019 school districts still receive the funding, but many of those districts rely on it heavily.

The Legislature could enact school finance reforms prior to the repeal date that would prevent those districts from “falling off the ASATR cliff,” according to the coalition.

TSC Executive Director Christy Rome said the coalition hopes to see a bill in the 85th legislative session that will maintain ASATR funding and prevent future funding uncertainties.

“Rep. Ken King, R-Canadian, and Sen. Donna Campbell, R-New Braunfels, both filed legislation to that effect in 2015, and we expect to see similar legislation filed in 2017. I believe there are additional legislators equally on-board and expect to see a variety of fixes filed,” Rome said.

Dale said Speaker of the House Joe Straus, R-San Antonio, told Dale and other representatives that school finance systems would be discussed during the upcoming session.

In May, the Texas Supreme Court ruled the state’s public school funding system was constitutional but imperfect with “immense room for improvement.”

“We’re going to be taking a very hard look at the school finance system,” Dale said. “I don’t think we’re going to leave any stone unturned.”

ASATR funding will more than likely be part of that conversation, he said.