MSBA Reimbursement History

by Linda Brenckle

As Northborough residents decide whether to authorize spending $100,000 on legal fees to seek a declaratory judgment, a review of the issue may be helpful.  This, and an article which summarizes events of 2006 to the present, and a graphic timeline, describe the history of the Massachusetts School Building Authority (MSBA) reimbursement allocation disagreement.

MSBA Reimbursement History Part 1:  2000-2005

An easy starting point for the purpose of this history is September 11, 2000 when the towns of Northborough and Southborough amended the Regional Agreement.    The purpose of the amendment was to create a fair way to allocate the costs of the approaching Algonquin High School addition/renovation project.  The amendment directed that yearly town assessments for capital expenses would be a percentage based on the average of each town’s student enrollment for the previous four years, otherwise known as the four-year rolling enrollment average.  The handling of operating expenses would not change; the assessment would be based on the percentage of students from each town for the previous year.

Both towns approved the Algonquin project in November of 2001; plans indicated that the project would be completed two years after groundbreaking.   An application was made to the School Building Assistance program of the Massachusetts Department of Education (SBA) in January of 2002 to request aid, which was approved in May of that year.  SBA would grant 65% of the cost of the project, given in yearly installments over the life of the long-term bonds issued for permanent financing near project completion.  The RSC would issue bond anticipation notes (BANs) for temporary borrowing during construction, then bonds for permanent debt as the project wound down.   All project debt, reduced by SBA aid, would be allocated to towns according to the newly amended RA.  Construction proceeded.

In October of 2002, because interest rates were low at the time, the RSC issued a $10 million bond to take advantage of the cost savings.  While a sound financial move overall, this affected the town allocations.  BANs are interest-only debt and bonds require payments of principal and interest.  The issuance of a bond earlier in the project favored Southborough because, with its climbing enrollments during the early period, use of the four-year rolling enrollment average would smooth out enrollment jumps during a time when there were higher expenses to pay off principal as well as interest.  Northborough calculated its additional expense to be $2 million in the first three years of borrowing. As a result, Northborough asked the RSC to cease permanent borrowing.

At the same time, Northborough asked the RSC to allocate SBA aid “based on the ratio of Gross Debt Service funded by each town.” Then District Superintendent, Mr. Robert Melican, sought advice from attorneys Ropes & Gray on the proper mechanism for allocating SBA grants.  Attorney Mr. Richard Manley, Jr., in a letter to dated February 12, 2003 responded that, in his conversations with the State Department of Revenue, he had been advised: “regional school agreements are subject to requirements of state law as in effect from time to time, the statutory mechanism set forth [Chapter 70B] is the appropriate method for allocation of school building assistance grants in the regional school context.”   On February 27^th Mr. Melican wrote to Northborough stating that special counsel had advised that the Chapter 70B formula was the only method for allocating SBA reimbursement but that the RSC did not have the authority to decide between 70B and the RA.   Mr. Melican also informed Southborough administrators, Boards of Selectmen and financial committees of this advisement at the same time.

MGL Chapter 70B, section 10 outlines the formula for figuring the SBA grant percentage of approved school projects.  The formula is:  Base percentage (A) + Community Income Factor (B1) + Community Property Wealth Factor (B2) + Community Poverty Factor (B3) + Incentive Percentage.  The Base level in effect at the time was 31 percent.  The Community Income Factor is the town’s average per capita income as a percentage to the statewide average.  The lower a town’s average per capita income, the higher the factor—the lower the earnings of town residents, the more grant benefit the town receives.  Likewise, the Community Property Wealth Factor is the town’s average property values as a percentage of the statewide average; lower property values translate to a greater grant benefit.  Replicating the pattern of the previous two, the Community Poverty Factor is the proportion of low-income students as compared to the statewide average; towns with more low-income students receive a greater benefit.  Finally, the Incentive Percentage is based on the maintenance rating and energy efficiency of the existing building(s), the type of project—renovation versus new construction versus major construction versus alternatives to construction—the community use of the project, and the availability of non-state funding for it.  The SBA formula, as applied to calculation of percent reimbursement for a single town, is straightforward but section b, which describes regional apportionment of debt and reimbursement, is like looking at a scene in the midst of a tornado.

In June of 2003, Mr. Bradford Jackson, then Assistant Superintendent of Finance and Facilities for the District, prepared and distributed a revised debt interest model using the 70B formula, which he said was only an estimate of the cost of the project based on assumptions.  It forecast the total project cost to be $3 million higher for Southborough and $3 million lower for Northborough as compared to using the RA formula.  In July of 2003, Mr. Jackson presented a summary of developments of the preceding 6 months regarding project financing to the RSC, who discussed his presentation.  In response to a question from an RSC member, Mr. Jackson “noted that he was not aware of information being referred to legal counsel at that time” [when the original debt interest model was in use].   No action was taken by the RSC at the July 2003 meeting.

In 2004, responsibility for school building assistance was transferred from the Massachusetts Department of Education to the newly formed MSBA under the direction of the State Treasurer’s Office.  Projects would now be funded differently.  Many towns were seeking aid, as aging school buildings needed work and student populations, the children of the Baby Boomers, increased.  Aid for the Algonquin project was reduced from 65% to 56% of costs.  The schedule of aid reimbursement was also changed.  It would be distributed in installments from the beginning of the project as costs were incurred.  Algonquin construction, however, was already underway.   Transitional projects such as this were considered on a case-by-case basis.  The Algonquin project was to receive two lump-sum payments near the end of the project rather than the bond-life installments that had been the original reimbursement plan.

Watch further posts of the history of the issue at hand…