October 10, 2010
Dear Emeryville Neighbors,
Here is another installment in the information regarding Measure J and the Center for Community Life. This time I will talk specifically about the financing structure, as well as I understand it. I am not a financial professional, but I feel that the information I have heard makes sense to me, and I will try to share it with you.
At the city/schools committee meeting last Thursday, October 7, I spent the better part of 20 minutes asking Khushroo Gheyara (from Caldwell, Flores and Winters, the consultant that is advising on facilities and financial planning) questions that I had or that had been posed to me in the last few weeks. I will sum up the answers that I received, and hope that this will bring clarity for you as well.
First of all, there are 2 aspects to Measure J that we need to consider: the overall project and the financing of that project. I feel strongly that the project is one that will enhance our community: both the schools and the city. I have stated those reasons in my previous blog.
If you like the project, then let’s look at the financing. Bond financing is the way that many capital projects are accomplished. This bond measure is not remarkable or different than many others. It would combine two kinds of bonds: a traditional one where interest is paid out every 6 months, and a “zero-coupon” bond where the interest is paid at maturity of the bond. As with a mortgage, the one where interest is not paid during the life of the loan ends up costing us more – a greater amount of interest over time.
The bonds for this measure are typical for a project like this. By allowing 3 different series of bonds to be sold, the district is left with some flexibility about how much to issue and when. Emery Unified would have about 7 years’ time to issue the bonds. If interest rates were high, we might choose to issue less in bonds early on, or add years onto the repayment of the bonds, if necessary.
We cannot anticipate accurately interest rates or how much assessed value the city of Emeryville will have over time, so what happens is we work with assumptions. For now, this bond measure assumes a growth of assessed value of 4%. Historically over the last 2 decades of extreme growth, Emeryville has had assessed values rise at close to 11%, but times have changed. The 4% assumption is conservative. If assessed value does not grow at at least 4%, then there would be a longer life to the bond payments.
Interest rates are the other variable that we do not have control over. Assumptions again guide our decisions here. If the bond were sold today, at today’s interest rates, the cost of the bond would be principal plus interest roughly equal to 1.8 times the principal. In other words, with $95 million borrowed, we would pay back the $95 million plus an additional $171 million, or a total of $266 million. Just as homeowners can refinance a mortgage, there is an option to change a bond whose interest rate is higher than we’d like, and it is called “defeasance”. If the interest rate (which is locked in at the time the bonds are issued) is higher than today’s, the interest would be higher than the amount above. This bond has been projected out at an assumed 6% interest rate. Again, this is a conservative assumption, as currently the interest rate is closer to 4%.
(Interestingly, the bond measure on the ballot for neighboring Berkeley assumes a higher rate of assessed value growth and a lower interest rate. I feel better about our more conservative estimates.)
The length of each bond will also vary. The first bond is assumed to be for 25 years.
The best way to measure how much this bond will cost the property owners of Emeryville, is to look at the maximum annual payment of $60 per $100,000 assessed value. For my family that would equal approximately $180/year. Just as when you take out a mortgage, you don’t usually look at the total cost over the life of the mortgage, you instead calculate how much your monthly payment is. This bond is really that annual payment for each property owner.
Ultimately, I feel that if you are comfortable incurring some debt for the long-term benefit of the community, then this project will make sense. If you are someone who disagrees with bond financing in general (although it is used all over our state and country), then you might not like this plan. The building is slated to have a life of at least 50 years, the bond should be paid off in 47 years.
I hope that if you have questions, or you see some inaccuracies or mistakes in what I have written here, you will write to me directly to let me know. Again, I am no expert on general obligation bonds, but I am very interested in getting all questions asked and adequately answered.
I hope this information will help you to support Measure J.
Sincerely,
Jennifer West
Emeryville City Councilmember
(510) 420-5795
emeryvillewest@gmail.com
emeryvillewest.blogspot.com
