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Evanston Skokie School District 65 Board is expected to receive a formal proposal from its Finance Committee Monday, May 23, to award a contract to PFM Asset Management for financial management of more than $44 million in lease certificates that will finance the new Fifth Ward school.

If approved, the contract would start the next day.

Raphael Obafemi, the district’s Chief Financial and Operations Officer, made a presentation to the May 16 meeting of the board’s Personnel, Buildings & Grounds, and Finance Committee, with the request for proposal, or RFP, that came from Superintendent Devon Horton. 

Obafemi told the committee that PFM was one of five firms invited to submit a proposal for “Investment of Lease Certificates Proceeds and Arbitrage Rebate Management,” according to the documents. Aside from PFM, three firms responded: Wintrust Investment Management, PMA Asset Management and Raymond James Investment Service.

The RFP asked the firms for strategies on managing the “proceeds of General Obligation Lease Certificates (Limited Tax), Series 2022 in the amount of $44,008,180.45.” 

While about $40 million of that total is to build a new Fifth Ward school, the other $4 million will be used for capitalized interest, or the costs associated with borrowing to build a long-term asset such as the school, Obafemi said. 

Obafemi also said that to pay that $4 million for capitalized interest, the district will use a firm to help invest those funds to allow it to pay the first year of interest on deadline.

PFM Asset Management primarily manages money for public governmental entities, with 95% of its clients being school districts, municipalities, water districts and park districts. 

In December 2021, PFM was bought by U.S. Bank via its subsidiary, U.S. Bankcorp Asset Management. At the time, the news release announcing the sale said that PFM would continue to “operate as a separate registered investment advisor” and that it had more than “$125 billion in assets under management and more than $44 billion in assets under administration.” 

Eric Thole, head of U.S. Bancorp Asset Management, said in the release that PFM was known for its public sector work: “PFM Asset Management offers its clients a variety of product offerings, including local government investment pools, outsourced chief investment officer services and separately managed accounts in both fixed income and multi-asset class strategies.”  

The same day as the committee meeting, Horton sent out a letter to district parents heralding the new school, which began: “After 53 years, we are thrilled to return a neighborhood school to Evanston’s 5th Ward.”

The email went on to say the school is scheduled to open for the 2024-2025 school year, and it explained the creative lease certificate financing plan the district is using to build the new school. It read:  

“The estimated cost of construction is approximately $40 million. We are pleased that costs will be fully covered through the issuance of Lease Certificates and without raising taxes or putting a financial burden on our community. Lease Certificates are long-term financial commitments exclusively used for funding new construction and they must be repaid from the district’s operating budget (use of existing funds for the repayment of the debt). 

“In simple terms, the issuance of Lease Certificates means the District is leasing the building from the bank and will make payments. The District will pay $3.2 million annually over 20 years. Once all payments are made in full, the title will be transferred from the bank, and the district will fully own the building. Based on the District’s strong financial position, we obtained a fixed interest rate of 3.48% despite unfavorable market conditions.

“The Lease Certificates would be paid back through the district’s operating budget using transportation savings resulting from a new neighborhood school in the 5th Ward. Over 500 students will no longer have to be bused to other schools which will provide significant savings in annual transportation costs. These savings will be repurposed and used towards largely making the necessary debt service payments.”

There is much more detail in the 160-page “Official Statement” filed with the Securities and Exchange Commission, a document that is required for any public offering of municipal securities to inform potential investors of the risks and the benefits. 

It explains that:

  • Raymond James & Associates was hired by the district as its municipal adviser and prepared the statement .
  • Chapman and Cutler of Chicago has been retained as the district’s bond counselor. 
  • The lease is held by Zions Bancorporation, N.A., Chicago.
  • The $3.2 million annual payment is the amount the district anticipates saving after eliminating its busing.
  • The filing, which also contains the district’s annual 2021 audit, shows the school currently has a strong financial position and a good record of financial maintenance. The lease certificates were given a Aa2 rating, which is the third highest long-term credit rating that Moody’s assigns, meaning it considers the certificates high-quality fixed-income securities with very low credit risk.
  • The Illinois State Board of Education gives every district a financial rating score from one to four, with four being the best. District 65 has gone from being on the watch list in 2016 to 3.9 in 2021. From 2018 to 2020, it was at 3.8.
  • “The Certificates were offered for sale by the District at a public competitive sale on March 29, 2022. The best bid submitted at the sale was submitted by Mesirow Financial Inc., New York.”
  • The District awarded the contract for sale of the lease certificates to Mesirow at a price of $44,338,917.95. That figure reflects the par amount of the certificates, $38,315,000.00, plus the original issue premium of $6,300,935.40, and less the underwriter’s discount of $277,017.45. 

The report also cites some warning signs:

  • “While preliminary costs have been projected by the District’s consulting architects, not all of the construction contracts have been let by the District. No assurance can be given that the cost of completing the Project will not exceed available funds.”
  • It also warns that Illinois’ finances are extremely bad, including the debt repayment on the pension funds, and that could affect the project. 
  • And another danger looms if there are any more issues with COVID-19.

Funding structure recap

In an interview with the RoundTable, Obafemi said that although the district can pay back the $44 million debt over time using the savings from transportation, the district has to begin paying interest on the amount later this year.

In order to have enough to pay interest on the loan, it included the interest as part of the borrowed money, known as capitalizing interest. 

If selected, PFM Asset Management will handle arbitrage for the district. Obafemi explained that a government entity can borrow money as a taxable or nontaxable instrument; this money is nontaxable.

For investors, he continued, nontaxable instruments are attractive because they do not have to pay federal taxes on any money they make from the investment. Instead of borrowing money and letting it sit in an account, the IRS allows governmental institutions like the school district to put that money toward their project in a process called “arbitrage.”

“Arbitrage means you will not borrow money to be able to earn interest instead of using it towards a project, it is a level interest that you’re allowed to earn,” Obafemi said. “[PFM’s] specialty is to keep us honest to make sure that we don’t run afoul of that section of the IRS rule that relates to arbitrage management. They monitor and they give us a report every month to make sure we spend the money on a given schedule. So we’re not just earning interest, we’re using the money for the project.”

It was unclear how much PFM would earn from this contract or how its fees are structured.

Susy Schultz

Susy Schultz is the editor of the Evanston Roundtable. She has been a journalist for more than 20 years, and is the former president of Public Narrative, a nonprofit dedicated to teaching journalists and...

Debbie-Marie Brown

Debbie-Marie Brown is a reporter and Racial Justice Fellow at the Evanston RoundTable. They cover the local reparations initiative, Black life in Evanston, and the 5th ward. Contact Debbie-Marie at dmb@evanstonroundtable.com...

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