Plan to repay Gregori bond taps general fund

Coming up with $140.7 million to pay for the soon-to-open Gregori High has not been easy for Modesto City Schools.

The district has used up all its school bonds, state grants, developer fees and the extra Mello-Roos property taxes paid by those who own homes built during the past 20 years.

Millions of dollars from the district's general fund have poured into Gregori, and millions more will be needed.

The district still is trying to arrange the final $10.5 million in financing. To repay that loan, it plans to tap more than $500,000 a year from its general fund through 2027, and it will put up Enochs High as collateral.

Diverting general funds, which are supposed to go toward instructional expenses, to construction projects is unusual in California. Those funds are in short supply, especially this year because of state budget cutbacks.

"It definitely would not be what we considered typical. It means that by building the school, you have less money for instruction," said Edgar Cabral, a senior fiscal and policy analyst who specializes in school funding at the nonpartisan Legislative Analyst's Office in Sacramento.

Cabral said the general fund is supposed to be used for ongoing operations, such as teacher salaries and books.

"I don't think the idea is that it would be spent on facilities," Cabral said. "They're paying from the general fund because they obviously weren't capable of staying on budget (when building Gregori)."

Gregori ended up costing more than twice what the public was told to expect when it passed a $65 million school bond in 2001.

"You have to spend some general fund money for construction," said Modesto City Schools Superintendent Arturo Flores. He said some of the general fund money allocated to Gregori is "one-time dollars that are spent on items such as construction, furniture, equipment and supplies."

District administrators admit they don't know exactly how much general fund money has been diverted to Gregori in the past nine years. They acknowledge more than $7.52 million in general fund money was put into a "new school site start-up" fund. In addition, an undetermined amount of general fund money was placed in a $10.45 million "special reserve -- capital projects" fund for Gregori.

"Once it goes into the special reserve, it's hard to track back where it came from," explained Dennis Snelling, the district's business services director. He is sure some general fund money was put in that $10.45 million reserve, but he said there is no easy way to figure out how much. "If you told me it was most or all (from the general fund), I wouldn't be stunned."

The issue of spending general funds for construction is critical because Modesto City Schools now is struggling to make ends meet.

The district must slice $25 million, about 10 percent, from its 2010-11 general fund budget. To do so, it plans to shorten the school year by five days, boost class sizes, lay off about 80 teachers and 85 nonteaching employees, and reduce every employee's salary.

Had general fund money not previously been spent for Gregori's construction, administrators confirmed that it could have been used to ease the district's current budget woes.

But district leaders don't begrudge previous spending decisions, and they support plans to use future general funds to repay the $10.5 million in revenue bonds it now needs to cover Gregori's remaining construction bills.

"The district has spent general fund money on debt services for facility needs and continues to believe this is money well spent on educating students in a positive learning environment," school board President Kim Spina wrote in an e-mail to The Bee.

"The board and the public have been given a clear and accurate picture" about how the district is paying for Gregori, said Spina, who joined the board in 2007. "Regular public board presentations have discussed the status of both finances and construction."

There has been confusion, however, about how Gregori's final debt will be repaid.

In issuing its bond rating May 18, Moody's Investors Service posted an analysis online that inaccurately explained how the Modesto school district would repay the Direct Pay Qualified School Construction Bonds it plans to sell.

Moody's initially reported that "annual developer fee receipts" would repay that yet-to-be-secured financing. Based in part on that, Moody's issued the school district an A1 bond rating. The rating agency corrected its analysis last week, and it now shows that "redevelopment pass-through revenues" and general funds will repay the debt.

Explaining collateral process

The Moody's report also explains how three buildings at Enochs High will be used as collateral for the Gregori bond.

It isn't unusual for school districts to use one school to secure revenue bonds for another school. Ceres did that several years ago when it used Blaker-Kinser Junior High to secure funding for Central Valley High, but Ceres has not used general funds to repay those bonds.

"The issue of using the general fund is a real problem. It's not normal," Ceres Superintendent Walt Hanline said about how Modesto plans to repay its revenue bonds. "It's not common to get put in the position they're in."

This isn't how Modesto residents initially were told Gregori would be financed.

Back in 2001, when Modesto voters were asked to pass a school bond to fund a Salida-area high school, the campus was estimated to cost $66 million. Voters were told construction costs would be covered by school bond proceeds, state grants, developer fees and Mello-Roos property taxes.

An identical construction plan for Enochs High in northeast Modesto's Village I development was proposed at the same time.

But instead of each high school costing $66 million, Enochs' price tag topped $101.4 million and Gregori's is estimated at $140.7 million.

Money to cover the combined $242.1 million cost fell short, despite spending $63.74 million from the school bond, $72.99 million in state grants, about $69.25 million in Mello-Roos taxes and developer fees, and $25.65 million from other district sources including general funds.

Before it started Gregori's construction in 2007, the district knew it would need about $10.5 million more than it had to cover all costs.

Initially, the plan was to have the builder, Acme Construction, borrow that money, then loan it to the district at the prime interest rate plus 1 percent, which is 4.25 percent.

But last year, the district became eligible to tap a new federal stimulus program that will allow it to borrow money at an interest rate of less than 1 percent. The district was given permission to sell those so-called Qualified School Construction Bonds.

Now that Moody's has issued its bond rating and corrected the mistake about how the bond will be repaid, those bonds should be sold within a month.

Rather than selling $10.5 million in revenue bonds for Gregori, however, the school district plans to sell $15.9 million.

"We figured we had a revenue stream to pay back $16 million," explained Duane Wolterstorff, manager of fiscal support services. "We haven't identified what we're going to use (the remaining $5.4 million) for."

Cabral, from the state's Legislative Analyst's Office, advised caution about accessing too much cash from Qualified School Construction Bonds.

"It's not free money," Cabral warned, noting that all of it must be repaid. "The program just helps lower the interest rate."

Bee staff writer J.N. Sbranti can be reached at or 578-2196.

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