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Duluth School Board explores Red Plan debt issues

A watered-down version of a Duluth School Board proposal that advocated for the refinancing of Red Plan debt was approved Tuesday night.

Board member Art Johnston proposed the original resolution, which suggested the district explore refinancing all Red Plan debt and halting an annual general-fund transfer that pays part of that debt. They were moves he said could help the district's financial woes, but that district officials said would require changing federal and state laws.

Because some board members objected to his proposal's intent and tone, Johnston said during Tuesday's meeting, he worked with member Nora Sandstad on a compromise.

What the board approved was a resolution that says it supports legislation that would allow the debt currently paid out of the general fund to be paid from another source, and that it "strongly encourages" district administration and advisers to find alternatives to the current debt repayment plan.

"This should allow a lower payment if we can get some help on this and this would not result in going to the tax rolls; that's my hope and intent of this," Johnston said.

However, if state law was changed to allow the general-fund debt to be paid elsewhere, that would mean payments would come from property taxes, as there is no other alternative, said Superintendent Bill Gronseth.

Johnston said that was not part of the resolution.

"Hopefully that will get worked out as we go and my intent is to work it out as we go," he said, noting the resolution was "generic" to allow for flexibility.

Johnston's goal is to stop that annual flow of money — about $3.3 million this coming year — from the general fund. It's a financing mechanism that was put in place at the start of the project and approved by the board and the Minnesota Department of Education at that time. The move would require a referendum or a change in state law because it would raise taxes.

Also known as the long-range facilities plan, the $315 million Red Plan was completed in 2013 and resulted in the closure of several schools and the building of new schools.

Johnston's original resolution sought to form a committee with district administration to find alternative ways to pay off Red Plan-related debt, to look into subsidies related to the general-fund debt and to get second opinions on ramifications of the moves.

The district has twice before refinanced chunks of Red Plan debt, saving more than $8 million in the process, said district chief financial officer Doug Hasler, who agrees that refinancing debt — when it makes sense — is a "worthy" goal.

However, there are legal and contractual restrictions linked to refinancing all of the debt, and with shifting general-fund payments to another source, he said last week.

Following the approval of Tuesday's resolution he said that while he was "absolutely committed" to exploring the board's direction, he needed more clarification on its intent.

Sandstad said Wednesday that Johnston's initial proposal was "not well-received" by board members, and that it appeared "distrustful" of administration, as if they weren't looking out for the financial best interest of the district. She didn't agree with that, she said, but wanted to move things forward.

"I wouldn't vote to approve an increased levy without seeing the impact of that," she said. "Most of us are in agreement that we don't want to be paying" Red Plan debt through the general fund, because it takes money away from classroom expenses.

That annual payment was intended to be generated by the sale of unused district properties, utility and operational savings and "other district funds." Savings have not been as high as projected, most notably because the former Central High School remains unsold.

The idea behind the resolution is to get help from local lawmakers in changing state law, said board member Alanna Oswald.

"Lawmakers demand that we have a board-passed resolution in order for them to help us, so here it is," she said.

Rep. Jennifer Schultz, DFL-Duluth, said Wednesday the E-12 budget was settled for the next two years, but local lawmakers would do what they could to help the district.

Board chairman David Kirby called the legal obstacles to refinancing and challenges of changing state law "insurmountable." Among the obstacles is a state requirement that refinancing must bring about at least 3 percent in savings.

"What you want and what you realistically get are two different things," he said. "We've had reputable experts tell us this is not doable with the way the statutes operate and the way the bond markets operate."

The board members approving the resolution were Harry Welty, Sandstad, Johnston, Oswald and Annie Harala. Kirby opposed it and Rosie Loeffler-Kemp abstained.