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Schools left ‘scrambling’ after Missouri treasurer tied bond deals to AG’s COVID demands

A man in a blue suite and red tie speaks at a podium with several people behind him including the Gov. of Missouri, Mike Parson.
David A. Lieb
/
AP
Missouri state Rep. Scott Fitzpatrick speaks to reporters after being appointed as the next state treasurer by Gov. Mike Parson during an event Wednesday, Dec. 19, 2018, in the governor's office of the Missouri Capitol in Jefferson City, Missouri.

If schools refused to certify their district had complied with Attorney General Eric Schmitt’s demands to drop any and all COVID-19 restrictions, thousands in savings to taxpayers were at risk. In the nearly three months since the state required the certification form, 21 districts signed and seven refused.

It was just after 5 p.m. on Friday, Dec. 10, when the forms arrived from the state treasurer’s office.

Without warning, and with little explanation, school superintendents discovered they were now required to certify their district had complied with Attorney General Eric Schmitt’s demands to drop any and all COVID-19 mitigation measures, such as mask mandates.

If they refused, state Treasurer Scott Fitzpatrick would not sign off on school districts’ refinancing of debt at a lower interest rate through the state.

Hundreds of thousands of dollars were on the line. The deadline to comply or refuse was only days away for schools with pending deals.

James Harris, a lobbyist representing L.J. Hart & Company, which specializes in local government bonding, wrote in late December to Gov. Mike Parson’s policy director, Kayla Hahn, that Fitzpatrick’s decision had “left schools’ legal teams and banks scrambling.”

As long as the policy remains in place, Harris wrote, “every school will wind up paying higher interest rates because of this uncertainty, whether or not they choose to comply with the Treasurer’s order.”

Hahn forwarded the message to Fitzpatrick with the note: “FYSA. Pretty concerning.”

Getting the treasurer’s signature for school bonding deals had historically been a routine process.

But as emails obtained by The Independent and Documenting COVID-19 Project through open records requests show, the new requirement caught districts with pending deals completely by surprise and with few options.

In the nearly three months since Fitzpatrick enacted the new requirement, 21 districts signed the form and seven refused.

“I think it’s a political move, and I don’t think the health of students is a political decision,” said Paul Mensching, the superintendent of the Harrisonville School District, who did not sign the form.

In order to save taxpayer money, many school districts participate in the state’s direct deposit program, which allows them to take advantage of the state’s credit rating and refinance their past debt from bonds at a lower interest rate.

But the treasurer’s decision, even as COVID cases have fallen and many school districts have dropped mitigation protocols, has left superintendents wondering what requirements could be unilaterally imposed on bond deals in the future.

“They’re going to put their own personal agenda against saving the taxpayers money and making the best decision for our schools,” said Tonya Woods, the superintendent of the Thayer R-II School District, who signed the form. “It’s just sad.”

Asked about superintendents’ frustrations, Mary Compton, a spokeswoman for Fitzpatrick, said “participation in the program is voluntary,” and noted the treasurer has amended existing bond agreements to allow districts to refinance outside of the state’s program if they choose not to sign the form.

“If I really wanted to be difficult, I could prevent them from even doing that,” Fitzpatrick said Thursday. “But we’re not doing that.”

Scrambling to understand the change

Emails in the days following Fitzpatrick’s decision show that, initially, those involved in the deals were unclear what would happen if superintendents chose not to sign.

Others wondered if superintendents could be putting themselves in legal jeopardy by agreeing to the terms.

“The Treasurer is asking school administrators to sign paperwork that a school board could quite easily violate, which would have the effect of putting the administrators at risk of legal liability for decisions they cannot control,” Harris wrote to the governor’s office. “School boards act independently, and by majority vote – without consulting school staff at all – can impose restrictions that would run afoul of the language in the Treasurer’s letter.”

Rick McConnell, a partner at the St. Louis-based law firm Armstrong Teasdale, which was serving as bond counsel for three school districts with pending deals, wrote an email three days after the forms were sent out ticking through unanswered questions: Could this affect the rating on the bonds? Would other parties involved in the agreements withdraw their signatures? Does the lack of a signed direct deposit agreement affect whether the bonds are valid?

The outside financial adviser for the Missouri Health and Educational Facilities Authority, which administers the direct deposit program, said in an email later the same day that without the state’s credit enhancement, he didn’t see how the deals’ underwriters could go through with the purchase of the bonds.

“I’d expect these closings will fail,” he wrote to MOHEFA’s top officials and general counsel.

McConnell wrote he hoped the requirement could be eliminated for districts with deals closing in the coming days, in order to allow more time to deal with any potential ramifications. But, he wrote, “we aren’t terribly optimistic about the chances of success.”

McConnell wrote in an email later that morning that another attorney spoke with Deputy State Treasurer Mike Price, who said Fitzpatrick “has concerns about being caught up on the ‘wrong side’ in litigation that the AG might initiate over the issue.”

After a Cole County Circuit judge ruled in November that health orders intended to mitigate the spread of COVID-19 were “null and void” if issued by unelected health officials, Schmitt pushed for its enforcement across the state.

He warned in letters to school districts and local health departments that if they failed to drop health orders, he would pursue legal actionand later did. Compton said the certification form, sent three days after Schmitt’s letter to schools, was “necessitated by the actions threatened in the letter and the obstinate response to it by many districts.”

MOHEFA’s general counsel, Michael Lause of Thompson Coburn LLP, was shocked Schmitt’s letter could “grind financial matters to a halt.”

Perhaps, Lause wrote in an email to Armstrong Teasdale attorneys and L.J. Hart & Company officials, someone ought to get the attorney general’s office to indicate it wasn’t Schmitt’s intent to delay financings.

Five days after Fitzpatrick implemented the new requirement, Michael Stanard, MOHEFA’s executive director, wrote to an S&P Global Ratings associate that some districts might delay their deals until there is more clarity.

“That is really all we know at the moment,” Standard wrote in a Dec. 15 email. “We don’t know how long it might last.”

In a February report, S&P Global Ratings wrote that the agency didn’t anticipate Fitzpatrick’s new requirement and Schmitt’s lawsuits against schools would have a major impact on districts’ credit quality in the short-term, but “a significant judgment against them could pressure their finances or operations and consequently credit quality.” Compton said it reaffirmed Fitzpatrick’s concerns about the impact Schmitt’s lawsuits could have.

“We will monitor the situation as it develops and take any necessary rating action on a case-by-case basis,” the S&P report read.

School districts

Ultimately, most districts chose to sign the form in order to save as much money as possible so costs wouldn’t be passed onto local taxpayers.

For the Thayer R-II School District with roughly 700 students on the Arkansas border, refinancing past debt saved the district over $750,000.

“I can’t let that money go,” Woods, the district’s superintendent, said. “I owe that to my taxpayers and my district.”

The Thayer R-II School District had already ended masking requirements by the time the certification form was required. Woods said she felt the new requirement exemplified state officials’ attitudes toward public education.

“The motivations behind this are completely selfish,” Woods said, “and it’s very sad that they would take advantage of the taxpayers, along with our public schools.”

For the districts that refused, the risks were worth standing on principle.

The Harrisonville School District’s refinancing had been set to close at the end of December, and at the time, the district located in Cass County was already in compliance with Schmitt’s directives.

But vowing to not implement any mitigation measures going forward — amid a pandemic where strategies to limit the virus’ spread have been fluid and evolved over time — didn’t seem practical, said Mensching, the district’s superintendent.

“That was the big reason for our hesitation,” Mensching said. “We don’t know what’s coming in the future, so signing some document that binds us to something that we don’t know what might change, is just irresponsible.”

Efforts by the district’s attorneys to alter the form, like to include a set end date, were rejected, Mensching said.

The Harrisonville School District had expected to save roughly $333,000 by refinancing past debt through the state, Mensching said. But by refusing to sign the form, the district ultimately had to get its own rating and refinance the debt on its own — ending up with $88,000 less in savings than if they had gone through the state.

“The whole thing is ridiculous,” Mensching said, later adding: “It’s a strange world politically that we’re operating under right now that I just haven’t seen in my tenure in education, and I think frustrating is the best word for it.”

The Affton School District in St. Louis County also did not sign the form. In a Dec. 22 letter to the school community, the district’s superintendent and Board of Education wrote that by not signing the “unusual” request, the district would continue to operate under its original 2017 agreement, “which will withhold approximately $8,000 per month more than what is required with our newly restructured debt payments.

“Ultimately, we anticipate that these excess funds that are withheld will be returned to the district annually,” the letter read.

Asked about his decision to require the form, Fitzpatrick reiterated Thursday he believed it didn’t make sense for the state “to essentially be co-signing a loan for an entity” that the attorney general’s office may be preparing to sue.

The November Cole County ruling that was the basis of Schmitt’s demands is currently being appealed and the Missouri Supreme Court has been requested to hear the case.

“Hopefully at some point there’s more clarity around this, and it’s not necessary,” Fitzpatrick said of the form. “It’s not my goal that the school districts don’t use the program.”

This story was originally published in the Missouri Independent.

The Independent’s Rudi Keller contributed to this story.

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