School districts use “Lease-to-Own” as a huge – Illegal – Loophole to avoid Referendum

My goal is to make sure that CUSD 200 follows the LAW.

CUSD 200 has decided they can fund a new pre-K (after 2 failed referendums) with a lease-to-purchase agreement, without a referendum.   The school statute clearly contains language that allows the district to lease an existing building.  However, it also contains language that requires a referendum for any new building, with a possible exception.  Lease-to-own is not in that exception.  In the transcript when referendum exception passed in the House, the sponsor assured his fellow Reps that it could not be used to avoid referendums.  This gaping lease-to-own “loophole” has been used at least three times according to PMA in the last few years.  We fear that when school districts see others doing this, it will catch on like wildfire!

Wheaton-Warrenville, CUSD 200 plans to build a new Early learning Center (pre-k) at the existing site for $17.3 million without asking taxpayers and without raising taxes.  The new plan calls for the district to pay for a new Jefferson by dipping into reserves and borrowing money through so-called lease certificates for a term of up to 20 years.

This newly discovered loophole is inconsistent with the school code (105 ILCS 5/10-22.36) . The first paragraph says that all new building require a referendum.  The fourth paragraph lists exceptions.

Changes2 proposed to make law clear

The original law prior to 2001 stated that no referendum was required if the district used funds from the sale of other buildings or funds received as gifts or grants, provided that no funds were derived from the district’s bonded indebtedness or tax levy.  That was clear.  However, in 2001 the language was changed to add subsection (1) “while the building is being leased by the school district” as well as the clause “other than lease payments”.

The change was made by

  • Public Act 92-0127
  • Bill number: SB1035 of the 92 general assembly
  • Passed in the General Assembly May 01, 2001.
  • Approved July 20, 2001

We found the House transcript for the day that the school code in question was passed with the term “lease” added.

In the transcripts for the House on 5/1/2001,

http://ilga.gov/house/transcripts/htrans92/t050101.pdf

on pages 49-52 Rep. Black asked

“…I want to make sure, Representative, that we’re not circumventing the right of the voters to say, ‘I don’t think that you ought to buy that building.'”

And Rep Crotty (bill sponsor) replied

“That is not in the Bill….When we’re talking about leasing, many school districts lease a building maybe for a dollar an hour just to be sure that that is not something that needs to be done with referendum.  So, we’re not changing that part.  And if there are added dollars needed for a school district, they most definitely have to still go through referendum.”

Those who passed it understood that it does NOT allow lease to own in order to avoid the referendum!

 

CUSD  200 school Board meeting on 1/17/2018

Watch key points of the video.

Jan Shaw comments (start at 17:47):  https://youtu.be/wC9gRv3tTVM?t=17m47s

I questioned the legality of Lease Certificate and told them that they must cut something (starting with Dr. Schuler… admin… and teachers – end-of-career bonuses… & admin making their own pension contributions) then I will support a referendum for Jefferson.

 

PMA presentation for lease certificates…(starts at 1:57:00)  https://youtu.be/wC9gRv3tTVM?t=1h56m35s

Note: about 2:01:30 Jim Matheisen (a banker & school board member) asked “are we unique to doing this in the state of Illinois?”  … “so it is pretty clear in the law that a lease can be entered into before the building is built?”

PMA Rep listed districts that used these – all in the last year or two.  (about 1:58:00)

  • Sunset Ridge
  • Huckster (?)
  • Airoway schools (?)

Not finding the last two (please, comment if you recognize the names)

He made this sound like to the district, this is as if building with bonds, except they cannot raise taxes, they must sign a lease agreement, and the funding organization sells “lease certificates” rather than “bonds.”  He said the bank is just a “conduit.”

Current schedule shows interest starts accruing Aug 2018, and payments around Aug 2019.

Jan Shaw spoke again at the end https://youtu.be/wC9gRv3tTVM?t=3h1m

We found one of the districts PMA mentioned.

Sunset Ridge

Located in the Village of Northfield approximately 20 miles north of downtown Chicago, District 29 consists of two schools. Middlefork School serves students in kindergarten through 3rd grade, while students in 4th through 8th grade attend Sunset Ridge School. District boundaries include a large portion of Northfield, as well as a small section of Northbrook.

500 children

Feeds New Trier High School

Letter: Sunset Ridge: Demolish Or Renovate? Oct 27,2015

http://jwcdaily.com/2015/10/27/sunset-ridge-school-demolish-or-renovate/

We noted that this letter mentions Wight & Company – the firm CUSD 200 Board member Brad Paulsen works for.

PMA did the lease certificates for Sunset Ridge – the same firm CUDS 200 uses

http://www.pmanetwork.com/files/bondsales/Sunset_Ridge_SD_29_GO_LT_Lease_Certificates_2016A_POS.pdf

 

From D29 board meeting minutes and notes…

Sunset Ridge apparent timeline

  • Fall 2015:  district newsletter = a “capital lease” option to finance =
  • Oct 2015: LTE Demolish Or Renovate
  • Oct 13,2015: board authorized lease certificate agreement
  • Nov 10,2015: Board discussed the wording of the contract agreement with Chapman & Cutler
  • Fall 2015:  $9.7 million lease certificates issued
  • Feb 9, 2016: PMA presentation
  • Feb 2016: issued $15.3 million of lease certificates
  • April 12, 2016: reported that they had a ground breaking ceremony
  • July- Aug 2017 old build demolished
  • August 2017: temporary occupancy certificate for the new building

Who was involved

  • Wight & Company, Brad Paulsen works for them – Paulsen also serves on CUSD 200 school board
  • PMA financial – sold the Lease Certificates (also CUSD 200)
  • Pepper Construction (another one I recognize from CUSD 200)
  • Chapman & Cutler, the law firm that would serve as bond counsel (also CUSD 200 past bond issues)

Sunset Ridge lease agreement

Via FOIA, we obtained a copy of the lease agreement.  It refers to 105 ILCS 5/10-22.12 (Lease of property for school purposes).  Nowhere in the agreement does it reference the portion of the school code that details acquisition of a new building (105 ILCS 5/10-22.36).

Item 10 on page 24-25 details the purchase of the building for 1 dollar after all payments of principle and interest have been made (scheduled for 20 years).

D29 Lease Agreement-2016 page 24_25

This Lease, and all  real estate interest  transferred hereunder, shall terminate upon the earlier of(a) the 7th day of December, 2114, (b) the date on which the construction of the Building is completed; provided that (i) all of the lease payments required of the District by this Lease have been fully paid or provided for and (II) Illinois law then provides that title to the Building may be lawfully transferred to the District without the holding of a referendum or the doing of any other act by the District, or (c) the earliest date on which the District is then authorized by Illinois law to take title  to the Building; Provided that all of the lease payments required of the District by this Lease have been fully paid for  If this Lease terminates pursuant to the provisions of (b) or (c) above, the District shall have the option to acquire title to the Building from Lessor upon payment of One and No/100 Dollars ($1.00).  Upon such payment by the District, title shall immediately transfer to and vest in the District.  The Lessor agrees to take any and all action necessary to cause such transfer of title to District to be effectuated.  If the Lease terminates pursuant to the provisions of (a) above, title to the Building shall not transfer to vest in the District. [emphasis added]

D29 Lease Agreement-2016 page 26

p26 item 18. Opinion of Counsel.  The District agrees to supply the Lessor the opinion of Chapman and Cutler LLP, Chicago. Illinois, that there is statutory authority for the District to enter into this Lease, that the Lease and the Certificates have been duly authorized, Executed and delivered by the District, that the Lease and Certificates constitute valid and binding general obligations of the District in accordance with their terms payable from any funds… [emphasis added]

I have requested via FOIA a copy of “Chapman and Cutler LLP, Chicago. Illinois, that there is statutory authority for the District to enter into this Lease.”

School Code – what it says & does not say

While it is true that, the statutory language is clear that school districts can purchase a building that is being leased.  What we contend is not legal is what Sunset Ridge did and CUSD 200 is planning:

  • signing a lease for a building yet to be built to district specifications without referendum
  • Having the entire purchase price of the building paid in 20 years via the lease with the district taking title for $1.00 at the end of the lease period without referendum.
  • Having all money raised to pay for the construction via “lease Certificates” that look/act just like bonds to avoid a referendum. 

The only difference they claim is they cannot raise taxes to do it.  But, we all know money is fungible.  If they spend all reserves on a new building, they can borrow more via working cash bonds (without taxpayer approval) or cry poor and leverage the taxpayers for needs of other buildings.

If the interpreted of the existing law was to allow a lease-to-own for a building not yet even built, it would make the first section of 105 ILCS 5/10-22.36 moot & therefore that is not a correct interpretation.

From a friend who is an attorney:

As I read the statute, the lease exception would swallow the referendum requirement because any type of lease could be used to circumvent the referendum requirement as long as the district had funds on hand to pay the money. …

In reading the Chapman opinion, they write it very narrowly. They specifically do not opine as to the validity of doing the transaction without a referendum. They only opine as to the ability to enter into a lease, which is found in the school code; the ability to issue lease certificates, which is also clear; and the ability to pay the certificates.  They essentially assume authority for the underlying transaction.

Remember, Illinois is a Dillon’s rule state

That means the School boards only have the powers that are expressly granted in the school code.  Lease-to-own for school buildings is not granted and in fact conflicts with 105 ILCS 5/10-22.36.  All districts that have already done this, have broken the law. Not certain what to do about them especially if the new building is complete and the old one demolished.  We certainly should STOP any and all districts who are contemplating this.

One thought on “School districts use “Lease-to-Own” as a huge – Illegal – Loophole to avoid Referendum

  1. The next school board meeting is Wed 2/14. On the consent agenda is “Approval of First Addendum to the Financial Advisory Agreement With PMA” for the purpose of selling lease certificates.

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