Q: Concerns have been raised about the impact of the elimination school property taxes on the outstanding debt of school districts. How is the administration addressing those concerns?

A: We were well aware of the impact of any proposals for school reform in Michigan on outstanding debt, and we addressed it in three or four different ways. First, we made a conscious policy of not changing the millage rate levied by schools for outstanding general obligation debt. It was a policy of both the legislature and the governor that the existing general obligation debt of school districts would be safe and held harmless. The millage rate will be levied in 1994 as it has in past years. So number one, all GO debt of the schools will remain, and the millage rate to support that debt will remain in place.

Two, limited obligation bonds of school districts are also not in jeopardy. Remember, the governor has not proposed eliminating school districts. As long as school districts exist, and they will continue to exist, limited obligation debt will continue to be supported. All we are doing is changing the funding source of school districts, not eliminating revenues to schools. In fact, in the governor's proposal almost every district is guaranteed an increase in revenues from the prior year. We feel the safeguards are there for both general obligation and limited obligation school district debt.

Q: A lot of the districts are paying for the limited tax debt with school operating property taxes, and you are eliminating those. Is there going to be enough revenue for schools to pay off this debt?

A: It's in everyone's interest to make sure that existing debt of school districts is honored and debt service is made on a timely basis. We are not reducing the revenues to school districts; we are just changing the source from the local property tax to a state-funded source. Limited obligation bonds are an obligation of the school districts budget. It seems to me that as long as the budget is intact, there is no implication for the outstanding debt of the districts.

Q: What will be the impact on the short-term cash-flow borrowing that many school districts do in spring?

A: The short-term cash-flow borrowing is something we are working on now between the districts and the Legislature and the [governor's] administration. We are considering many options, including front-loading some of the payments to schools to help them over the summer months. Other options are to go through the Michigan Municipal Bond Authority to assist the local units in doing a cash-flow borrowing. We are working on proposals to offset the negative impact, if any, on schools' cash flows in the upcoming year.

Q: If the governor's plan is approved, how will it affect the schools' issuance of limited or unlimited tax GO debt?

A: I don't see an impact on general obligation debt, which is by far the largest type of debt issued by school districts. They will still be able, with a vote of the people, to levy millage to service general obligation debt. Schools will still have the ability to issue limited obligation debt. The security for that debt will change from the local revenue to a state revenue. But I don't see any major changes in the way schools issue debt, both general obligation or limited obligation, under the governor's proposal.

Q: The governor has said that some form of the property tax would have to be put into place if voters turn down his school plan in February. Any contingency plans for what form the property tax would take?

A: That's being worked out now with the Legislature. What is clear [is] because of current constitutional prohibitions, we cannot replace all of the money from the reduction in the property taxes at the state level without a ballot proposal. So if the governor's proposed sales tax increase does not pass the legislature or is not approved by the voters, we will probably end up with a reliance on the local property tax.

Q: How do you put that back into place?

A: We believe that you could pass a bill that would restore the local property tax. It's a technical matter. As a policy goal, part of governor's proposal is to nearly eliminate property taxes for school operation, but that proposal is dependent on the sales tax's passing in February or March.

Q: Legislation passed by the Senate earlier this month also calls for eliminating the use by schools of capital appreciation bonds. Is the administration in favor of this provision?

A: The treasury endorses a proposal that would require mandatory sinking funds with the issuance of capital appreciation bonds. We view capital appreciation bonds like any financial instrument - used correctly they can be a financial advantage to a local unit of government. We believe in Michigan there are cases of abuse with the use of capital appreciation bonds. So we will support legislation that would require a mandatory sinking fund with the issuing of capital appreciation bonds.

Q: Local government officials have estimated that the loss of school operating property taxes means a loss of about 60% of the revenue supporting many tax increment finance districts in the state. How does the administration propose to replace that money?

A: As I said before, it's in everyone's interest to make sure that the outstanding tax increment debt - like the local school debt - is fully honored, that debt service payments are made on a timely basis. There are many options being discussed to provide revenue sources for the outstanding TIF bonds. The governor had proposed that local units of government could levy millage, depending on the local unit of government, without a vote of the people to service existing debt and provide more than enough revenue to cover their existing TIF debt and replace a portion of the state revenue sharing. That is one option. Other options are being discussed. It's absolutely clear in my mind that when the negotiations are finished with this, a proposal will be in place to fully service the outstanding tax increment debt.

Q: What are some of the other options

A: It's possible [that] existing TIF districts could be allowed to capture part of any property taxes levied by the state for schools. So again, the main point is everyone is in agreement in Michigan that outstanding bonds issued by TIF districts will be secure, and debt service payments will be made on a timely basis.

New TIF bond proposals are another issue. As we move away from property taxes in Michigan, our capital development programs will change. TIF districts capture property taxes. If we have lower property taxes, they're going to have less money to capture. So we are reviewing lots of different options for future economic development encouragement. If local units have economic development down the road to service expenditures, but they don't have it today, but they need the capital expenditures today to draw that business activity, there's this time constraint of capital. We're looking at ways we can encourage local units to get over this capital hump, whether its TIFs or other programs. That's what we're discussing now.

Q: In the governor's plan for restructuring education, rating agencies raised questions about some of the proposals like school choice. It could put a school district out of business if that school is not the choice of students and parents. What are you doing about concerns about this part of the governor's plan?

A: I think the rating agencies have taken the appropriate response. They said Michigan is trying a innovative and different approach to substantive education reform. We're not getting dragged by courts into reform. We're moving ourselves. [The rating agencies have] given us time.

I still believe a new system will be in place by the end of the year for school finance in Michigan. And I think it will quiet many of the concerns that the rating agencies and Wall Street have for the state and locals units of government in Michigan.

I think when the proposal is ultimately put in place, schools will be much more secure. Many schools have been relying on a local property tax, whose millages come up [for a vote] every few years. The old system had the uncertainty of financing from the local property tax. This would take that responsibility and shift it from the units of local government to the broader taxing authority of the state.

So I think, on the whole, the system in place by the end of the year will have more financial certainty for school districts than the current system.

Q: and A:

Michigan shook up the municipal bond industry this summer when it took an unexpected and radical approach to bringing long sought property tax reform to the state.

Over a two-day period in July, the Legislature eliminated more than $6 billion of property taxes levied by school districts for operating purposes. The tax elimination, which takes effect July 1, 1994, did not touch taxes levied by schools for outstanding unlimited tax general obligation debt.

Still, rating agency officials expressed concern about outstanding limited tax general obligation debt of the districts and about debt issued by other governments. Last month, Standard & Poor's Corp. placed nearly $92 million of tax increment finance debt issued by Detroit and Lapeer on Credit-Watch with negative implications due to the tax repeal.

Meanwhile, Pepublican Gov. John Engler has set a yearend deadline for lawmakers to take action on his proposal to replace school property tax revenues with a 50% increase in the state sales tax and various new or increased taxes.

Engler has also proposed using $774 million in annual state revenue sharing to local governments for school funding. To make up for the loss, the proposal would allow localities to levy two to six mills of additional property taxes without a popular vote. The state revenue would be given to schools as a $4,500 annual per pupil grant.

The governor has also proposed restructuring the school system by setting up charter schools and by allowing parents and students to choose their public school.

Engler wants to place his proposal for financing and restructuring schools before voters in a single constitutional question in February or March.

Nick Khouri, Michigan's chief deputy treasurer, who helped craft Engler's plan, recently talked to Chicago bureau chief Karen Pierog about credit concerns that have arisen due to the state's action.

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