The new Wheatley building is part of the School Facilities Master Plan (Master Plan), which was jointly created by OPSB and the Recovery School District (RSD) to guide the rebuilding of schools after Katrina with the $1.4 billion FEMA settlement.  Both districts manage construction projects under the Master Plan, and have cooperated, until now, to pursue NMTCs that generate funding for master plan projects.

The Cowen Institute firmly believes that the two districts must continue to work together to pursue NMTCs. Although the NMTCs for the Wheatley building may only amount to $2 million, NMTCs for the entire Master Plan could amount to $40 million, money the Master Plan desperately needs. In fact, without NMTCs our analysis predicts the Master Plan will be short $94 million (see explanation below), roughly equivalent to building or renovating four schools or stabilizing 24 schools.  If there is an inability to cooperate, it could endanger future NMTC grants and other leveraged financing options. If last night is any indicator, the future funding analysis will grow more grim.

The divisive point of the NMTC issue appears to be, at present, how Qualified School Construction Bonds (QSCB, pronounced ‘que-scabs’) should be spent. The OPSB borrowed $79 million in QSCBs in December, 2011. “Borrowed” means they will pay it back with the revenue they receive from taxpayers; dollars that are intended to fund public education in New Orleans.

The main reason given for blocking the NMTC item last night was that it was implied that it is undesirable for OPSB to use QSCBs on Wheatley, which is an RSD-managed project. However, since FEMA will reimburse expenditures on Wheatley, OPSB will be reimbursed.

As the taxing and bonding authority for public education in New Orleans, OPSB is responsible to raise all local money, for both OPSB and RSD. It would therefore be proper and just for OPSB to spend the QSCBs on both OPSB and RSD projects in proportion to student enrollment, which means spending approximately 70% on RSD projects. Additionally, OPSB actually owns all public school buildings and will eventually have them under their control. It is therefore prudent to invest in their future holdings, especially since they will be reimbursed by FEMA.

OPSB should use QSCB money to pursue NMTCs with the RSD to raise more money for Wheatley and many more projects. Fortunately, OPSB is holding a special meeting tomorrow to consider the Wheatley NMTC issue, where only a majority vote will be needed to approve the necessary actions.

Of course, NMTCs alone will not cover the entire, projected shortfall of $94M. To reduce the shortfall, the Master Plan can still be amended, because little money has been committed to Phase II projects. However, the most likely organization to suggest revisions, the School Facilities Master Plan Oversight Committee (MPOC), has not had enough members to constitute a quorum since November 2011. Luckily, BESE will likely finish appointing MPOC members at their meeting in New Orleans on February 27, allowing the committee to attend to this urgent matter.

Even still, New Orleans should be ready for a tax increase to accommodate any budget shortfalls. In the mean time, show your support for New Market Tax Credits. It’s a good deal for kids.

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Here’s how we came to a shortfall of $94 million:

Final costs of the complete projects under the Master Plan, as reported for the third quarter of 2012, are on average 17.7% higher than their original budgets, contingency money included, as reported for the third quarter of 2011.

Applying the 17.7% pattern to future projects results in a budget gap. Phase II of the Master Plan has $800 million in original budgets for new buildings, renovations, and stabilizations, and $821 million to fund the projects. If Phase II follows the 17.7% pattern, the districts will be $120 million over budget. (Figures throughout this blog are rounded to the nearest million and rates to the nearest tenth.)

It is important to remember that New Orleans is rebuilding its schools at the same time it is building hospitals, improving its airport, and has been upgrading other tourism infrastructure for the super bowl. Doing all this construction at the same time makes bids less competitive and materials more expensive. Most of these projects will continue to compete with the rebuilding of schools.

Yet, a 17.7% gap might not be accurate. District officials admit that some of the earlier projects were grossly over budget, but argue they have learned from their mistakes. So if managers are able to cut average overages in half to a   generous 8.9% over original budgets, then project expenses for Phase II will exceed total funding by $50 million.

Additionally, the districts do not expect all the funding from tax credits and insurance proceeds they hoped for in Phase II (see page 9 here). They have received $30 million of the expected $60 million in insurance proceeds and are not sure how much more they will get; they expect $20 million of the $44 million in State Historic Tax Credits (changes to Louisiana’s tax code proposed for this coming legislative session may eliminate State Historic Tax Credits); and for the purposes of this analysis we assume no New Market Tax Credits. Taking it all together, there is likely to be $94 million less than was expected for Phase II, bringing the budget gap to a total of $144 million.

Fortunately, OPSB took advantage of extremely low interest rates and borrowed an additional $79 million, which OPSB officials say is being treated as a rainy day fund of sorts for the Master Plan. But it is not sensible to add that to Phase II revenues alone, as there are still about $468 million worth of Phase I projects in the works, according to the November 2012 capital projects update. If OPSB spends the $79 million proportionally between what is left of Phase I and all of Phase II, it will spend about $49 million on Phase II.

The shortcomings in expected funding and the pattern of project overages, but offset by OPSBs additional bonds, bring the districts to a budget gap for Phase II of the Master Plan of about $94 million, which is approximately what it costs to build four new schools, or renovate four schools, or to stabilize about 24 schools.