October 19, 2009

Dear Charlotte News:

I strongly support the proposed $2.8 million "Bare Necessities" bond to fund repairs at Charlotte Central School. First, the repairs are urgently needed. Second, I have every confidence that the School Board has done the necessary preparation, and will continue to exercise the appropriate care, to ensure that the repairs will be carried out in a cost effective manner. Third, the current financing terms are outstanding, and there is a very strong possibility that these terms will become significantly worse within the next two years.

If you have any doubts about the sad state of disrepair of a significant portion of the school, please visit the school during the upcoming October 28 tour and question and answer session. If you are unable to visit the school that evening, please read about the various problems on the school's website. The temperature regulation is abysmal, hindering the ability of students to learn and teachers to teach. The electrical system is a danger. There are numerous code violations. In sum, the proposed repairs are long overdue. Moreover, putting off the repairs places the town and Charlotte taxpayers in a legally risky position. If you think that a $2.8 million bond is expensive, how would you like to finance a lawsuit?

I disagree strongly with the letter published in the October 15, 2009 edition of the Charlotte Citizen, which states a) that the cost estimates are inflated, b) that the board paid little attention to energy efficiency, and c) that the board is rushing into this. In my judgment, the school board deserves our thanks for putting together a reasonable proposal for the repairs. They have consulted with a local architect and builder, both of whom are experienced, and are comfortable with the plan and the cost estimates. Consulting a website for a cost estimate, as the author of the aforementioned letter did, is not a suitable substitute for 'on-the-ground' estimates by firms familiar with local market conditions. Further, the Board has not ignored energy efficiency, but has consulted with Efficiency Vermont, and the results of that consultation are available on the school website. And rather than this being a rush job, the Board has been preparing for these repairs for more than two years. Finally, the project will be open to a competitive bidding process, which will produce project costs that reflect market conditions.

There is a strong probability that the bond will qualify for school construction assistance made available by the federal government as part of the 'stimulus' bill approved early this year. The effective interest rate on bond issued under this program, according to the executive director of  the Vermont Bond Bank (with whom I discussed this issue), would likely be less than one percent. Even if the project was not accepted for this program, and would be financed under a pooled municipal bond per the normal channels, the interest rate would likely be between 3 and 4 percent. The precise interest rate under this second option would not be known until the date of issue (either in February 2010 or July 2010). I am a professional economist, and I can assure you that the sooner the better, because there are some powerful market forces that are conspiring to raise interest rates over the near term. First, as the US economy recovers, demand for loanable funds will rise, pushing up interest rates. Further, investors will shift out of low risk securities, such as municipal bonds, into riskier securities such as corporate bonds or stocks. Second, as the world economy grows (and it is growing considerably more rapidly than our own economy), foreign firms and governments will demand an ever larger quantity of loanable funds in the global financial market. This will also raise interest rates in the US. Third, the Federal Reserve has more than doubled the monetary base in the last year, and as the US economy recovers it will begin to reduce this extraordinary 'monetary easing' that has occurred, in order to avoid high inflation. These Federal Reserve policies will also raise interest rates. Finally, the declining value of the US dollar will contribute to inflationary pressures in the US, which will put upward pressure on interest rates through a number of channels.

Now, there is a chance that interest rates will remain low for some time, and that occurs under a scenario in which the US economy drops back into a recession (declining gross domestic product). Most professional economic forecasters, however, do not see that as the most likely event. How high could interest rates go? In the mid 1980s, Vermont towns were floating bonds at 7.25% or higher. Thus, by voting in favor of the bond now, our financing costs would be dramatically lower. And given that these repairs are needed 'urgently ' it would be a real pity if we were forced to finance them in two years at much higher costs (and much higher taxes).

It is in our children's interest, the teachers' interest, and the taxpayers' interest to support the "Bare Necessities" bond. As an economist, I am used to analyzing difficult tradeoffs and financial decisions. This is not oneof them. It does not get much easier.

In closing, I would like to respond to Clyde Baldwin, who wrote quite a striking commentary in the October 15, 2009 Charlotte News. He concluded that we should oppose the bond because "before moving on to the next big thing - construction - we should achieve mastery over the essentials - education. To which I respond, the Board must be able to walk and chew gum at the same time. I commend Mr. Baldwin's laudable efforts to promote educational quality in the school, and I agree that the Board must be firm in demanding improvements from the administration. However, none of those legitimate concerns negate in any way the urgency of the repairs, the solid groundwork that has been laid to pursue them, and the outstanding (and temporary) financing options available. Now is the time to repair our school. Please vote yes on the Bare Necessities bond.

Rich Sicotte