Prayers Answered!

Pontiac schools get $18M loan from Fifth Third Bank

Wednesday, April 15, 2009

By DIANA DILLABER MURRAY
Of The Oakland Press

The Pontiac school district will stay afloat due to a loan from the Fifth Third Bank for $18 million against the district’s projected $42 million summer property tax collection.

Felix Chow, interim deputy superintendent of finance at Pontiac schools, had said the district would run out of money shortly after April 30 without a loan to replenish schools that are operating on a $16.7 million cash flow deficit.

The Pontiac Board of Education approved the terms of the loan agreement Monday to obtain the loan to be paid back by Dec. 20. There is no penalty to pay it back early.

The actual amount borrowed by Pontiac schools will be $18.7 million at 6 percent interest, which includes $82,000 in closing costs and attorneys’ fees.

The bank will purchase bonds from Michigan Municipal Bond Authority in Lansing, which will do the actual cash transfer.

The bonds must be sold by the authority before a check will be delivered to the district about one week after the date of sale.

The district also borrowed $8.7 million against its projected state aid earlier this year through the bond authority, which is also handling loans for several other districts borrowing against their state aid.

Chow has personally talked to banks early on to try to get a loan but found it impossible in the tight economy when banks are freezing credit. So the district obtained the help of a financial advisor and the Michigan Municipal Bonding Authority.

At the same time the bank is giving the loan, it is making every effort to ensure its investment is protected.

“Thank you for taking the risk and showing the faith in our ability to pay it back and continuing your relationships with the school district,” Chow told Aron Kominars, vice president and managing director of Fifth Third Bank in Southfield, and Craig S. Kahler, vice president of public finance at Fifth Third Securities in East Lansing, at Monday’s meeting.

“We are proud to be providing the opportunity to present the loan,” Kahler replied. “The markets are very tight. I am proud as a former school district manager ... to bring this to the school district.”

After the board voted, Vice President Gill Garrett told the two bankers, “We do take our partnerships very seriously.”

Tax collections, from the city of Pontiac and the portions of the city of Auburn Hills and Bloomfield Township that are in the Pontiac school district, will go directly into a debt retirement trust account, no later than one day after receiving them.

The property tax revenue can be used for no other purpose until the note and interest is paid in full. Tax funds from the other communities in the district also will go to paying off the note but will not be held in the lock box.

If property taxes paid are not adequate to cover the loan, the bank will have first rights to a portions of the district’s $8,000-per student state aid, except for the outstanding $8.9 million loan. The district cannot borrow any other money until the Fifth Third loan is repaid.

Further, the district agreed to open or transfer all of its existing and future depository accounts, including its general and special fund accounts, with Fifth Third within 10 days.

In addition, the agreement signed by the board promises that the bank will be notified of any event that might affect the repayments, such as a change in the status of the emergency financial manager of the city of Pontiac or if the state should appoint an emergency financial manager for the school district.

Trustees and Chow have said they are working on a five-year plan to eliminate the district’s near $12 million deficit and prevent growing deficits in the future. It must be submitted to and approved by the state after the end of the school year.

Chow said even planned layoffs and closing half the district’s schools next school year will not be enough to offset the deficit, which in the 2009-2010 school year could exceed $22 million if steps are not taken.

Contact staff writer Diana Dillaber Murray at (248) 745-4638 or diana.dillaber@oakpress.com.