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School board gives nod to 5% contingency fund

The Medford School Board gave preliminary approval Tuesday of a policy establishing a minimum 5 percent district contingency fund to help maintain recently upgraded bond ratings from two major credit rating agencies.

A contingency fund helps offset stints of short cash flow and unforeseen expenses.

The board is expected to finalize the policy April 3.

On average, the Medford School District has kept a contingency fund of 3 to 7 percent, said district business manager Kent Stephens.

When Moody's Investors Service and Standard & Poor boosted the district's credit rating, representatives urged the district to adopt a policy setting a minimum contingency fund to retain the higher score, Stephens said.

The Government Finance Officers Association recommends governments maintain a minimum contingency fund of 5 to 15 percent of general operating revenues. The Oregon Association of School Business Officials suggests a contingency fund of 3 to 8 percent.

A minimum contingency fund helps show the district's financial stability to investors.

In January, Moody's increased the district's credit rating to an A1 from an A2, on a scale of the lowest, a C, to the highest, an Aaa. Rating the district for the first time, Standard & Poor gave it an equivalent score of A+.

The enhanced credit score likely played a role in the district netting a low interest rate on a recent sale of $40 million in bonds to begin construction projects at several campuses, including building a new South Medford High School and renovations at North Medford High.

Voters approved a $189 million bond measure in November for upgrades at all 18 campuses in the district.

The winning bid, a 4.35 percent interest rate on $40.1 million in bonds went to Banc of America Securities, said district financial adviser Dale Okerlund, vice president of public finance for Wells Fargo Brokerage Services in Salt Lake City, during a board report Tuesday.

The company was the lowest bidder out of 10 during the recent electronic sale, though the five lowest bids were almost identical.

The district plans to sell the $189 million in bonds in four phases between now and 2010.

The sale was the first time the district used a competitive bid process to sell bonds with the assistance of a financial adviser. Previously, the district negotiated bond sales directly with underwriters.

Okerlund projected the district would save about $55 million in the next 25 years by phasing the bond sales and using Internal Revenue Service laws that allow the district to keep interest earnings if bond funds are spent within two years of the sale.

"It's not that those savings will go into the district's checkbook," Okerlund said. "It's that the tax rate will be lower than what it would have been."

Stephens said it's uncertain what the property tax rate will be, but it could be as much as 7 cents less per $1,000 of assessed property value than the $1.95 initially forecast before the bond election.

Reach reporter Paris Achen at 541-776-4459 or pachen@mailtribune.com.