School Bond FAQ
By Dunellen Borough Council
On December 10, 2019, the residents of Dunellen will be asked to vote on a Board of Education $23.8 million bond referendum. With this FAQ sheet the Mayor and Borough Councilmembers would like to inform everyone about how bonding works and the potential impact this referendum will have on future Borough projects. This is an educational piece so residents can understand how future improvements in the Borough and the School may be affected by this referendum.
Q: What is a municipal bond?
A: A municipal bond is a debt security issued by a municipality to help finance larger capital expenditures that impact almost everyone in the community. Over the years, the Borough has bonded for roadway improvements, repairs to sewer infrastructure, Police and Public Works vehicles and equipment and most recently the improvements at Columbia Park Field and Tennis Courts. Bonds are issued for various terms, based on how long the purchase or repair is expected to last. Bonds for replacing sewer pipes, for example, can last for 40 years! Of course, the longer the debt repayment, the more interest is paid by the borrower.
Q: Why do municipalities and school districts issue bonds?
A: Both the Borough and School bond for expenses that are outside of the normal operating expenses in the fiscal year budget. For the Borough, this normally includes things like road and infrastructure improvements, capital equipment (e.g., fire trucks, dump trucks and police equipment) and improvements to our parks (e.g., the Columbia Park improvements). In the case of the school district, bonds are issued for building repairs, improvements, rehabilitation and improvements, as well as for items such as computers that are eligible under the bond law.
Q: What is a debt ceiling?
A: The debt ceiling is a cap on the amount of debt that can be issued, thus limiting how much money may be borrowed.
Q: What is the debt ceiling in Dunellen?
A: The municipal debt ceiling in NJ is 3.5% of the Equalized Valuation Basis. For Dunellen, this equates to $21 million dollars. Please see https://www.state.nj.us/treasury/taxation/lpt/lptvalue.shtml for more information on the Equalized Valuation Basis.
Q: What is the current debt for the Borough?
A: The current debt changes throughout the year as the Borough issues new debt and pays on previously issued debt. As of November 4, 2019, the outstanding municipal debt is $11 million, leaving $10M available under the ceiling.
Q: Does the School Board follow a similar budget process as well?
A: The School Board follows a similar process, but as their budget is independent of the municipal budget, their debt ceiling is calculated differently.
Q: How much of my property taxes go to the Board of Education to run the schools in Dunellen?
A: Approximately 60% of your local taxes go directly to the School District, which operates independent of the municipality and has its own budget.
Q: What is the debt ceiling for Dunellen Schools?
A: The debt ceiling for the schools is $24M
Q: What is the current debt of the School District?
A: The current school debt is $6M, leaving about $18M under the ceiling for the District to borrow.
Q: The school referendum is for $23.8 million, which exceeds the debt ceiling for the School budget. What happens to that extra $6 million?
A: The School District can “borrow” against the Borough’s debt ceiling, but not the other way around – meaning, the Borough cannot borrow against the School District’s debt ceiling.
Q: What does that mean for the Borough’s debt ceiling?
A: This will reduce the Borough’s debt ceiling by $6 million to about $4M.
Q: What effect will this have on the Borough?
A: A referendum may adversely affect the Borough’s future ability to borrow, because of the lowered debt ceiling. This would hinder the Borough’s ability to pave roads, continue making necessary improvements to our infrastructure, buy critical police, fire or DPW equipment and make park improvements.
Concluding Statement from the Mayor and Borough Council:
Financial actions by one agency in a community like Dunellen can have a significant impact on other branches. An unintended consequence of the School Board’s referendum is its impact on the Borough Council’s ability to borrow for future, “big ticket” expenditures. These are expenditures which are better paid for through bonds than from yearly department operating expenses. The municipality’s ability to bond helps keep property taxes down by spreading the cost over many years. Absent that ability, worthwhile projects could be delayed, postponed or the costs added directly to the Budget, ultimately raising everyone’s taxes. It is vital that residents understand that artificially lowering the debt ceiling from the school bonding affects the Borough’s ability to finance its own debt, influencing how the Mayor and Council make their decisions. We might have to reprioritize over time what gets done.
The intent of this FAQ is to keep you informed how bonding works and what it will mean for prospective improvements moving forward.