September 27 Quad Board Meeting Brief

Select Board, School Committee, Finance Committee, Andover High School Building Committee Meet to Discuss Financial Impact of AHS Project 

ANDOVER, MA - The Select Board, School Committee, Finance Committee, and Andover High School Building Committee met in a joint session, referred to as a “Quad Board Meeting,” on Wednesday, September 27 to review the financial impact of the proposed Andover High School building project.
 
The Andover High School Building Committee (SBC) was established in 2022, and has completed a feasibility process to evaluate site design options for a project that would be funded locally, without support from the Massachusetts School Building Authority (MSBA). In April, the SBC voted to recommend the “Campus 2 with Auditorium” design, a new construction option that includes a new auditorium. The initial estimated cost of the project was $480,874,000, based on a cost analysis conducted during the feasibility phase.
 
The SBC subsequently submitted a request to the Select Board to call a Special Town Meeting to appropriate $1.3 million to complete the schematic design phase of the project. The September 27 Quad Board meeting was intended to provide additional information to relevant boards and committees on the financial impact of the proposed project before the request to call a Special Town Meeting is acted upon.

During the meeting, Town Manager Andrew Flanagan and CFO Patrick Lawlor presented a financial impact analysis that covered project cost escalation, the effect of borrowing on the Town’s bond rating, and impact to taxpayers. A potential “interim” plan that would make short-term investments in the current high school facility, and serve as a bridge to a full-scale replacement project in the future, was also presented to the Quad Board. Topics covered in the analysis were provided by members of each Board and Committee during outreach conducted by Flanagan and Lawlor throughout recent months. 

The full meeting can be viewed online through AndoverTV.

Click here to view the full Andover High School project financial impact analysis presentation.


Project Cost Escalation
The Quad Board was presented with an analysis of project cost escalation, meaning the increase in total cost of a high school building project based on its construction start date and completion date. The analysis compared the baseline project proposal, which would start in 2025 and be completed in 2028 and have a total estimated cost of $480 million, to several fully Town funded and MSBA supported alternative scenarios with completion dates ranging up to 2039.

Projected total costs were simulated at annual escalation rates of 4 percent, a commonly used construction cost inflation rate, and 5.5 percent, a less favorable rate intended to account for volatility experienced in recent years.

Flanagan noted that escalation is a greater factor in MSBA supported projects due to the extended timelines associated with such projects. It generally takes eight years from the time that a Statement of Interest (SOI) is accepted by the MSBA for a building to be complete. For example, a project that an SOI is submitted for in 2025 and accepted by the MSBA in 2026 would be ready for students to move in August 2033.

Due to significant increases to school building project costs and other changes being contemplated to MSBA funding models, the exact rate of reimbursement for a future project is difficult to anticipate. Modeling presented to the Quad Board reflected potential reimbursements at 17 percent, 20 percent, and 23 percent.   

In nearly all scenarios where the school construction is delayed, including those that assume MSBA support, the total cost of a high school project to the Town would exceed the baseline project’s estimated total of $480 million. Scenarios in which an SOI is submitted in 2025, cost escalation is limited to 4 percent, and the MSBA reimburses at 20 percent or 23 percent, would fall below the baseline project’s cost. The same is true for a project in which an SOI is submitted in 2026 and a 23 percent MSBA reimbursement is received.

Click here to view the full escalation modeling.

Key takeaways: If a high school project is initiated at a date later than the baseline project currently under consideration, escalation will result in the total cost to the Town being greater. This cost escalation would occur regardless of the availability of MSBA funding, and its impact would be more pronounced on an MSBA-supported project due to the extended timeline compared to a non-MSBA supported project.


Bond Rating Impact
Due to the estimated cost of the proposed Andover High School project and the limited precedent of public building projects of its magnitude, there has been widespread discussion of how  debt issuances associated with the project might result in Andover’s bond rating being downgraded.

Andover currently has a AAA bond rating, the highest score issued by Standard and Poor's. This score enables the Town to receive favorable interest rates when borrowing from creditors to fund projects. However, according to recent ratings letters issued by Standard & Poor’s, Andover’s debt profile is considered weak as a result of major capital projects and a historical, long-term lack of investment in unfunded liabilities.

Flanagan and Lawlor engaged Standard and Poor’s (S&P) Global Rating Services to conduct an analysis on the impact of future borrowing at several increments on the Town’s bond rating. The results of this analysis were presented to the Quad Board during the meeting.

Borrowing between $150 million and $500 million would result in a rating downgrade to AA+, according to S&P’s review. This represents a one-level downgrade and would apply to both the triggering debt issuance (e.g., a new high school) and to subsequent debt issuances for other expenditures. Borrowing at or below $50 million would allow Andover to maintain its AAA rating.

A downgraded bond rating would result in increased interest rates on borrowing. This factor would increase the total debt service payments (principal and interest) of a $480 million project funded in 2024 by over $26 million.

Increased interest rates resulting from a bond rating downgrade would also have an impact on the Town’s Capital Improvement Program (CIP). After one year, debt service costs would increase by $77,000, and would total an additional $3.4 million over 30 years. Likewise, a downgraded bond rating would increase debt service associated with water and sewer projects, which may result in increased costs to rate payers. 
 
Click here to view S&P Bond Rating Impact Simulations

Key takeaways: It is projected that an additional $480 million in debt to fund the proposed high school project would result in the Town’s bond rating being downgraded to AA+. An increased bond rating would result in the Town paying higher interest rates, which would result in high debt service payments on a high school project and for projects included within the perennial Capital Improvement Plan. The Town’s AAA rating would be preserved if borrowing is limited to approximately $50 million. 

Taxpayer Impact
An analysis of the impact of a high school project to Andover taxpayers was presented to the Quad Board comparing the baseline $480 million project to alternative scenarios where projects are supported by the MSBA with SOIs submitted in 2026, 2028, or 2031.

The modeling presented by Flanagan considered the following factors over time: total project cost, total exempt debt service and pension obligation bond (POB) carrying costs, per capita income, and total exempt debt service/POB carrying costs as a percentage of per capita income. These factors were analyzed to assess how much of residents’ income will be committed to paying debt service for major projects, including a new high school and for perennial capital projects, and pension obligation bonds in various scenarios.

At a total cost of $480 million, the baseline project funded in 2024 would result in an annual cost of $2,181 on the average residential tax bill over the next 20 years. Over time, if the baseline project is instead delayed, the total project cost increases significantly. However, when comparing the Town's total exempt debt and pension obligation bond carrying costs as a percentage of per capita income, a project funded in 2024 will demand a higher percentage of per capita income than a project accepted by the MSBA between 2025 and at least 2031.

For instance, the baseline project on average incurs a total exempt debt and POB carrying cost of $3,323, with an average per capita income of $138,137, requiring 2.41% of per capita income. In contrast, a project funded through MSBA acceptance in 2029 averages a total exempt debt and POB carrying cost of $3,103, with an average per capita income of $164,064, requiring only 1.89% of per capita income.

The total cost as a percentage of per capita income decreases over time due to income growth, debt retirement, the impact of MSBA funding, and the avoidance of a bond rating downgrade.

Click here to view the full taxpayer impact analysis.

Key takeaways: The baseline project under consideration would result in an average annual cost to Andover taxpayers of $2,181 over the next 20 years. The average annual cost for a project would increase over time, even with MSBA support. However, the cost to taxpayers for exempt debt service and POB carrying costs as a percentage of per capita income would be less in future years as a result of income growth, retiring debt, the impact of MSBA funding , and the avoidance of a bond downgrade.


Interim Plan 
The Quad Board was presented with an overview of a potential “interim plan” for Andover High School where the Town would make short-term investments in the existing facility to address some of its most significant deficiencies while fiscal conditions improved for a future full-scale building replacement. The interim plan was developed in response to requests for an alternative to the full-scale replacement option that would serve as a bridge to a future project, preserve the Town’s bond rating, make investments that extend beyond the life of the existing building, and alleviate overcrowding in the immediate term.

Flanagan emphasized that a short-term project would coincide with a continued submission of statements of interest to the MSBA for a full-scale replacement project.

Flanagan provided an overview of a potential interim plan with an estimated total cost of $52 million. The proposed plan would entail detached modular classrooms, a cafeteria expansion, mechanical system improvements, security improvements, and parking improvements, among other features. The plan also contemplates field enhancements, including improvements to the Plateau Field on the AHS campus, and the addition of fields at Chandler Road. The investments in field, parking, and furniture investments, totaling an estimated $25.5 million, would extend beyond the life of the existing facility and continue to have value after a new building is constructed.

The interim plan presented to the Quad Board is strictly conceptual and has not been designed. If a decision is made to pursue an interim option, design funds would need to be approved by Town Meeting, and the project would be managed by the SBC.

Click here to view an overview of the interim plan.

Key takeaways: An interim project at Andover High School costing approximately $50-60 million could address deficiencies to Andover High School and serve as a bridge to a future full-scale replacement project at a time when fiscal considerations are more favorable.


Next Steps
The September 27 Quad Board meeting focused solely on the financial considerations related to the Andover High School project. The Quad Board will convene for another meeting on October 18 at which time officials from Andover Public Schools will provide analysis of the educational impact of the project.