Western New York school plans BANs to finance child abuse settlement

BY SourceMedia | MUNICIPAL | 06/21/22 01:57 PM EDT By Connor Hussey

The Kenmore-Town of Tonawanda Union Free School District in Erie County, New York, plans to issue bond anticipation notes to cover the costs of a $17.5 million settlement agreed upon under the Child Victims Act.

The issuer recently disclosed the specifics of a $17.5 million settlement stemming from 35 claims filed under New York?s Child Victims Act and that they?ll require issuing some form of debt in order to minimize the financial impact of the settlement on current students.


?In order to minimize the impact on students, there will be either a full borrowing of the amount involved or a combination of some borrowing and some cash that they have on hand,? said Jeffrey Stone, partner at Hodgson Russ and bond counsel to the Kenmore-Town of Tonawanda Union Free School District. ?That has not yet been finalized.?

Stone said the intended borrowing through bond anticipation notes makes the transaction much more flexible for the school district, since it allows the district to combine the notes with other notes expected to sell in August.

?We are issuing notes that are renewed on an annual basis for up to five years and that's how we will spread the cost out,? Stone said. ?They have a bond anticipation note in August for buses and we will probably append this borrowing to that so that they would save on some stuff,? he added.

The notes will then be marketed in the same method as anticipation notes used to construct a school building or to purchase buses.

Covering the costs of the settlement through debt issuance isn?t common practice in the muni industry but has been represented in a few high-profile examples.

In 2019, Michigan State University issued bonds to help refinance a private placement loan used to help cover the settlement costs paid to the victims of trainer Larry Nassar, and the University of California recently announced its intention to issue $3 billion of medical center pooled revenue bonds to finance the more than $700 million of expected settlement claims tied to the victims of former UCLA gynecologist James Heaps.

In New York settlement costs don?t require the community approval in a public referendum.

?Normally, for a school district in New York State, you would have a public referendum on whether to do a capital project and then the board would typically enact upon resolution to go from there,? Stone said. ?The only difference is that with respect to bonds or notes issued for a settlement of a legal matter or a judgment like this, there is no vote required.?

The school district?s planned issuance will likely be larger than the $17.5 million owed to victims but they aren?t factoring in the nine ongoing lawsuits under the Child Victims Act into that figure.

?They are not in any way tied to these other 35 claims,? Stone said. ?They have not been settled and the district still could reserve the right to take those to trial,? he added.

Should the district choose to settle, more borrowing may be needed. ?When and if they are [settled], then the same opportunity for borrowing will exist for those,? Stone said.

Stone anticipates the offering to be finalized by mid-August.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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