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Funding School Facilities

Module by: William J. Price. E-mail the author

Summary: As America begins the second decade of the twenty-first century, there is little question that the education of our youth is critical to the continued political and economic health of our nation. To ensure that societal demands for education are met, politicians and other policy makers must make decisions about what kind of educational system should be provided and how such a system will be funded. In addition, they must ensure that equal educational opportunity is available and accessible to all our students, regardless of their socio-economic status or where they may live. This is a tall order, but one that is crucial to the full development of human capital in our state and nation. Expenditures for education are the largest single budgetary expense for state and local governments in the United States. Estimates are that as much as eight per cent of the nation’s gross domestic product is spent for all levels of educational service. With an estimated annual expenditure of over 600 billion dollars to support the education of record levels of K-12 student enrollments, and approximately six million teachers and support staff nation wide, education is indeed big business. As with any business it is important that a continued source of revenue be available to successfully meet increasing demands, while at the same time using existing resources as wisely and efficiently as possible. Since support for public education relies primarily on public tax dollars, positive public perceptions of schools is critical to their continued financial support.

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This manuscript/chapter has been peer-reviewed, accepted, and endorsed by the National Council of Professors of Educational Administration (NCPEA) as a significant contribution to the scholarship and practice of education administration. In addition to publication in the Connexions Content Commons, this chapter is part of a complete collection (book) entitled MICHIGAN SCHOOL FINANCE: A Handbook for Understanding State Funding Policy for Michigan Public School Districts , ISBN 978-1-4675-0165-1. Formatted and edited in Connexions by Theodore Creighton and Brad Bizzell, Virginia Tech.

Introduction

One of the most important fiduciary responsibilities of a local school district board of education is to ensure the provision of adequate and safe school facilities to house the school district’s educational programs and services. This means providing buildings and grounds that are sufficient to house the number of students attending the school district in any given school year. In addition to the appropriate number of classrooms, schools need office space for administration and various support staff, small group meeting space, large assembly areas such as cafeterias, media centers, performing arts centers, and a wide range of athletic facilities including gymnasiums and often times swimming pools. In addition, outside facilities will include playgrounds, ball fields, football and track facilities as well as parking lots, bus garages and maintenance facilities. In recent years technology has become a new facility requirement and schools today will require the capacity to house a variety of technological tools including such things as wiring for large computer systems for internet use for both instruction and administration. Everything that is provided by the citizens of a local school district in the way of buildings and grounds is referred to as capital outlay and collectively represents many millions of dollars of taxpayer investment.

The salient question, of course, is where will the vast amounts of revenue needed to fund school district facilities come from? Despite the now almost universal acceptance that education is a state responsibility as we discussed earlier in this handbook, many states including Michigan have left it to their local school districts to shoulder the burden for capital outlay costs within their communities. This almost complete indifference on the part of many states including Michigan in providing any funding to local school districts in support of school facilities is a policy issue open to debate, Periodically that issue is raised by local school district leaders to the Michigan Legislature but to no avail. Given the current economic climate in Michigan the policy of requiring local districts to fund capital outlay on their own is not likely to change any time soon.

Since Michigan school districts are required to provide for and fund their own school facilities, then some process must be utilized by local school boards to raise large amounts of revenue to pay for the construction of new facilities and/or the renovation of existing facilities. Since there is insufficient revenue in the school district’s general operating fund to provide millions of dollars for capital outlay projects, school districts must resort to borrowing the funding using long term loans. The primary vehicle that school districts use to raise large amounts of revenue for major school construction projects is through the sale of municipal bonds. The process involves obtaining local taxpayer approval to issue long-term bonds and involves levying specific debt retirement property taxes to annually obtain funds to repay principal and interest payments on the loan until paid off. ( “See Appendices, “School Tax Elections in Oakland County 2010-2011” prepared by Oakland ISD to illustrate a ballot proposal for a bond issue for the Avondale School District)

School Bond Issues

Michigan school districts are considered local units of government. They are general powers districts operating as a corporate body, and as such under Michigan law (The Revised School Code, Act 451 of 1976 as amended) are authorized to set tax rates for local school districts and to sell municipal bonds. In simplest terms a bond is a debt or obligation incurred by an operating entity with repayment characteristics that extend beyond ten years. The total cost of a project includes the principal amount of the loan and the added costs of borrowing referred to as interest, and usually also includes various administrative costs associated with the bonding projects such as legal fees, costs of bond referendums, cost of bond consultants, construction managers, architectural fees, etc.

Bonds issued by local school districts are considered municipal bonds. While there is more than one type of municipal bond, school districts’ issue what are referred to as general obligation, or full faith and credit bonds and are backed by the total taxing power of the school district and therefore, is a debt shared by all property owners in the district. The bond- holders security lies, therefore, in the income capacity of the entire community and not with specific assets. Municipal bonds are considered attractive investment instruments by potential investors because they are relatively low risk and the interest earnings are tax exempt from federal and state income taxes. Bonds are sold on financial markets through competitive bidding and districts attempt to sell their bonds at the lowest interest rate. Interest rates are largely determined by current economic conditions at the time of sale and the bond rating assigned to the school district by rating agencies such as Standard and Poor’s and Moody’s. The ratings assigned to the school district reflect its overall financial health, it’s past financial history, and the amount of their existing debt and taxable property values.

Even though the issuance of bonds is permitted by local school districts, officials in the Department of Treasury of the state of Michigan carefully regulate their sale and usage. For example, a local school district may not levy more than 13 mills for bonded debt, may not amortize payment schedules that exceed 30 years, and may not have outstanding debt that exceeds 15 percent of the total school district’s assessed valuation of taxable property. The state regulates this to insure that districts’ have the capacity to pay off their bonded debt. As stated previously, school bond loans are paid back by the annual levy of a specific tax in the form of a debt retirement millage applied against the district tax base in sufficient amount to generate the required annual principal and interest payment obligations until the loan is retired. In normal economic times property taxable values increase annually as a result of inflation, and over time the millage rates necessary to produce the required annual revenue will be reduced. As property values increase it takes less mills of tax to raise the necessary revenue needed for annual principal and interest payments. Therefore, the later years of the bond amortization schedule typically require the levy of a smaller number of mills than are required during the initial years of the payment schedule. This has often been used as a marketing point as school districts ask their voters to approve a bond proposal. In recent years, however, with the collapse of the housing market and the decline in property values, many districts have actually had to increase millage rates above the initial rates to generate required debt retirement annual revenue obligations under Michigan law. This has tended to increase property taxes at a time of declining property values which has been confusing to property owners who don’t understand why their taxes are increasing at a time of falling assessed values on their home. (See Appendices,”Property Value Growth Slowing” prepared by the Michigan House Fiscal Agency)

The differing value of property between school districts raises another important public policy issue as it relates to school facilities. One of the negative outcomes of the Michigan Legislature’s failure to fund local school district facilities using state revenue is the creation of a huge equity problem between Michigan school districts. Generally districts that have greater fiscal capacity that we have defined as high property wealth find it easier to raise revenue through bond issues. They are able to raise large sums of money with fairly modest tax levies. Conversely, property poor districts that are usually older urban or rural districts lack the fiscal capacity to raise large amounts of revenue even with a very high tax effort. One has only to drive through high property wealth suburban school districts and then drive through rural or older urban districts to note a stark contrast in the newness and overall quality of school facilities between school districts in the same state. To the extent that state-of-the-art school facilities, including the latest technology, play a major role in establishing important conditions for learning, Michigan students do not have equal educational access when considering school facilities. This condition is not likely to improve without state assistance in funding school facilities particularly for property poor districts.

The entire process of borrowing money and issuing bonds for capital outlay is enumerated in the Revised School Code, (MCL380.1351-380.1372). Briefly, allowable and unallowable uses of bond revenue are as follows:

Allowable Uses

  • Construction of new school facilities
  • Construction of additions to existing school buildings
  • Remodeling existing school buildings
  • Energy conservation improvements
  • Asbestos abatement
  • School buses
  • Purchasing land
  • Developing and improving sites
  • Developing and improving athletic and physical education facilities
  • Developing and improving playgrounds
  • Costs of required audits
  • Refunding debt
  • Direct bond program costs after the bond issue has been approved by voters
  • Purchasing loose furnishings and equipment including furniture and equipment
  • Purchasing technology limited to hardware and initial purchase of operating system

Unallowable Uses

  • Repairs, maintenance, or maintenance agreements
  • Supplies, salaries, service contracts, lease payments, installment purchase contracts
  • Automobiles, trucks, or vans
  • Portable classrooms purchased for temporary use
  • Uniforms
  • Textbooks
  • Upgrades to an existing computer operating system or application software upgrades
  • Computer training, computer consulting, or computer maintenance contracts

It is important to note that bond funds may only be used for the exact purposes for which they were intended as outlined on the school district ballot proposal. Independent audits are required of all bond issues upon completion of construction projects and filed with the Michigan Department of Treasury. Revenues from the sale of bonds may not be co- mingled with other school district funds.

Types of Bond Issues Authorized

When raising revenue through the sale of municipal bonds, local school districts have some options. Bonds may be either non-qualified or qualified.

Non-Qualified Bonds

Non-Voted: The board of education of a local school district may, without a vote of the electorate, issue bonds that with the districts outstanding bonded indebtedness does not exceed five percent of the state equalized valuation of the district. Since there is no vote of the electorate allowing the levy of a special debt millage, non-voted loans must therefore be repaid by making principal and interest payments from the school district general operating fund. This option, also known as resolution bonds because they are approved by board resolution, is seldom used by local school districts and when used typically involves small capital outlay projects that don’t require a large amounts of funding.

Voted Bonds: The more common type of school district bond issue is when there is an affirmative vote of the electorate to authorize the board of education to issue the specific amount of the bonds. Since these are unlimited tax obligations, the local school board has the obligation and authority to set the tax rate for principal and interest payments annually.

As stated earlier, unlimited non-qualified bonds may not exceed 15 percent of the district’s assessed valuation.

Qualified Bonds

The local board of education also has the option to seek pre-qualification of the proposed bond issue by the State Treasurer prior to the local bond election. This process requires that the proposed bond projects be reviewed and approved by the State Treasurer in order to receive state qualification. This process allows a district to borrow money from the State School Loan Revolving Fund if needed to make principal and interest payments. State qualified bonds are, however, subject to prevailing wage requirements for construction projects involving school bond revenue whether or not state school funds are actually borrowed. One important advantage of qualified bonds is that since they have backing by the state they carry the state’s credit rating that is often higher than an individual district. This may allow a bond issue to be sold at a lower interest rate thereby saving a local school district long- term interest costs.

Sinking Funds

Another funding option for purchase of capital outlay available to a school district is through the use of a sinking fund. A sinking fund is where a school district seeks voter approval to levy a set number of mills known as a sinking fund millage to generate capital outlay revenue annually through this special tax collection. A district may not levy more than five mills for a period of more than 20 years. Sinking funds may be used essentially for the same projects as bond issues with some exceptions as outlined in the State School Code. The primary difference between a sinking fund and a bond issue is that a sinking fund does not involve borrowing and therefore does not involve long- term debt or interest payments. It is essentially a pay-as-you-go process where each year authorized sinking fund taxes are collected and spent on capital outlay projects approved by the local school board and the State Treasurer. Sinking funds are used primarily for smaller scale capital outlay projects such as roof replacement, parking lot resurfacing, boiler replacements, etc., which are not large enough to warrant a bond issue but are too costly to charge to the general operating fund thereby reducing money available for instructional programs. A school district may have both a bond issue and a sinking fund. As with bond revenue, sinking fund revenue may not be co-mingled with other funds and requires annual independent audits of expenditures and revenues. Sinking fund revenues are subject to Headlee rollback provisions whereas debt service property taxes are exempt from Headlee provisions. (See Appendices,”School Tax Elections in Oakland County 2010-11” prepared by Oakland ISD for illustration of Sinking Fund election for the Novi School District)

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A lens is a custom view of the content in the repository. You can think of it as a fancy kind of list that will let you see content through the eyes of organizations and people you trust.

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