How These Financing Strategies Can Help Georgia School Districts Jump-Start Big Capital Projects
By Cheryl Shaw and Fabian Walters
Math teachers at K-12 school districts have a clear goal in front of them every day: teach math to students. Every now and again, however, school district administrators need to do a little bit of math of their own to fund big capital projects.
With high inflation, supply shortages, and high costs of labor, the ability for district leadership to make the financing work has become more challenging.
In Georgia, home to some of the nation’s largest school districts, there are numerous financing options available to schools that help them navigate these hurdles. While the below options are tailored for Georgia schools, these strategies are mostly available in other jurisdictions. School districts should understand their needs in their jurisdiction before making a decision on the type of financing strategy that makes sense for them.
Starting With a Plan
Before a school district jumps into how it will finance a capital project like a new or expanded school, it needs a plan.
These capital plans should take inventory of existing facilities, assess conditions of a district’s buildings and property, and project what the financial needs are over the next five years. The plan should include an estimate of the cost of needed renovations and modifications or what extent of construction is needed to provide a district’s educational programs.
Think of this document like a budget with priorities. Schools in need of renovation or work should be rated on a scale of 10 — 10 being great condition and 1 meaning the school is in very poor condition, renovation would be a waste of money, and it should be replaced completely. Outside agencies can help districts assess their schools to help come up with a budget to figure out what the cost will be to replace or renovate various components of the property so it’s usable for students.
One Option for Funding: State Money
With your plan in place, school districts need to answer a key question: How can we go about paying for all of this?
In Georgia, the state reimburses school districts for a portion of the cost of construction for education-related projects. This reimbursement goes up to 80% of the eligible total cost. School districts with a weak tax base will typically receive higher state reimbursement of up to 92%.
To qualify, school districts must have a five-year facility plan so the state is aware of the district’s needs when it applies. The way it works in Georgia is that the state Department of Education administers the capital outlay program for educational facilities by taking an aggregate application of school districts’ needs from across the state and then asking the state legislature to approve appropriations. The state then sells tax-exempt bonds and funds projects through the Georgia Department of Education.
School districts have to comply with several relatively straightforward requirements like competitive bidding and building the project in a certain amount of time. Districts should be aware that the project needs to be built first before they receive any reimbursement.
Sales and Use Tax Option
Another option Georgia school districts can consider is a 1% sales and use tax that’s imposed to fund capital projects for educational purposes. Known as the Educational Special Purpose Local Option Sales Tax, or E-SPLOST, this funding strategy requires a referendum and approval by a majority of voters in a district’s jurisdiction.
The sales and use tax is imposed on most purchases and is collected over a five-year period.
Districts will need to list the projects they want the voters to approve. Importantly, if a school district builds a voter-approved project with this tax money, it is not prohibited from the previously mentioned state capital reimbursement.
In fact, a school district that has a need of building two schools can use E-SPLOST funds for the first school and, with proper planning and budgeting, secure state capital money to build the second school.
The downside of this option is that E-SPLOST money is gradually collected over five years, meaning a district may not have much of the needed funds in the first year.
Funding Option Upfront
That brings us to one of our next financing strategies: the general obligation bond.
This option also requires a referendum and voter approval. However, the big difference here is that once approved, the funds from the bond are immediately available to a school district. This is a great option for schools with more immediate capital needs.
Bonds are long-term debt payable over 30 years and backed by a school district’s full faith and credit. There are certain limitations, including that the district’s general obligation debt – including the amount of the bond – can’t exceed 10% of the assessed value of the taxable property in the school district’s jurisdiction.
To finance these bonds, districts must levy an annual ad valorem tax that’s sufficient to pay the debt within 30 years.
Investors tend to like these types of bonds because they are backed by the school district’s full faith and credit. Districts rarely default on these bonds, too.
One way districts can think about the voter approval piece is that it’s equitable: Given the long life of the bond, current and future taxpayers are paying for it and seeing the benefit of it.
Importantly, school districts should be aware that the referendum for the general obligation bond can be combined with an E-SPLOST referendum. This allows districts to pair bond funds with E-SPLOST proceeds.
Funding Options Without a Referendum
Not every financing strategy for school districts requires a referendum.
Tax anticipation notes (TANs) work similarly to general obligation bonds but don’t require a referendum with voter approval.
These temporary, short-term notes are made in anticipation of future tax revenue to be received. It can be used to jump-start a capital project. Since TANs are debt instruments and bear interest, investors pay a bit more scrutiny to the information school districts provide. TANs are capped at 10% of the assessed value of all taxable property, and the total principal amount can’t exceed 75% of the total gross income from all taxes collected by the district in the previous calendar year or the school district’s total anticipated revenue for the year in which the TAN is issued.
Basically, school districts can’t borrow more than they can pay back.
In addition, a TAN must be paid on or before December 31 of the calendar year in which the loan is made.
Other Non-Referendum Options
School districts may also finance capital purchases through multiyear lease purchase contracts. Under this strategy, a property is leased to the school district under a renewable lease, and the acquisition cost is paid with the lease payments. The lease payments equal the principal and interest payments on the sum borrowed. At the end of the lease, title to the property vests with the school district.
There are certain provisions districts must add to the contract to prevent the lease from becoming an obligation against future year revenues.
Certificates of participation (COPs) are a subset of these multiyear lease purchase contracts. The contract is structured as a tax-exempt obligation under which investors purchase a share of the annual lease payment. COPs are sold as securities in the bond market but do not constitute bonds. Investor purchases provide funds for the capital project. All the rules applicable to multiyear lease purchase contracts apply to COPs.
Another option is guaranteed energy savings performance contracts. These can be used for capital projects that reduce energy and operating costs through the implementation of energy conservation measures. They can include measures such as reducing energy or water consumption and wastewater production.
The cost of the capital improvement is paid by the energy and operational savings, including without limitation future cost avoidance. Contract payments are made over time, and the energy cost savings are guaranteed by the energy savings provider to the extent necessary to make the contract payments. Once implemented, the energy savings provider monitors the energy consumption. If the actual energy savings are less than the contract payments, then the provider must pay the shortfall.
Final Takeaway
Amid a challenging time to fund big capital projects, Georgia school districts have several financing options to meet the needs of their students and families.
Some require referendums and voter approval while others do not.
If your school district is not located in Georgia, there might be similar financing options depending on your needs.
Cheryl Shaw, a partner at Parker Poe in Atlanta, has vast experience with education special purpose local option sales tax (E-SPLOST), tax allocation districts analysis, intergovernmental agreements, and other financing/funding sources for school real estate and transactions. She also reviews and advises school districts on the business and finance impacts of “bonds-for-title” projects. She may be reached at [email protected].
Fabian Walters is a partner in Parker Poe’s Washington and Atlanta offices and concentrates his practice on public finance and corporate law. In particular, he focuses on public finance transactions involving real estate, affordable housing, and public schools, including colleges and universities. He may be reached at [email protected].