Financing Capital Outlay Ii

FINANCING CAPITAL OUTLAY: CHAPTER FOURTEEN According to the National Education Association: Capital Outlay is an expenditure that results in the acquisition of fixed assets or additions to fixed assets, which are presumed to have benefits for more than one year. It could be for land, existing buildings, improvements of ground, construction on buildings, additions to buildings, remodeling of buildings, or initial, additional, and replacement equipment. Debt Service is an expenditure for the retirement of school district indebtedness, including bond and loan principal, interest, and service charges. Capital funding traditionally has been provided from local resources, which reflects local fiscal capacity and aspiration. Federal provides negligible amount of aid for capital outlay. Two sources for financing capital outlay: Local and state Some only local

FINANCING CAPITAL FACILITIES: LOCAL OPTIONS Choice #1: “Pay As You Go” Financing-the ability to finance the construction of school facilities from current revenues.

Advantages:

Disadvantages:

*available only to the large and/or affluent school districts

*results in sharp increases in the local tax rate

*ideal way to finance capital outlays *quick and easy *eliminates large sums of money for interest, the costs of bond attorney fees, and election costs

*creates friction among taxpayers and governmental agencies because of increased school taxes *fails to distribute costs among the generations who benefit from the school facilities *fails to realize the economic advantages of borrowing in periods of inflation

Choice #2: Building Reserve Funds are financed by special tax levies and the funds are kept separate from the school district’s current operating funds. Advantages:

Disadvantages:

*Projects can be constructed without the delays and expenses associated with gaining voter approval for bonds.

*Changes in school leadership result in diversion of funds for purposes other than those intended when the funds were collected.

*Debt service charges are avoided

*Many who contribute will not realize any benefits.

*Local restrictions on taxing or debt limitations will not interfere with the project

*The taxpayer is only concerned with the total cost of the school district’s budget. The higher tax rates create taxpayer resistance and result in a reduction of the current budget.

Choice #3: General Obligation Bonds: legal papers issued by the borrower as evidence of debt, which specify interest rates, payment periods, and security. Advantages:

Disadvantages:

*enjoy tax exempt status from federal and state income taxes

*varies from state to state and even within school districts

* desirable for investors with high incomes

*debt limitations in the form of a percentage of locally assessed valuation of real property

*relative safety of principal

*varies among states regarding the approval process required prior to the sale of bonds

FINANCING CAPITAL FACILITIES: STATE OPTIONS Category #1: Complete State Support-the funding of capital and debt service expenditures is borne by the state

Advantages: *a higher degree of fiscal equalization is achieved *access to a greater variety and quantity of resources *an allotment mechanism based on needs *if state had to issue bonds, the larger issue would result in overall savings in interest and service charges

Disadvantages: *control of public schools will become focused at the state level *uniformity of public schools would not recognize the unique needs of localities *construction could be unnecessarily delayed due to competition for state resources

Category#2: Equalization Grants-designed to allocate revenues per unit of need inversely to the fiscal abilities of the local school districts

Advantages: *comparable public school facilities can be provided without the imposition of an excessive local tax burden *frivolous use of state funds would be curtailed *reduced dependency on local property tax=additional resources for other governmental services

Disadvantages: *a substantial amount of state resources would have to be dedicated to this purpose *localities would not be able to respond to immediate construction needs

Category#3: Percentage Matching-a grant designed to provide a fixed percentage of state support for local public school facilities projects. The fiscal capacity of the school district is not taken into account and the total amount of state assistance varies with the cost of each project.

Advantages:

Disadvantages:

*local school districts initiate and can tailor construction projects to their own needs

*penalizes local school districts with limited fiscal capacity

*state encourages cost effective construction practices *reduces dependency on property tax freeing local resources for other governmental purposes

*insufficient appropriations by the state would render the program ineffective *school districts with sufficient capital facilities would not be eligible for state assistance;

citizens would not see direct benefit from their taxes

Category#4: Flat Grants-a fixed amount of funds allocated by the state to be used to finance construction. It could be by ADA or ADM or just a fixed amount.

Advantages: *control of the building program remains with the local school district *does provide some measure of equity *reduces dependency on property tax *easily administered

Disadvantages: *only supplement the local funds *some school districts would receive unneeded funds while others would have unfunded needs

Category#5: Loans-states provide low interest loans to local school districts. Loans are usually modest. Criteria are used.

Advantages:

Disadvantages:

*an economical mechanism for borrowing funds

*state loan funds are extremely limited

*not charged against the local school district’s debt limitation *time required to acquire funds is usually considerably less than the time required to acquire funds through the sale of bonds

*fiscal equalization is not enhanced *diverts the attention of the legislature from adequately funding the construction of public schools *local control may be diluted through use of state approval process

*state can encourage cost efficient construction practices

Category#6: Building Authorities-designed to function at either the state or local level to circumvent the restrictive taxing or debt limitations of local governments

Advantages:

Disadvantages:

*permits the state to assist local school districts without a constitutional amendment

*ignores the more pressing problem of adequately financing the construction of public school facilities by evading tax and debt limitations

*a combination of local, state, and federal revenues may be used to pay the costs of lease rental or lease purchase agreements *can be used without voter approval

*revenue bonds result in higher interest costs than *right of taxpayers to voice approval or disapproval is circumvented

Persistent Fiscal Problems 1. Some states provide no help at all. 2. Federal government provides no help at all. Constitutional/Statutory Limitations: 1. Restrictive debt and tax rate limitations and variations among states 2. Assessment practices which do not coincide with statutory or constitutional prescriptions and wide variations in assessment levels among local districts 3. A property tax base which is out of touch with reality 4. Voter reactions to property tax rates 5. Rigid voter qualifications and provisions which require more than a majority vote 6. Rapid increase in school construction costs 7. Overdependence on property tax 8. School district geographical boundaries which isolate commercial and industrial taxable wealth 9. Needs so great that many districts can not meet their needs no matter what

Equitable State Capital Outlay Programs 1. Quality of school facilities available to the pupils of a school district should not be determined by the fiscal capacity of the district. 2. Equitable measures of needs for school facilities should be used. A. School buildings depreciate at a rate of about 2% per year. B. Need should include pupil growth, projected pupil growth and capital outlay needs C. Cost variations should be included D. Debt service should be included in the measure of need 3. Finance plan should include borrowing plus current revenue 4. Carefully planned and projected over a number of years 5. State should not exercise unnecessary controls 6. Annual continuing plan