As the coronavirus pandemic left K-12 school districts contemplating a world of hybrid and remote learning, it also forced them to confront a big financing question. How to fund future building projects, like new or expanded schools.
The soaring cost of construction materials shot up during the pandemic due to factors like a disrupted supply chain and higher labor costs, leaving builders, developers, and other industries struggling to meet demand. Everything from steel, copper, brass, lumber, and other materials increased in price. At the height of the pandemic, the price of lumber, for example, had by some accounts tripled compared to pre-pandemic days. While the cost of materials has seen relative declines in recent months, in part due to some relief in supply chain issues, the cost of certain materials remains higher than pre-pandemic levels, according to a June analysis from the Associated General Contractors of America of government data.
Fortunately, for school districts large and small, in urban counties or rural communities, there are financing tools available to navigate this ongoing issue.
The issuance of general obligation bonds can fund important infrastructure projects that keep a school district competitive and thriving.
Here's a look at why bond financing is a smart approach and how a bond has a number of long-term benefits that help districts in today's environment with an inflated cost of doing business.
Start With a Strategic Plan
Every district should be strategically planning for the future. How you plan for anticipated needs today will help you in the decision-making process in the future.
That means you should project what you will need in 10 or 20 years to start planning a new school building or projecting other capital needs.
Bond Financing May Help Schools in the Long Term
General obligation bonds are long-term debt instruments that can be issued by school districts to pay for new school construction or other capital projects.
The general obligation debt must be approved in a referendum election.
The debt can also be authorized under the referendum imposing an Education Special Purpose Local Option Sales Tax for Education Purposes (ESPLOST), if specific language is included. ESPLOST is a special 1% sales and use tax used to fund the acquisition and construction of capital projects for educational purposes. If approved by voters, ESPLOST is imposed for a 5-year period throughout the school district’s county. When the ESPLOST referendum includes an authorization for general obligation debt, the school district can start the capital projects as soon as the referendum passes. The district can then pay the general obligation debt from ESPLOST proceeds.
Terms of general obligation bonds are limited to 30 years and the debt may not exceed 10% of the assessed value of all taxable property located within the boundaries of the school district. The principal and interest are paid through a sinking fund with the assessment and collection of an annual ad valorem tax.
Districts can contemplate bonds with overruns. Typically, if construction costs are high, districts can plan for inflated prices through a bond supplement to help cover those costs. It can be difficult to navigate the complex bond market so consider partnering with outside advisors.
If passed, these bonds can help a district in several ways. First, the district gets to spread the cost out over a few decades. The benefit is that the residents today aren't paying for or carrying the costs of residents who see the result of a capital improvement in 10 or 20 years.
Other Benefits of Bond Financing
Another benefit is that districts can lock in costs and interest rates for today versus waiting to start a construction project in a volatile environment down the road. According to recent reports, while construction prices are stabilizing in recent months, they are still higher than what they were prior to the pandemic.
Even with rising interest rates and higher costs, districts should strongly consider entering the market now given the uncertainty of future costs or rates. Plus, schools have the option to refinance a bond later as rates come back down.
Bonds also help districts avoid tapping into their general revenue funds, which are typically used to pay teachers and cover other operational costs. In other words, with bond financing, a district can build its multi-million-dollar school and keep classroom activity functioning.
These are mostly long-term benefits to consider. One short-term benefit, though, is that once a bond is passed, a school district doesn’t have to wait around for the money to start the project, depending on outside factors like supply chain delays. This efficiency component can be a big win for a district looking to make an improvement right away.
Financing Tools Available to Districts
Beyond general obligation bonds, there are other financial tools available for schools looking to complete a capital improvement project. These options include short-term borrowing, tax anticipation notes, lease-purchases, or installment sale contracts and certificates of participation. There are also public-private partnerships that can serve to start and finish projects efficiently.
No school district is the same. Issues facing a smaller district in a rural setting are likely quite different than districts located in the middle of a larger city. Amid an environment with higher construction costs, districts should consider taking an innovative approach to financing capital projects, including one that considers creative financial solutions.
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