While bonds can be used to finance capital needs for Georgia school districts, other strategies are available that do not require a referendum. Tax anticipation notes, multi-year lease purchases, certificates of participation, and contracts for capital improvement energy projects may all be used to fund capital projects. In an environment of higher construction costs and a challenging economy of higher interest rates, these financing tools can help school districts push forward capital projects like new or expanded schools.

These finance tools serve as limited exceptions to the constitutional requirement that voters must approve school district debt in a referendum. The financial obligations are not treated as general obligation debt under these structures, meaning voter approval is not required.

Here’s a look at how these financing alternatives work.

Tax Anticipation Notes

Tax anticipation notes (TANs) are temporary, short-term notes made in anticipation of future tax revenue to be received. TAN funds may be used to jump start a capital project pending receipt of revenue from property taxes or an Education Special Purpose Local Option Sales Tax for Education Purposes (ESPLOST).

The TAN is a debt instrument similar to a bond in that interest bearing notes are issued and sold to investors. Investors receive interest payments and repayment of principal on the maturity date. Investors have recourse against the school district’s unencumbered funds if the debt is not paid. Provided certain IRS spending requirements are met, the interest cost to the school district may be reduced by investment interest earned based on market conditions.

Unlike a bond, the TAN must be paid on or before December 31 of the calendar year in which the loan is made. This repayment requirement can pressure a school district since property tax collections are not received until close to the end of the calendar year. To resolve the time constraints, proposed 2024 House Resolution 804 seeks to amend the Georgia Constitution to allow repayment within 12 months of the TAN funding date. If the constitutional amendment passes, then Georgia school districts will be able structure TANs to ensure repayment occurs well after tax revenue is received.

Certain restrictions apply on the amount of the TAN. Specifically, the amount of the TAN may not exceed 75% of the total gross income from all taxes collected by the school district in the preceding calendar year or the school district’s total anticipated revenue for the calendar year in which the TAN is issued. Also, a school district may not take out a TAN if a temporary loan from a prior year is unpaid.

TANs allow a school district to fund a project before tax revenues are received. This benefits the school district by providing flexibility if the project is time sensitive or if construction costs are rising.

Multi-Year Lease Purchases

School districts may also finance capital purchases through multi-year lease purchase contracts. With this financial tool, the 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.

Certain requirements apply to keep the instrument from being considered a debt for constitutional purposes. One requirement is that the lease must terminate each calendar year. The lease may automatically renew unless the school district actually opts not to renew, but the contract must provide an annual termination on or before December 31. This technical requirement keeps the contract from being an obligation against future year revenues. Lessor’s recourse in the event of non-payment or non-renewal is limited to the current calendar year appropriations and taking the property back.

The school district must also meet certain requirements to enter into a multi-year lease purchase contract. For example, annual payments under all multi-year contracts and intergovernmental contracts (excluding guaranteed energy savings contracts) in any calendar year may not exceed 7.5% of the total local revenue collected by the school district for maintenance and operation in the preceding completed fiscal year.

The multi-year lease purchase structure provides school districts with a long-term capital financing option limited to current year appropriations.

Certificates of Participation

Certificates of participation (COPs) are a subset of multi-year 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 multi-year lease purchase contracts apply to COPs.

Guaranteed Energy Savings Performance Contracts

School districts may use guaranteed energy savings performance contracts to fund capital improvements that reduce energy and operating costs through the implementation of energy conservation measures. These measures may include facility alterations and equipment designed to reduce energy or water consumption, reduce wastewater production, avoid capital costs, or achieve similar efficiency gains.

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.

The guaranteed energy savings performance contract is intended to be cost neutral to the school district. Accordingly, many of the restrictions applicable to other multi-year contracts do not apply to guaranteed energy savings performance contracts.

Final Takeaway

TANs, multi-year lease purchase contracts, COPs, and guaranteed energy savings performance contracts provide capital financing options without the requirement of referendum. School districts should consider these strategies when reviewing capital funding options.

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