Private capital for public schools: districts overcome cultural barriers to find non-public building partners

School Administrator, August, 2003 by John M. McLaughlin, G. William Bavin

The problems are legion. There is not a school leader in the country unaware of the dilapidated condition of many of America's public schools.

A study in 2000 by the National Education Association estimated that $268 billion is needed to bring the nation's schools up to acceptable standards for basic issues such as plumbing, roof integrity, lighting and safety. The Government Accounting Office stated that 60 percent of school buildings suffer at least one major structural problem. In schools built in the 1920s and '30s, the lye tends to leach from the mortar leaving the bricks held together only by sand.

In addition to the pressing renovation needs, new schools are in demand across the country. Florida adds almost 60,000 public school students a year while New York City's enrollment grows by 25,000 annually, according to "Financing School Facilities," published by the Association for School Business Officials. Clark County, Nev., which is one of the nation's fastest growing school districts, opened 16 new facilities in 2001 and 13 in 2002 and has 25 school projects in the pipeline for opening in the next two years. Nationally, tens of billions of dollars are needed for the construction of new facilities.

The enormity of the school infrastructure problem is overwhelming the capacity of school districts and states to address it effectively. Financing school improvements, expansions and new construction by traditional means such as general obligation bonds or equalized funding formulas is limited. One solution to the infrastructure crisis beginning to take shape is the entrance of private capital into the public school facilities market. While still in the early stages, public-private partnerships increasingly are providing a viable alternative to address the need for extensive renovation and development of public school facilities.

Cultural Issues

The Association of School Business Officials offered one of the more comprehensive looks at the problem and some forward-thinking remedies in its 1999 report, "Financing School Facilities: A Report Prepared by ASBO International's Facilities Project Team." ASBO criticized general obligation bonding and equalized funding as limited in terms of adequacy and resulting in significant accumulated deferred maintenance.

In its report, ASBO highlighted innovative financing strategies and recommended policy and statutory changes. Among its recommendations: changing state and federal laws to allow the capital markets to receive a tax-exempt return for investments made in the renovation and construction of school facilities.

That recommendation was partially addressed when President Bush signed into law the Economic Growth and Tax Relief Act of 2001. Section 422 of that act extends the privilege of using tax-exempt private activity bonds to qualified education facilities. Previously, the ability to issue bonds that earn interest exempt from federal taxation was largely limited to state and local government.

Section 422 joins the Qualified Zone Academy Bond program, launched in 1997, in the federal government's effort to assist public education's facilities crunch. While Section 422 and QZAB are steps in the right direction, funds are limited and far exceeded by demand. Section 422 is capped at $3 billion annually, yet spending on new facilities, expansions and renovations was more than $20.3 billion in 2001, according to School Management and Planning's Seventh Annual School Construction Report.

Michael Sullivan, vice president of business affairs at the University of St. Thomas in St. Paul, Minn., and a contributing author of the ASBO report, believes not enough has happened to address the facilities problem. Experienced as a financial officer in both higher education and K-12 education, Sullivan reports that private financial participation in facilities development is common among universities but still a rarity in public schooling. In particular, he bemoans the sealed bid process used in Minnesota and many other states in which the low bid wins the contract.

Sullivan wants to see more design-build projects in the public school arena. At his university, he says, "design-build is worth about 10 percent in time and cost. We build 10 percent faster and 10 percent less expensively."

Design-build now encompasses about one-third of all non-residential construction according to Richard Belle, editor of Design-Build Dateline, a trade publication. Its use, he says, "clearly has quadrupled in the last 20 years" and should command about 50 percent of the market in the next 10 years.

As a private institution, St. Thomas can use design-build for facility development, but public schools and public universities in Minnesota, with the exception of the University of Minnesota, which pre-dates the state's constitution, are prohibited from its use. "Instead of a closed economic system, we need to get the market working to provide a more efficient and economical system and more competitive pricing," Sullivan concludes.