HJR 105: Joint Subcommittee to Study the Level of Assistance to Localities Necessary for Developing Adequate K-12 School Infrastructure

September 21, 2004
Richmond

At its initial meeting, the joint subcommittee received a staff review of its background report as well as testimony from the assistant superintendent for finance, Virginia Department of Education, and the deputy secretary of finance.

Adopted by the 2004 Session of the General Assembly, HJR 105 directs the subcommittee to examine, among other things, (i) the physical and technical infrastructure needs of K-12 schools throughout the Commonwealth; (ii) availability of local funding sources to meet those needs; (iii) public-private partnerships that may be available to meet a portion of those needs; (iv) the priority of each of those needs; (v) the level of commitment by the Commonwealth needed and appropriate to supplement local efforts in meeting those needs; (vi) the level of the Commonwealth’s debt capacity available over the next 10 years to assist with capital projects for K-12 schools; (vii) the appropriate bond structure, including issuer, type of debt obligation, period of time over which the debt should be issued, and potential revenue sources for repayment; and (viii) the method for prioritizing and distributing the proceeds thereof.

Responsibility for School Construction

While state and federal moneys may support public education programs, responsibility for constructing and maintaining public school facilities has traditionally and primarily rested with localities. In 2003, a record $29.2 billion was spent on public school construction and renovation, representing a four percent increase in the $28.1 billion expended in 2002; expenditures may reach $30.7 billion in 2006. Localities alone must foot this school construction bill in some states. Typically relying on local bond issues and property tax revenues for school construction, local governments may face particular challenges in times of fiscal stress or voter reluctance to support tax increases or bond referenda for school construction. Disparate property tax values and varying local effort have resulted in significant differences in the quality of school facilities. These disparities have prompted litigation in several states in recent years.

School Construction in the Commonwealth

As title to school property in the Commonwealth rests with the relevant local school board, so does primary responsibility for capital outlay and improvements. To support school construction, local school boards may pursue financing independently—perhaps through general obligation debt sold in public or private markets or assistance through the Literary Fund, the Virginia Retirement System, or the Virginia Public School Authority. In 1996, unmet school construction needs in Virginia stood at $2.2 billion, reflecting a 147 percent increase in only three years.

Literary Fund

Created in 1810 as a “permanent and perpetual” fund, the Literary Fund supports low interest loans for school construction, grants through the interest rate subsidy program, debt service for technology funding, and teacher retirement. Once Literary Fund principal reaches $80 million, the General Assembly may set aside additional moneys for “public school purposes,” including the teacher retirement fund.

In fiscal year 2004, Literary Fund revenues stood at $209.1 million. These revenue sources included (i) $63.8 million from fines, fees, and forfeitures; (ii) $68.4 million from Literary Fund repayments; (iii) $50.0 million from unclaimed property; (iv) $13.0 million from unclaimed lottery winnings; and (v) $13.9 million in interest earnings.

Since 1983, local school divisions have claimed $882.9 million in direct Literary Fund loans (see Table 1).

Source: Daniel S. Timberlake, assistant
superintendant for finance, Virginia
Department of Education
(September 21, 2004).

Transfers of Literary Fund moneys for teacher retirement, a common practice for more than 30 years, affords greater flexibility in the application of general fund appropriations. These transfers have increased over time, reaching $100 million in 1992. For several years in the mid-1990s, these transfers claimed nearly 90 percent of Literary Fund revenues, resulting in delays for school construction project funding. These transfers ceased in fiscal years 2000 and 2001; however, since fiscal year 2002, the bulk of Literary Fund revenues have again supported teacher retirement.
EDUCATION
In fiscal year 1999, $9.0 million was transferred to the School Construction Grants Program. Based on estimated revenue from unclaimed lottery prizes, this transfer totaled $8.4 million that year, with $10.2 million, $8.2 million, and $9.2 million transferred in fiscal years 2000, 2001, and 2002, respectively. These transfers ceased in the 2002–2004 biennium.

Beginning in 1988, Literary Fund revenues were used to support the purchase of computers and educational technology for public schools; the revenues have supported debt service on equipment notes issued by the Virginia Public School Authority. About $232.9 million in VPSA bonds have been issued since fiscal year 2001 to support “a computer-based instructional and testing system for the Standards of Learning.” The current fiscal biennium will include about $118.5 million in additional bond proceeds.

The Literary Fund may also be used for interest rate subsidies, which support school construction projects on the Literary Fund’s First Priority Waiting List through the Virginia Public School Authority. The subsidies are designed to reduce the principal amount of debt financed “in a manner that produces debt service payments equivalent to what the school division would have paid for a direct Literary Fund loan.” This subsidy program has funded an average of $5.4 of projects for every $1 of Literary Fund revenue (see Table 2). Among the advantages of this funding route, according to the deputy secretary of finance, are below-market interest rates and greater flexibility in spending (under VPSA capital project expenditure guidelines). In addition, the subsidy loan does not count toward the $20 million Literary Fund cap. Between November 1996 and November 2003, the interest rate subsidy program funded a total of $489,172,501 of projects for 89 localities on the Literary Fund waiting list.

Source: Daniel S. Timberlake, assistant superintendant for finance, Virginia Department of Education (September 21, 2004).

As of June 30, 2004, the Literary Fund principal totaled $502.9 million. Also as of June 30, 2004, the costs of the 55 projects on the First Priority Waiting List—those for school divisions having a composite index less than 0.6000, coupled with outstanding debt to the Literary Fund of less than $20 million—stood at $260 million.

Literary Fund loan amounts must be no less than $50,000 and cannot exceed $7.5 million. While the loan term may range from five to 20 years, most loans have a 20-year term. The interest rate is based on the school division’s composite index of local ability-to-pay. Localities with a composite index less than or equal to 0.2999 receive a two percent interest rate; those from 0.3000 to 0.3999, a three percent interest rate; from 0.4000 to 0.4999, four percent; from 0.5000 to 0.5999, five percent; and at 0.6000 and above, six percent.

Projected revenues for 2005 are $177.4 million, to be added to an expected $36.8 million in unspent revenues from fiscal year 2004. For 2006, projected revenues are $190.7 million, to be added to an anticipated $12.8 million in unspent revenues from 2005. No direct loans are expected to be issued for 2005 or 2006.

Virginia Public School Authority (VPSA)

Three routes for general obligation debt—backed by taxing authority and typically boasting low interest rates—are available to localities: localities may (i) sell debt directly, either in public or private markets (an option that may require voter approval); (ii) seek Literary Fund loans at below-market interest rates; or (iii) obtain funding through the VPSA.

An alternative to the general obligation bond is the revenue bond, typically issued through a local industrial development authority and secured by a pledge of revenues. These bonds may include a relatively high cost of financing, as additional legal counsel, underwriter, and ratings and other fees may increase costs. In addition, interest rates are typically less favorable than those available for general obligation debt. In the revenue bond model, the IDA borrows the funds to construct the school, then leases the project to the school division.

Established in 1962, the VPSA is often described as a “bond bank” and is authorized to purchase general obligation local school bonds through funds set aside to it from the Literary Fund and other funds appropriated by the General Assembly. In practice, the VPSA typically purchases these local general obligation bonds from the proceeds of the sale of its own bonds. The VPSA assists localities through pooled and stand-alone bond initiatives.

School bonds purchased by the VPSA through its pooled bond program do not require approval by the voters of the borrowing locality. Localities initiate the VPSA funding process; unlike the Literary Fund route, there is no project waiting list. As of June 30, 2004, total VPSA indebtedness on behalf of local school construction surpassed $2.3 billion.

The VPSA enjoys a “double-A plus” bond rating by the three major rating agencies and is able to offer favorable interest rates for participating localities. The VPSA supports its various costs by charging localities a 10 basis point surcharge (0.10%) over what it pays on its bonds.

The VPSA also provides a “stand-alone” bond program, with bonds featuring a rating equal to the locality’s general obligation rating and secured by the local school division, and the State Aid Intercept Provision, which allows the Commonwealth to “intercept”—or, in effect, garnish other local revenues in the event of default.

The VPSA has also issued Qualified Zone Academy Bonds through the federal Taxpayer Relief Act of 1997, which provides bond financing using a tax credit to the lender—rather than an interest rate—for certain eligible schools (those in a federal enterprise community or within a school division with 35 percent of its student population eligible for free or reduced lunch). Finally, the VPSA has also issued various bonds and notes to support educational technology since 1989.

Lottery Proceeds

The 2004–2006 budget appropriates $145 million and $147.9 million in lottery proceeds directly to school divisions; at least 50 percent of these moneys must be expended on nonrecurring costs. The 2000 Session of the General Assembly authorized local governing bodies to establish escrow accounts from lottery proceeds designated for nonrecurring costs as described in the budget—school construction, additions, infrastructure, site acquisition, renovations, technology, other expenditures related to modernizing classroom equipment, and debt service payments on school projects completed during the past 10 years. Although similar in concept to the School Construction Grants escrow accounts, these accounts must be clearly separate.

Maintenance Supplement

The 2001–2002 Appropriation Act allotted $9.5 million for a maintenance supplement, calculated to fund a state share of $15 per pupil in average daily membership, to be matched by the locality on the basis of the composite index of local ability-to-pay. While the 1998 Session adopted legislation citing the maintenance supplement program, the 2002, 2003, and 2004 Appropriation Acts did not include this initiative.

School Construction and Educational Technology Grants

The Virginia Public School Construction Grants Program provides grants for school nonrecurring costs such as construction, additions, infrastructure, site acquisitions, renovations, technology, escrow payments, and school safety equipment. Grants may also be used for debt service payments for projects completed within the past 10 years. A similar initiative, the Virginia Public School Educational Technology Grants Program, provides grants for educational technology, including infrastructure, software, and hardware acquisitions and replacement, and innovative programs to advance the effectiveness of educational technology.

Legislative Scrutiny and Recent Developments

The challenges of public school construction needs have not eluded the General Assembly, as numerous legislative studies have tackled the complex issue in recent years. In 1994, an 11-member select committee of the House Committee on Appropriations, the Senate Committee on Finance, and the Commission on Equity in Public Education recommended, and the 1995 Session restored, the maintenance supplement and increased the total Virginia Public School Authority outstanding debt issuance cap. The Commission on Educational Infrastructure recommended, and the 1997 Session of the General Assembly passed, legislation authorizing local school boards to create nonstock, nonprofit educational technology corporations to facilitate the implementation of public-private partnerships to enhance access to and the quality of educational technology.

The 1998 Session of the General Assembly linked car tax relief and school construction funding within the 1998–2000 biennial budget, providing approximately $533 million for these initiatives “pursuant to such legislation as may be adopted by the 1998 or subsequent sessions of the General Assembly.” A special session resulted in legislation providing for personal property tax relief as well as detailing the distribution of funds through the Virginia Public School Construction Grants Program. In 2002, the Assembly enacted the Public-Private Education Facilities and Infrastructure Act, authorizing private entities to “acquire, design, construct, improve, renovate, expand, equip, maintain or operate qualifying projects” upon approval by a public entity, such as a local school division, “that has the power to take such actions with respect to such projects.”

Issues for Further Study

Members expect to explore a variety of issues at future meetings: (i) what constitutes an “inadequate” school facility; (ii) buy-down amounts required for projects on the First Priority Waiting List; (iii) school construction successes in other states; (iv) enrollment projects and the need for new construction, in addition to renovation or repair; (v) the Public-Private Education Facilities and Infrastructure Act of 2002; and (vi) the costs of school buildings.

Chairman:
The Hon. Beverly J. Sherwood

For information, contact:
Kathleen G. Harris
Division of Legislative Services

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