Judge Allows South Carolina Districts To Participate in Lease-Purchase Deals
A South Carolina Supreme Court judge has cleared the way for local districts to build schools through lease-purchase plans without seeking voter approval.
The ruling may permanently alter the school-construction process in the state, officials said last week.
Prior to the ruling, South Carolina had been one of the few states that did not permit school districts to finance major construction or renovation projects through lease-purchase agreements. The method is commonly used in most states for all kinds of public construction, including schools.
Under such lease-purchase arrangements, a nonprofit entity is formed to raise funding for capital-construction projects. It insures the borrowed capital, builds the facilities, and then leases them. The lessee can eventually assume ownership of the facility at the end of a fixed term of payments.
The method has been a particularly appealing one for school districts, which can build lease payments into their operating budgets and avoid having to ask voters directly to take on substantial additional debt burdens in bond issues.
Those who opposed the lease-purchase method in South Carolina argued that it allowed districts to circumvent the state constitution, which requires districts to seek permission from local voters to accrue debt beyond a certain limit.
In the wake of the October ruling, the South Carolina School Boards Association announced plans to sponsor a $30-million to $40-million lease-purchase program to build schools in several districts, according to John C. Cone, the association's executive director.
School officials in the state--which recent surveys show needs more than $1 billion in new school facilities--sought court approval for the construction-financing agreement earlier this year after local voters repeatedly failed to support bond referenda needed to ease overcrowding that Mr. Cone said had schools "busting at the seams."
Traditionally in South Carolina, districts have paid for new schools by issuing bonds after obtaining voter approval to raise debt-service taxes in cases where the district had reached its constitutional debt limit.
The debt limit in the state is unusually low and most districts have already exceeded it, Mr. Cone pointed out.
The lease-purchase agreement allows school administrators to "meet their constitutional responsibilities to house and educate children" more efficiently, Mr. Cone argued.
"Democracy moves slowly," he said. "Often, by the time a district wins voter approval, and gets around to building the buildings, the situation has gotten very bad for students, who have been forced to double up for a long time."
Mr. Cone blamed the lack of voter support for school-construction projects on the declining number of families with school-age children.
When voters refuse to support new construction, he added, "this is the only game left in town."
The supreme court's ruling overturned a lower-court decision in a lawsuit against the Lexington 1 school district, where the school board turned to the lease-purchase idea after voters rejected three consecutive bond referendums.
The suit was filed by a Lexington resident, Marvin P. Caddell, who argued that the lease-purchase payments by the district would constitute long-term debt, and therefore would require voter approval.
Under the school-boards association's plan, it will form a nonprofit corporation that will sell bonds to finance construction and renovation projects. The corporation will lease the buildings back to the districts.
Local school boards will meet the yearly lease payments through annual budget appropriations, supported by raising their operating millage, if necessary.
The supreme court ruling concluded that the lease-purchase payments would not constitute long-term debt, because local school boards would be free to stop its payments at any time. The district, however, would lose the leased facility if payments were stopped.
Mr. Cone noted that a lease-purchase plan generally does not save districts money. But it does help smaller districts that may not be able to attract the bigger lenders who can offer lower interest rates.
The school-boards association will be able to pool the requests of several districts and thus have the ability to attract funding at a lower rate of interest, according to Mr. Cone.
He also compared the financing plan to applying for a loan to buy a car. "All administrators would have to do is fill out a three-page application," he said.
According to a researcher for the Government Finance Office Association, lease-purchase is the only method used to build schools in some states, such as Indiana and Colorado.
In New Jersey, Gov. Thomas H. Kean offered state direction to local districts interested in using the financing plan, saying it was a way to broaden the financial options available to schools throughout the state.
Other states where the method is not used include Florida, Georgia, Minnesota, and Missouri. But officials in those states say they are considering it as an option.