Published Online: January 21, 2009
Published in Print: January 21, 2009, as Cost Concerns, Economic Anxieties Put Construction on Shaky Ground

Cost Concerns, Economic Anxieties Put Construction on Shaky Ground

Years of rising fuel and materials costs, compounded by current budget shortfalls and uncertainty about the marketability of construction bonds, have made school facilities directors eager to reap the benefits of President Barack Obama's economic-recovery initiative, which is slated to include federal money for building and modernizing schools.

"Most school districts feel a tremendous need [for construction funds]," said Gordon Beck, the director of school facilities and organization for Washington state. "Whatever funding can come from the federal stimulus is like a godsend, and would certainly do great things."

The Democrats in the U.S. House of Representatives released their version of the bill on Jan. 15. It would set aside $14 billion for local school districts for a school modernization and repair program, which includes technology upgrades and energy-efficiency improvements. ("Stimulus Plan Aids Education," this issue.)

Although no official date has been set for final action on economic-recovery plan, the Senate will also offer its own version of such legislation. Speaker of the House Nancy Pelosi has proposed a mid-February deadline for Congress.

The incoming administration is working with lawmakers to adopt the stimulus package, which includes school construction funding.

We'll put people to work repairing crumbling roads, bridges, and schools by eliminating the backlog of well-planned, worthy, and needed infrastructure projects," Mr. Obama said in a Jan. 8 speech at George Mason University in Fairfax, Va. "To give our children the chance to live out their dreams in a world that's never been more competitive, we will equip tens of thousands of schools, community colleges, and public universities with 21st-century classrooms, labs, and libraries."

Sue Robertson, the president of the Scottsdale, Ariz.-based Council of Educational Facility Planners International, or CEFPI, estimates that the amount of money needed for those projects is between $30 billion and $45 billion, out of an overall federal stimulus plan that could total more than $800 billion.

"That would be huge in terms of making America's schools into good, operable, safe, secure, and educationally appropriate environments," Ms. Robertson said. "With less than that, it's going to be hard for some districts to get enough money to make a difference."

Bond Questions

Although funding systems vary from place to place, most school districts do not receive state aid for construction projects, Ms. Robertson said. Most construction is financed through bond referendums put before local voters.

The amount of money that districts can receive from issuing bonds is affected by the interest rates they are able to secure in the market. But given the economic recession, districts are "questioning whether to sell them or wait to get a better interest rate, Ms. Robertson said.

What is yet to be determined, said Ms. Robertson, is when school districts will sell their bonds, and what kind of costs they will see.

However, Nick Johnson, the director of the state fiscal project for the Washington-based Center on Budget and Policy Priorities, believes that school bonds may be a safe choice for investors in a somewhat unstable marketplace.

"A lot of the concern about the bond market is easing," he said. "The reality is that investors realize that you need bonds, and school districts are a pretty good bet," for investors.

But as unemployment rates rise and the economy worsens, it may become harder to convince voters of the importance of such projects, said Melanie E. Drerup, the deputy chief of planning for the Ohio School Facilities Commission.

Even districts that receive state funding for school construction projects are now struggling to meet funding needs as state budgets begin to buckle.

For example, in California, where the state matches a portion of local funds for school construction projects, districts are now trying to make ends meet after a statewide freeze on public-works projects because of drastic budget shortfalls. ("California Challenge: Avoid 'Dysfunction' in Resolving Budget," this issue.)

"With this state funding stoppage, we could literally end up in a position where we had to stop those schools that are already under construction," said Guy Mehula, the chief facilities director for the 680,000-student Los Angeles Unified School District, which was expecting $833 million from the state for projects that are already under way. For now, the district has decided to sell some local bonds earlier than expected to offset the shortfall.

Stopping construction on existing projects is a scenario the district is actively avoiding.

"If you stop the project, it's going to be longer before those kids get relieved and get back into a school into their neighborhood," Mr. Mehula said. "From a pure construction standpoint, if you stop a project, you're going to have to suspend a lot of money to pay the contractor extra to stop the contract. You would have to terminate those contracts, or pay the late charges, then pay the contractors to remobilize."

In South Carolina, districts are struggling to adapt to a change in the school construction funding law that links those funds with sales taxes instead of property taxes, said Alex James, the director of the office of school facilities for the South Carolina Department of Education.

Because of the law, which was passed in 2006, the amount of money available for facilities construction and maintenance is directly affected by the condition of the economy. As people cut back on spending, sales-tax proceeds for schools decline.

"When the law was passed, ... everybody was thinking we were invincible," said Mr. James. "Nobody has that crystal ball."

To offset the shortfall, districts have begun to depend heavily on local funds, including the proceeds from bond referendums.

Impact of Inflation

Despite fluctuating interest rates for bonds, those districts whose voters have already set aside money for school construction projects shouldn't be greatly affected by the current economic climate, said Paul Abramson, the president of Stanton Leggett and Associates, an education space-planning consulting company based in Harrison, N.Y.

"School districts that are hard pressed for current dollars may very well have existing funds for construction," he said. "But you can't take dollars that have been set aside ... for capital projects and legally use that money for current expenses."

Mr. Abramson, who also tracks school facility and construction trends, did not anticipate seeing a significant decrease in the number of projects finished in 2008 once those statistics have been released.

"There may be some hold-back on [projects starting in 2009]," he said, "but I think it's going to be relatively modest."

A bigger issue, he said, is the effect of inflation in recent years. "There's no question that over the last two to three years, the cost of inflation [of building materials and fuel] has taken a bite out of schools and out of school construction," Mr. Abramson said.

Over the past year, "the cost per square foot increased somewhere between 10 and 13 percent," he added. "That's a problem."

However, Ms. Robertson, from the CEFPI, warned against blanket statements about inflation in school building costs. Although such inflation is a concern for most districts, the cost of construction varies dramatically from place to place, she said.

Good Time to Build?

What's more, many school construction companies and district facilities directors have noticed inflation rates tapering off since the start of the recession, which experts officially date to December 2007.

"The bad news is the economy stinks," said Tom Roger, the vice president of the Providence, R.I.-based Gilbane Building Co., and the project manager of school construction for the 20,800-student New Haven public schools in Connecticut. "The good news is the cost of construction has stopped escalating."

For the districts that can afford to, "now is when they should be building," since the cost of materials have stabilized, he said.

Mr. Roger, along with Susan E. Weisselberg, the school construction coordinator for the school district, is nearing the end of a major construction project in the district.

"We've done so much of our effort before a lot of this hit," said Ms. Weisselberg, referring to the economic downturn, but the district didn't totally escape the crisis. Officials have decided to hold off starting construction for some schools until this summer, instead of beginning this month.

"That's a reflection of the uncertainty of the economy," Ms. Weisselberg said, "of wanting to see how things went in terms of city, state, and federal dollars."

Mr. Beck, from Washington state, is also anxious to see what will happen. "Everybody's reading the newspaper, keeping up with the national news, and trying to get prepared," he said.

Vol. 28, Issue 18, Pages 1,10-11

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