Published Online: September 29, 2009

Demand Soars for Stimulus-Backed Facilities Bonds

Construction bonding authority—a technical, and often obscure, source of capital funding for school districts—has emerged as a hot ticket for those looking to finance school facilities work under the federal government’s economic-stimulus program.

With little stimulus money expected to be left for construction after states make up for recession-driven budget cuts, districts are scrambling for some $24 billion or more in zero- or low-interest bonds under the $787 billion American Recovery and Reinvestment Act.

“This is a once-in-a-lifetime deal,” said Judy Marks, the associate director of the National Clearinghouse for Educational Facilities, based in Washington. Not only are bonds available, she said, “the cost of construction materials is down, the cost of labor is down, a lot of contractors who would be busy bidding for [office buildings and other projects] are competing for school construction.”

One result: stiff competition in some places for a new program created under the stimulus law—Qualified School Construction Bonds—that can be used to build, upgrade, or repair school facilities.

In California, school districts applied for QSCB tax credits to cover $3.7 billion in projects, even though the state got to allocate just $700 million in construction bonding authority under the stimulus law for this fiscal year. The state decided to hold a lottery to determine which districts should get the funding.

TTennessee received authority to allocate $121 million in projects under that same program, but it got applications for $305 million, leaving some districts out of luck.

The 5,300-student Loudon County, Tenn., school system, for example, had hoped to use the bonding authority to help finance a number of projects, including the construction of a new middle school. At the current middle school, some classes are being held in locker rooms and other less-than-ideal spaces, said Jason Vance, the district’s assistant director of schools.

The funding “would have gone a long way” toward helping with those projects, Mr. Vance said. “We were ready to stick a shovel in the ground.” He said the district would apply again, if the opportunity presented itself.

Tennessee’s 5,000-student Maryville city school system, near Knoxville, was more fortunate. The district will use the $20.4 million in bond proceeds to build a new intermediate school, serving students in the 4th through 6th grades. That project had been stalled for more than a year because the district couldn’t afford the interest rate on traditional bonds.

“We don’t know how much longer it would have sat there, just because of the way the economy is,” said Stephanie Thompson, the district’s director of schools.

Funding Sources

Funding for school facilities was a major flash point in congressional negotiations last winter over the stimulus law, which includes about $100 billion in aid for education. Opponents feared that the inclusion of money for construction would set a precedent for federal spending in an area typically left to states and districts. ("Congress Revisits Construction Tiff," Feb. 25, 2009.)

In the end, a compromise allowed states and districts to use any money left over from the $39.5 billion State Fiscal Stabilization Fund to finance school modernization and repair.

But states’ still-dire fiscal circumstances have made it difficult for them to take advantage of that option, since most of that direct aid has gone to plug budget holes and make up for personnel and program cuts.

According to an Education Week review of stabilization-fund applications, 31 states reported they will have leftover money once all cuts to K-12 and higher education have been backfilled in the 2009 and 2010 budget years.

Not all of the state fiscal-stabilization money has flowed yet, so more states may choose to use a portion of the second round of funding, to be allocated later this year, for facilities. But the projected $5 billion in leftover cash would amount to only about 14 percent of the total in the stabilization fund set aside specifically for K-12 and higher education.

In addition, just three states—Arkansas, Oklahoma, and West Virginia—were able to use a portion of a separate, $8.8 billion Government Services Fund in the stimulus program for school modernization and repair, according to the Washington-based 21st Century School Fund and the Education Week analysis. The three states plan to spend just $24 million in all on facilities.

Faced with a limited pool of direct stimulus funding for facilities, states and districts have seized on the bonding programs that were created or expanded with little fanfare in the stimulus law.

Most significantly, the ARRA created the $22 billion QSCB program, which gives bondholders tax breaks on the bonds, allowing them to offer them to schools interest-free.

Congress also expanded the existing Qualified Zone Academy Bond program, which permits states to borrow money for school repairs, with the interest paid by the federal government through a tax credit to bondholders. The national limit for those bonds was increased to $1.4 billion in fiscal 2009 and $1.4 billion in fiscal 2010, which began Oct. 1.

Challenges Remain

Despite the high demand for those programs, some school districts, particularly in areas hit hard by the recession, have had a tough time convincing voters to approve bonding projects, said Mary Filardo, the executive director of the 21st Century Schools Fund, a nonprofit research and advocacy organization.

“The really poor districts are saying, ‘We don’t even have the money to pay back the principal,’ ” she said.

In part to help head off that potential problem, West Virginia, which received nearly $80 million in bonding authority under the federal program in fiscal 2009, decided to administer the bonds at the state level.

Unlike districts, in West Virginia, the state doesn’t need a voter referendum to issue bonds.

“We get the money; we just give it [out],” said Mark A. Manchin, the executive director of the state’s school building authority.

So far, West Virginia has been able to fix 17 of its leakiest roofs and replace 15 HVAC systems. The state also plans to build at least one new school with the help of the bonds.

Bills Still Pending

School construction advocates also are holding out hope that Congress will overcome its reluctance to provide direct federal funding for K-12 facilities work.

A longtime champion of such funding, Sen. Tom Harkin, D-Iowa, recently became the chairman of the Senate, Health, Education, Labor, and Pensions Committee. He already chairs the Senate appropriations subcommittee that oversees education spending.

Sen. Harkin has included $700 million in mandatory funding for a school modernization grant program in the fiscal 2010 education appropriations bill, which is working its way through Congress.

“School renovation should have been funded in the recovery act,” Sen. Harkin said in debate over the bill. “It creates jobs, it makes schools healthier, it improves energy efficiency, it stimulates the economy.”

Rep. George Miller, D-Calif. , the chairman of the House Education and Labor Committee, included more than $4 billion over two years in new, mandatory funding for school facilities in a broader measure overhauling the federal student-lending program that was approved by the House of Representatives last month.

Under the bill, money for school modernization, renovation, and repair would flow through the same formula as Title I of the Elementary and Secondary Education Act, which governs federal funding for disadvantaged students.

Sen. Harkin is planning to include at least some funding for school facilities in the Senate’s version of the legislation, which has yet to be introduced.

Assistant Editor Michele McNeil contributed to this story.

Vol. 29, Issue 06

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