Fla. ‘Lease Purchase’ Case To Decide Fate of School-ConstructionProjects

April 11, 1990 4 min read

By Michael Newman

The Florida Supreme Court is expected soon to decide a case that could halt hundreds of millions of dollars’ worth of school construction in the state.

At issue is whether so-called lease-purchase agreements are legal under the state constitution. In most such agreements, a district arranges for a nonprofit company or association to sell bonds for new construction or capital improvements; the nonprofit entity then builds the schools and leases them back to the district.

School officials say lease-purchase financing helps districts keep pace with the state’s burgeoning enrollment growth. New schools often must be built quickly, they say, and these agreements allow districts to begin construction without putting a bond referendum before voters.

But lawyers for the state argue that the agreements violate a clause in Florida’s constitution regarding the government’s authority to issue bonds. They say the funding plan is an “elaborate scheme” to bypass the public.

The dispute reached the supreme court after lawyers for the state appealed lower-court decisions upholding the legality of the arrangements in Orange and two other counties. The high court heard arguments in the case last month and is expected to deliver its ruling sometime within the next few months.

Opponents of school districts’ use of lease-purchasing say the practice is plainly prohibited by the state constitution.

If a government entity wants to issue a bond that matures more than one year after its release, said Henry E. Lee, chief assistant attorney for Sarasota County, it must receive voter approval. “That’s article 7, section 12 of the Florida Constitution,” he said.

The bond issuers skirt this provision by requiring districts to renew the lease-purchase agreements annually, Mr. Lee said. Technically, since the bonds must be renewed each year, they are short-term.

But Mr. Lee said the bonds are perceived as long-term investments and are used to pay for long-term projects.

The money raised from their sale is used “to fund long-term capital improvements,” he said. And “if the bond holders thought that [school districts] wouldn’t renew the bonds, they wouldn’t buy them.”

School officials use similar reasoning in defending the bonds.

Investors are willing to buy such bonds, and banks are willing to finance them, “because they know that school districts are good risks,” said Joseph L. Shields, general counsel for the Florida School Boards Association.

Mr. Shields also said the bonds often are the only alternative for crowded districts that must build schools quickly. “They’re fast and relatively easy to arrange,” he said.

Mr. Shields also noted that lease-purchase financing is common8throughout the state.

The f.s.b.a. is now involved in lease-purchase agreements with nine districts, he said, and has plans to finance schools in six more. At least four other districts are investigating the arrangements as well. There are 67 school districts in the state.

Under the f.s.b.a.'s plan, the association issues lease-revenue bonds or forms a nonprofit group to issue certificates of participation. Money gained from the sale of these bonds or certificates is used to fund school-construction projects.

The new schools are the property of the f.s.b.a., or the nonprofit company that issued the certificates, and the association then leases them back to the school district. Often, the land remains district property, Mr. Shields said.

After 20 years--when the nonprofit entity has paid off the bond--the school district that entered into the agreement gains ownership of the school.

The Florida Supreme Court last year upheld the Brevard County government’s lease-purchase of offices and equipment. The county did not hold a referendum on the matter, but neither was the money used to fund school construction.

Mr. Lee, the Sarasota County lawyer, said this precedent is irrelevant to the case now before the court. If the government failed to renew the bond in a lease-purchase of equipment, he said, “it would be forced to give the equipment back.”

For schools, Mr. Lee noted, the scenario is not so simple. Districts cannot simply give back the school buildings, he said, because “they’re on public land.”

“School districts have a moral imperative to renew their lease, or they lose their land,” he said.

But Thomas F. Lang, a lawyer for the Orange County School District, said a district may choose not to renew its lease. “Legally, there’s no obligation to renew,” he said.

If a district does not renew its lease, he added, the owner can rent the building to another tenant. But at the end of the period covered by the lease, both the building and the land revert back to the district.

An official in the state department of education declined to speculate on what percentage of school construction is financed through lease-purchase agreements.

But in Orange County, $176 million in capital improvements are on hold until the supreme court delivers its opinion. According to a district spokesman, officials had planned to open eight new schools next year, but now will open only five.

School officials in other parts of the state said the case had the potential to eliminate schools’ use of lease-purchasing. Lawyers in the case declined to predict how the court might rule.

But educators within and outside of Florida said the decision likely would have little impact on lease-purchase arrangements elsewhere.

Nationwide, Mr. Shields said, about 30 states currently allow school districts to use lease-purchase financing for such expenditures as school buses, capital improvements, and instructional equipment.

A version of this article appeared in the April 11, 1990 edition of Education Week as Fla. ‘Lease Purchase’ Case To Decide Fate of School-ConstructionProjects