Colorado District Turns to Private Financing of Construction

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The Jefferson County, Colo., school district is using a novel construction-financing plan developed by E.F. Hutton and Co.--one of the nation's largest bond-counseling and financial-planning firms--that will allow it to build three new schools without holding a bond election.

The plan will allow the district to raise the $23 million needed for the construction of the schools by selling approximately $26- million worth of shares in a lease to a group of investors--as yet unchosen--who will be the "nominal owners" of the building for a 10-year lease period.

The plan could be applicable to other districts that, like Jefferson County, need to construct schools but have difficulty winning bond referendums because of their growing populations of older voters who no longer have school-age children and do not want their taxes raised to finance new schools.

While the Jefferson County district is experiencing a population decline in some areas, it is growing in others. But its voters have defeated three of the last four school-bond referendums put before them.

"The district is a microcosm of the U.S.," said Steven D. Binder, developer of the plan and vice-president and manager of E.F. Hutton's public-finance department in the Rocky Mountain region.

"There are areas of the district growing wildly and in need of schools, areas in older neighborhoods, and areas experiencing flat growth.''

The plan is not intended to substitute for traditional voter-approved financing of general-obligation bonds, said Mr. Binder, but as "an accelerated pay-as-you-go method for certain crisis needs."

The district will raise the money by selling "certificates of participation" in a lease on the school to E.F. Hutton, which will then resell the certificates to an investment group.

During the next 10 years, during which time the investors will be "nominal owners" of the buildings, the district will buy the buildings back with lease payments of about $3.3 million per year.

Technically, the investors own the buildings during the lease period, but will act only as "owners of record," Mr. Binder said, without any other rights or responsibilities over the buildings.

Money for the lease payments will come from the district's capital reserve fund, which the school district maintains to provide for the construction, repair, and replacement of buildings.

The fund takes in about $7 million per year through a 4-mill tax levy, the highest levy permitted for a capital reserve fund under Colorado state law.

Therefore, half of each year's capital reserve fund will be used to make annual lease payments, so there will be no need for a tax increase, Mr. Binder said.

Using the capital reserve fund allows the district to avoid tapping its general fund (which would also create a need for further taxes) or the bond fund.

It is illegal in Colorado to use the bond fund for any other purpose than making payments for general-obligation bonds.

Change in State Law

Jefferson County, based on Mr. Binder's advice, had to lobby the Colorado legislature in 1977 for a change in state law that would allow districts to lease buildings from funds in the capital reserve fund.

The plan, in this case, should save the district $5.5 million over the cost of paying off bonds of comparable worth, because proceeds from the initial lease sale can be invested at a profit.

E.F. Hutton intends to make a profit on the arrangement during the sale of the certificates of participation to investors, Mr. Binder said.

Because state law says the Jefferson County district cannot enter into debt without electoral approval, the district has the option of renewing the lease each year.

Mr. Binder said that the year-to-year renewal option releases the district from the possibility of tying itself into future payment and therefore does not constitute "debt," according to the state supreme court's interpretation of the term.

If the school board chooses not to appropriate money for a lease payment, the certificate holders would immediately order the district to vacate the buildings and would begin immediate liquidation of the buildings and land.

Mr. Binder originally developed this plan in 1975 for a Colorado county that wanted to finance an administration building. He adapted it for use by the Jefferson County schools.

He said the plan is similar to some school-finance efforts in Indiana and California, but that the leases in those states are on a longer-term basis.

Vol. 02, Issue 07

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