Private SchoolsLearn Benefits of Bond Issues
When the 109-year-old De La Salle Institute needed money recently to improve its aging facilities, the independent Roman Catholic high school turned to the Chicago city government for help.
Not for the cash itself, but to ask the city to issue $7 million in tax-exempt revenue bonds. The city's nod gave the school a lower interest rate than with a conventional loan, and allowed construction to start much sooner than if it had raised donations first.
Despite such benefits, the entree into the tax-exempt-bond market represents something of a revolution in thinking for private and religious schools like De La Salle.
"The typical approach of a Catholic school is to say, 'We need a gym; we'll go raise a million dollars and then build it,'" said Brother Michael Quirk, the school's president. "Now, you're building [financing] models to get things done without waiting years before all the dollars are there."
Long the domain of public schools, and such larger nonprofit institutions as hospitals and universities, the tax-exempt municipal bond market is being used increasingly by private elementary and secondary schools as they become more sophisticated about their finances.
Along with dozens of secular private schools, archdiocesan Catholic schools in Iowa, Indiana, and Illinois have been issued such bonds in recent years. And last summer, the Archdiocese of Philadelphia, which hosts the country's second-largest parochial system, won a $28 million bond to build a suburban high school.
But such arrangements have also raised questions. Even though local governments don't directly lend the money or guarantee the bonds, some critics have asked whether government should be in the business of conferring such financial advantages on religious and other private schools.
'On the Radar Screen'
Although the bonds are similar to those issued in the public sector, private institutions do not need voter approval as do many public schools.
Getting such financing typically includes securing both the approval of the government agency charged with authorizing such debt and the assignment of a debt rating or a letter of credit from the bank that sets up the transaction. While the government signs off on the bonds, the debt doesn't affect the government's own debt ceiling or credit rating.
As cumbersome as the application process is, many school leaders think it's worthwhile because they enjoy lower interest rates.
Faced with rising enrollments and long-deferred maintenance and renovation needs, private K-12 schools now see debt financing as a way to pay for projects too costly for their typical capital-campaign drives. Many also are reluctant to dip into their endowments, which now are realizing record earnings in the stock market.
Competition among private schools also adds to the incentive: The school that can build a new arts center this year is a better sell to parents than the one that waits to raise the money for the project.
Standard & Poor's, the Wall Street financial-services and credit-rating company, reports that its list of institutions with publicly reported debt ratings--often sought by institutions applying for bonds--now includes 33 private schools. Most are for elite secular schools and were issued since the early 1980s.
The Phillips Academy in Andover, Mass., for example, has had about $35 million in bonds issued over the past nine years to carry out a renovation of its dormitories and other improvements. The financing opportunity arose after the Massachusetts legislature opened the tax-exempt market to private K-12 schools, said Neil H. Cullen, the school's chief financial officer.
"It's an exciting mechanism for nonprofit organizations because it gives them a financing ability that otherwise would not be there at such a low cost," he said.
Finance experts expect the number of private schools in the bond market to grow. "There are lots of schools out there that have not yet sought to tap the bond market or sought a bond rating, but it seems to be on their radar screen," said Lisa Danzig of Standard & Poor's.
Meeting Greater Demands
Tax-free bonds were the answer to the Roman Catholic Archdiocese of Indianapolis' prayer several years ago as enrollments boomed at the same time that many of its buildings were in disrepair.
"The vast majority of our schools were built in the 1950s and 1960s and were getting to the point where they needed renovation," said Jeffrey D. Stumpf, the archdiocese's controller. "And the total of the needs was up to $60 million."
Schools within the archdiocese in the past paid for improvements through their own capital campaigns. Once they had half the amount necessary in the bank, the archdiocese would lend the rest to the parish from a special loan fund. But that fund typically has no more than $10 million on hand.
So the archdiocese successfully got Indianapolis' City-County Council to approve $38 million in tax-free bonds, which is now being used for improvements in about 30 Catholic schools in the city. The money even paid for an entirely new school, St. Simon, which opened last fall in a northeast Indianapolis neighborhood that had lacked a Catholic school.
"[The city] really felt the diocese was taking a strong stand to keep neighborhood schools in the city," Mr. Stumpf said.
The bonds' overall interest rate is 5.8 percent. Had the archdiocese taken out a conventional mortgage with an 8 percent rate, the system would be paying about $600,000 more a year.
The Legal Challenge
Not everyone agrees such projects are what tax-exempt bonds were meant for.
The state chapter of the American Civil Liberties Union cried foul when the Economic Development Corp. of Oakland County, Mich., issued a $3.5 million bond for the Academy of the Sacred Heart in late 1995. The independent K-12 Catholic school in Bloomfield Hills used the money to enlarge a science wing.
"In the 1990s, you have to have good science labs to compete, and we compete with some extremely fine private schools in Oakland County," said Michael J. Viola, a member of the academy's board. "We basically needed some bridge financing between the construction work and the actual pledges, and this was an option that was made known to us by bankers."
But in what is apparently the first case of its kind involving a secondary school, the Michigan ACLU this month filed a lawsuit against the county in federal court in Detroit claiming the county had wrongly bestowed a significant financial benefit on a religious school.
"There'd be no constitutional objection if they did it for General Motors," said Robert Sedler, an ACLU lawyer. "The constitutional problem is that they've done it for a religious institution."
Lawyers for the county said last week that the situation was no different from issuing tax-exempt bonds for construction projects at Catholic hospitals or colleges.
"There is no lending of credit or direct lending of cash from the government; all the county provides is a conduit, which allows the institution to have debt that is tax-free," said Robert L. Schwartz, a lawyer for the Economic Development Corp. "It is the [Internal Revenue Service] tax code, not the state, that's providing this benefit."
The religious schools say they deserve the same financing options long available to religious institutions of higher education. "The question is," said De La Salle's Brother Quirk, "what's the difference between an 18-year-old at a Catholic high school and one at a Catholic university."
Vol. 17, Issue 36, Pages 1, 18Published in Print: May 20, 1998, as Private SchoolsLearn Benefits of Bond Issues