In recent years, the perception that there is a
shortage of classroom space and that many existing school
facilities are obsolete or badly deteriorated has led to a number
of proposals in Congress to increase government spending and
lending for the purpose of constructing school facilities. It also
has led to a growing number of proposals to create some type of
federal school construction program to share the financial burden
that heretofore had been the sole responsibility of local
governments, with growing assistance from state governments.
To
date, none of these proposals has become law, and school
construction remains the responsibility of states and localities.
The increased intensity and frequency with which these proposals
are put forward, however, ultimately may help these efforts to
prevail. Such an outcome could weaken the American system of
federalism, increase federal spending and lending, and centralize
in Washington yet another responsibility of local government.
One
of the school construction bills introduced in the 105th Congress,
however, offers an innovative approach to public school renovation
and construction by harnessing the energy, resources, and expertise
of the private sector. The Public Schools Partnership Act,
introduced by Senator Bob Graham (D-FL) as S. 2397, would amend the
federal tax code to allow the use of tax-exempt private activity
bonds for the construction of privately owned school facilities
leased back to the public school systems. If this bill were
broadened to enhance its versatility, it could serve as the
foundation for a legislative plan that encourages the use of
public-private partnerships to build public schools more rapidly
and at lower cost across the country.
PUBLIC SCHOOL
CONSTRUCTION TODAY
In
1997, the United States spent a total of $35.5 billion on new
school construction, of which $8.4 billion (or 24 percent) was
spent on private schools--the fastest-growing component of total
school construction spending. The $27.1 billion devoted to public
school construction in 1997 represents an increase of 23 percent in
such inflation-adjusted spending since 1993, while private school
construction has soared ahead at 58 percent. Over the same period,
the school-age population increased by 6.6 percent, suggesting
that, at the most aggregate of levels, spending on school
facilities outpaced the growth in student population.1
The
recent aggregate national construction figures appear to be at
variance with the prevailing view that there is a deficiency in the
availability of quality school facilities. But such aggregate
trends mask significant differences within and among communities
and regions in the quality of school facilities. Such numbers, for
example, tell little about the extent to which the condition of
existing school facilities has deteriorated to the point at which
it affects the quality of education or the safety of students, or
the extent to which technological changes in instruction have
rendered sound but older facilities below the desired standards and
preferences. They tell little about the continuing demographic
changes within and between metropolitan areas or regions that leave
a surplus of facilities in one community--often depopulated central
cities and rural communities--but severe shortages in others, such
as the fast-growing fringe suburbs and exurbs.
Unfortunately, no systematic census or
inventory of school facilities exists by which to make an accurate
or objective assessment of their adequacy and needs. Neither is
there a way to compare the information on what is available today
to what existed in the past to determine whether the situation is
improving (as aggregate spending data would suggest) or worsening
(as anecdotes from select states and communities would
indicate).2
Special Problems
for Central Cities and the Fast-Growing Suburbs
In
older cities and communities, the major school construction issue
is the repair and renovation of older school buildings, many of
which are in poor condition because of systematic neglect by city
governments. In late 1998, for example, the chief executive officer
of the District of Columbia schools announced a plan to spend up to
$1 billion in school repairs over the next 10 years.3
And in early 1999, New York City's Board of Education estimated it
would need to spend $11 billion for school construction over the
next 5 years.4
In
response to concerns over the local stewardship of public school
structures, some state courts have required the state government to
provide financial assistance to cities to replace or upgrade school
facilities; in other cases, the state government voluntarily chose
to do so. In May 1998, the State of New Jersey, for example, was
ordered by the New Jersey Supreme Court to replace or refurbish
deteriorated school buildings in its 28 poorest school districts.
Governor Christine Whitman (R) responded by proposing to spend $5.3
billion over the next 10 years, of which $2.6 billion would be
earmarked for those districts.5 In Virginia, Governor
James Gilmore (R) agreed to a new $100 million state-funded school
construction program in order to get the state legislature to enact
the personal property tax cut for automobiles he had promised
during his election campaign.6
At
the other extreme are the classroom shortages that often occur on
the suburban fringe or in the exurbs, where population growth is at
its most rapid and where school construction often fails to keep
pace with student enrollment. As a result, classrooms and
facilities may be overcrowded, and schools may set up temporary
mobile classrooms to accommodate the growth in students. Often in
these circumstances, school systems on the suburban fringe contend
that the growth in tax revenues derived from the new households
does not keep pace with the higher school construction costs
incurred in serving them; they argue for state and/or federal
financial assistance to meet their immediate needs.
A
combination of such pressures in Michigan contributed to voter
support for Proposal A in 1994, a ballot initiative put forth by
Governor John Engler (R) to begin equalizing school funding in
school districts throughout the state. Under the Engler proposal,
voters were offered a higher state sales and income tax in exchange
for lower local property taxes (with tax cuts exceeding tax
increases). The state used the increased state tax revenues to
provide each school district with a $4,800 annual payment per
pupil. Among the benefits of the proposal was an end to the
financial burden that a large influx of new students can create
within school systems on the suburban fringe of metropolitan
areas.
The
effective result in each of these recent examples of change in
state/local school funding is that state financial support has been
substituted for the traditional local funding responsibility. Such
a trend runs the risk that individual state governments may
encroach further on other local education responsibilities.
EFFORTS TO MAKE
SCHOOL CONSTRUCTION A FEDERAL RESPONSIBILITY
Although the trend toward greater
centralization of school financial support to date has largely
involved transfers of responsibility from local to state
governments, considerable and growing pressure exists to move some
of or all the responsibility further up the chain to the federal
government. Washington heretofore has been a minor financial player
in education whose assistance to local schools has been confined
largely to a series of niche and add-on education programs.7
That changed in late 1998, when Congress agreed to include in the
fiscal year (FY) 1999 federal budget a $1 billion downpayment for a
federal program to assist local school systems in hiring as many as
a 100,000 new teachers over the next several years.
Such
efforts to federalize public school financing are likely to
continue in the 106th Congress as Members of both parties attempt
to demonstrate their commitment to public education, which opinion
polls suggest is an issue at the top of the list of voter concerns.
But because education still is very much the responsibility of
state and local governments, most of the resulting federal
initiatives are likely to be directed toward devising new ways to
send more money to elementary and secondary public schools.
A Flurry of
Legislation
Indicative of the mounting pressure to tap
the resources of the federal government for school construction, 31
bills were introduced on school construction finance during the
105th Congress alone. Many of these will be reintroduced this year,
and their prospects for enactment are better than before. Among
these bills, only one--S. 2397, Senator Graham's Public School
Partnership Act--would encourage the creation of public-private
partnerships between local public school systems and private,
for-profit developers, a concept that is being implemented
successfully in Canada, Great Britain, and even a few communities
inside the United States.
Although S. 2397 did not reach the floor
of the Senate for a vote, its language was incorporated in an
amendment to the Education Savings PLUS Accounts Act (H.R. 2646)
introduced by Senator Paul Coverdell (R-GA). H.R. 2646, as amended,
passed the House and Senate with bipartisan support but was vetoed
by President Bill Clinton for reasons having more to do with
Senator Coverdell's A+ Accounts than with the public-private
partnerships included in the amendment.
President
Clinton's Proposal
In
January 1998, President Clinton proposed a new federal tax credit
to subsidize the interest costs on a total of $19.4 billion in
special 15-year bonds issued by local school systems to construct
or renovate their school facilities.8 According to the Clinton
Administration, the bonds would cost the U.S. Treasury an estimated
$10 billion in interest rate subsidies over the next 10 years.
Under the President's "Modern Schools for the 21st Century"
proposal, the new federal school bonds would be issued over two
years in face amounts of $9.7 billion per year. They would cover
the construction costs of about one-third of the public schools
expected to be built during those years.
Congress did not include the proposal in
its FY 1999 budget. President Clinton attempted unsuccessfully to
revive it in during the final days of federal budget negotiations
in October 1998. He proposed this initiative again in his FY 2000
budget, but he increased the volume of eligible bonds to $22
billion.9
AN ALTERNATIVE
TO FEDERAL AND STATE BORROWING
Although public financing of public
schools has been the norm in the United States, all except one of
the new legislative initiatives introduced at both the state and
federal level last year would perpetuate and expand that practice
by tapping into new governmental sources of money, notably at the
federal level. In contrast to such proposals to extract more public
resources to build public schools, a number of innovative
approaches here and abroad clearly demonstrates that the private
sector could build the desired facilities more quickly and for less
money than currently is the case. The early success of these
diverse efforts with public-private partnerships suggests that the
key elements of these efforts could be emulated in most other U.S.
public school systems, to the considerable benefit of students and
the taxpayers who fund their education.
Nova Scotia's
Partnership Approach
In
1997, Canada's province of Nova Scotia implemented one of the most
ambitious programs to use public-private partnerships to facilitate
the construction of new schools. By the end of 1998, as many as 41
new schools had been either completed or approved for construction
under this Public Private Partnership program (or "P3," as it is
known officially) and another 12 have been proposed for
approval.10 Drawing on the
resources and talents of the private sector, P3 was implemented as
a way to boost public services quickly while making as little
impact as possible on Nova Scotia's limited budgetary
resources.11
Nova
Scotia has a population of approximately 947,000 (about as many as
in the Oklahoma City, Oklahoma, metropolitan area) scattered across
55,362 square kilometers. With an unemployment rate hovering at
just over 10 percent, an economy still suffering from the long-term
decline of the North Atlantic fishing industry, and a freeze on the
provincial capital budget since 1990, efforts to upgrade the school
system might have been postponed pending the availability of
financial resources. As it is, 38 percent of Nova Scotia's
provincial budget is covered by transfer payments from Canada's
federal government under a revenue-sharing program in which federal
tax revenues from wealthier provinces, such as Ontario and British
Columbia, are transferred to less-affluent provinces.
As a
result of these pervasive financial shortfalls, Nova Scotia's
government needed to tap alternative sources of money. According to
the province's Ministry of Finance,
The
key objective is to enable Nova Scotia tax payers to get better
value for their tax dollars by shifting the responsibility for the
operation and/or financing of non-core activities to the private
sector. In the process, the potential exists for service to improve
within the same public expenditure framework, or for the same level
of public service to be provided at a lesser cost to
taxpayers.12
As
the P3 program relates specifically to schools, the province's
Ministry of Finance notes that:
Schools delivered via a Public Private
Partnership will be flexible, high tech learning environments to
support programs and services for students during the useful life
of the school. All technology will be integrated and provide
valuable support tools for students and professional staff.
These schools will be connected
electronically to neighboring schools so that equitable access to
technology is accomplished.
The
private sector will refresh the technology, and refreshed
technology will be provided to other schools in the region.13
The
first phase of Nova Scotia's P3 program encompassed as many as 41
new schools within three years. Eight already have been completed
and now are in service, and agreements on the remaining 30 to 33
were approved and signed in early 1999. Twelve additional schools
have been proposed but still await approval.
Under the P3 program, Nova Scotia's
Ministry of Finance requests bids from qualified developers to
provide one or several school facilities built to the ministry's
specifications in a designated district. Completed projects are
provided on a "turnkey" basis--the developer furnishes the desks,
telephones, blackboards, and computers while the school system
provides teachers, principals, and students.
Prospective qualified bidders compete on
price, and the cost of the project is converted into a 20-year
lease with annual rent payments equal to 85 percent of the
capitalized cost of the project. In effect, the school system gets
to use the building for less than the cost to build and finance it,
while the developer begins the lease 15 percent in the hole. In
order for the developer to make up the difference in cost and earn
a profit on his investment, the contract is structured so that the
school system leases the building for specific hours, such as 8:30
a.m. to 3:30 p.m., Monday through Friday, September through June,
as well as select off-hour periods. During the hours and days in
which the public school system is not using the facility, the
developer can rent its space to other approved and compatible
organizations and businesses.
Off-Hours Use. Such off-hours use
could include renting the facility to for- and not-for-profit
educational organizations, such as trade schools and refresher
educational programs, day care, community colleges and
universities, civic groups, religious organizations, local
governments, political groups, and similar entities for which
classroom-, meeting-, and auditorium-type space is essential.
Organizations and businesses whose purpose and activities are not
compatible with a building used primarily by children are
prohibited from leasing space, and such prohibitions are defined
clearly in the contract. By using the building more intensively
than would be the case if its occupancy were limited to just public
school functions, the developer/owner of the building would obtain
more revenues and earn more profit. These extra revenues are
"passed on," in effect, to the public school system in the form of
below-cost rent.
Because developers must compete actively
with other providers of space for off-hours revenue, they have an
important incentive to ensure that construction is done to
high-quality standards and design. One of the first developers to
win the right to construct and lease five schools, Nova Learning,
Inc., also won the province's 1998 Lieutenant Governor's Design
Award in Architecture.
Lease Terms. The school system's
20-year lease on each facility includes options to renew the lease
at the same rent for up to two additional 5-year terms. The school
system also has the option of buying the facility at a
predetermined price if it so chooses. Most important, the school
system has no obligation to rent the facility beyond the first
lease term, thereby providing the developer/owner with a powerful
incentive to maintain the building to its highest standard and
upgrade it with the latest technology.
If
the public school system determines that the original developer
performed inadequately, it simply can contract with another
developer for a new facility. Alternatively, if demographic changes
in the province or community lead to a reduction in school-age
children, the public school system can elect not to renew as many
leases as necessary to match facility space with student population
and consolidate its students in the leased facilities that remain.
In any case, Nova Scotia's P3 program allows the school system to
shift a number of important technological and demographic risks to
the developer/owner and at the same time enhance its own
flexibility and educational choices--at a lower cost than would be
the case if the construction, financing, and ownership were
entirely within the public domain.
As
in any new program that differs significantly from the old, the
first few schools built under the P3 program experienced some
startup problems, which, in turn, were reviewed by the province's
Auditor General (AG) in a report to the government.14
In particular, the AG did a comprehensive study of the first
completed P3 school and raised a number of concerns about whether
the long-term lease arrangement violated provincial budget rules
and whether the purported cost savings were significant enough to
justify the program. These and other concerns raised by the AG have
been used to modify the program for the 30 schools most recently
approved.
Scotland
The
Scottish Office (which is the governing body responsible for policy
initiatives under limited home rule) encourages the government and
local communities to utilize private financial resources to fund
the construction and renovation of public infrastructure, such as
wastewater treatment facilities, hospitals, and "state"
schools.15 This program is
entitled PFI (Private Finance Initiative) Scotland. As in Nova
Scotia, PFI Scotland has moved beyond the pilot project stage and
now is a fully operational component of the government's
infrastructure program, particularly for public schools.
As
of late November 1998, more than 70 schools with approximately
50,000 students in eight local authorities--including Scotland's
two largest cities--were scheduled to be replaced or renovated
under PFI Scotland. Included in the program were all of Glasgow's
29 secondary schools and Edinburgh's 27 secondary and primary
schools.16 The cost of this
renovation and replacement initiative is expected to total
£332 million ($554 million in U.S. dollars)--but it will be
provided by private-sector investors.
To
encourage these partnerships, the Scottish Office provides a
subsidy to local authorities to meet the lease payments and
operating costs. According to the Scottish Office,
A
schools project taken forward under PFI will generally involve a
contract being signed between a local authority and a private
sector consortium for the provision of educational facilities and
infrastructure along with on going maintenance and non-educational
operations. The length of the contract would normally be around 25
years. PFI projects do not require Councils to take loans. Instead
they pay an annual charge for the services.17
Under this program, Glasgow's City Council
has signed a contract with a construction company, which will
receive a 30-year concession to improve and manage all of the
city's secondary schools. When the offer first was announced in
June 1998, formal expressions of interest came from around 40
businesses in the first week; these were narrowed down to a group
of 6 qualified bidders who competed for the concession. The city
expects that the concessionaire will upgrade all of the schools
within 3 years, compared with an estimated 15 years under the
former government-run system, and that the savings will amount to
an estimated 30 percent below what it would have cost the city to
upgrade and manage the school facilities itself.18
England and
Wales
Beginning in 1997, the United Kingdom's
Department for Education and Employment began to select a number of
proposals for public-private partnerships for schools submitted by
Local Education Authorities (LEA) in England and Wales for its
financial support. This program was implemented as a comprehensive
nationwide pilot project to demonstrate the feasibility of
alternative partnerships for school facility improvements. In order
to encourage the development and submission of a diverse array of
public-private proposals from the LEAs, the Department for
Education and Employment offers approved projects a series of
financial incentives to facilitate the implementation. The
department believes that a program designed to test a variety of
different techniques will be more accurate in determining what
works best, and that the lessons learned from these experiments
will help to guide the development of a more ambitious and
comprehensive program in the future.
To
date, the Department for Education and Employment has approved and
funded three projects. These include a partnership to rebuild a
secondary school in Dorset, another to build and operate a new
primary school in Kingston-upon-Hull, and the third to build a new
school music center, including a recording studio, in Waltham
Forest. In the latter case, the private investor in the project
expects to earn a return on his investment by leasing space in the
music facility during afterschool hours. In addition to these 3
projects, another 23 proposals from the LEAs for 293 separate
facilities have been approved for funding and now await final
contract signing. An additional 18 proposals for more than 194
facilities have been submitted and are under review.
To
encourage the submission of additional innovative school
construction and renovation projects, the Department for Education
and Employment provides the LEAs with the financial support to
develop their proposals. As of September 1998, eight additional
proposals were under development with such support.19
The
Department for Education and Employment's approved projects reflect
an eclectic mix of techniques and facilities. In addition to
projects that involve the construction or renovation of school
facilities, the approved projects include: (1) a long-term contract
to replace the school kitchens in 66 Lewisham schools and provide
all school meals, as well as meals for the community's social
service programs (like Meals on Wheels) for a 10-year period; (2) a
joint venture to provide energy repair and supply at more than 120
schools in Stoke-on-Trent; and (3) land swaps with the developers
of new schools that allow them to redeploy the school's former
sites for other purposes, such as housing.20
In several of the land-swap projects, the estimated value of the
land is used to defray some of the costs incurred in constructing
the new building, thereby relieving the community's taxpayers of
some of the financial burden.
HOW PARTNERSHIPS
WOULD HELP SCHOOL CONSTRUCTION IN THE UNITED STATES
The
success of private-public partnerships in other countries offers
policymakers in the United States the framework for developing a
cost-effective and timely means of financing and constructing
public schools. In these countries, as in the United States, the
decision-making and operating responsibility for public school
systems lies primarily at the local level, albeit to varying
degrees, with some financial support and regulatory guidelines
imposed from above. In both Canada and the United States, schools
are run locally but they operate under rules and standards
established by the state or province and may receive significant
financial support from the state or province for operating and
capital costs.
Construction
Cost Advantages
In
the United States, publicly funded construction projects often are
guided by an extensive series of costly regulations and mandates.
Such mandates come in addition to the normal building safety and
soundness requirements embodied in the local building codes, which
all private and public construction projects follow in order to
obtain building and occupancy permits. For example, with all
federally funded projects, builders must adhere to provisions on
payment of prevailing wages, environmental reviews, minority
contracting, small business set-asides, origin of materials, and
other constraints. All these provisions can add substantially to
the cost of construction, compared with the cost to build an
identical structure to local building code requirements and
market-determined wages.
Although such mandates are at their most
costly at the federal level, states have imposed similar mandates,
which add to the cost of state- and locally financed projects, such
as school facilities. Indeed, 31 states have their own
Davis-Bacon-type laws mandating that prevailing wages be paid at
all state-financed projects.21 In states in which such
restrictive laws exist, all public construction projects (including
schools) are likely to cost more than they would if built under the
competitive conditions that guide all privately financed
construction projects. Depending on the way in which federal
assistance is ultimately provided, these federal mandates might
extend to a part of the U.S. economy that heretofore had been free
of such burdens--at least for those 19 states without prevailing
wage laws and possibly for another 12 states whose prevailing wage
laws are less onerous than the federal law.
Even
in the absence of state and federal regulatory mandates, privately
funded and owned private-sector construction projects generally
have a cost advantage over publicly funded projects because the
owner has a powerful incentive not to waste money or incur
unnecessary costs that will directly reduce or eliminate profits.
With public construction operating with taxpayer money and in the
absence of a profit incentive, the pressure to keep costs down is
less compelling. Indeed, to the extent that such buildings become
monuments to the existing political leadership, there often is the
temptation toward costly and grandiose designs--frequently the case
with federal office buildings, government housing projects, and
courthouses.22
Case Studies in
Florida
Pembroke Pines Public Charter
School. Pembroke Pines, Florida, highlights just how
significant such private-sector construction efficiencies can be.
Pembroke Pines, a public charter school, teamed up with Haskell
Educational Services (HES) of Miami, a subsidiary of the Haskell
Companies--a firm that specializes in designing and constructing
assisted-living facilities--to build and operate its new facility,
which opened in September 1998. The cost of building the school was
between 22 percent and 34 percent below that incurred for each
public elementary school built in recent times. But while HES
designed and built the school, the community financed it (with
tax-exempt borrowing), owns it, and leases it to HES to operate as
a charter school.
HES
receives a state reimbursement of $3,750 per student per year,
which is not sufficient to pay both school operating costs and the
facility lease payments to the city government. Thus, HES has a
powerful incentive to control costs and increase revenues. Any
money saved through construction efficiencies, for example, means
lower lease payments and fewer additional sources of revenue
that must be found. As in the case with the public-private
partnerships in Nova Scotia, HES generates the additional revenues
to cover the remaining costs and earn a profit by offering
fee-based, after-hours programs at the school. At present, such
programs are offered before and after normal school hours, on
weekends, and during the summer, and include such services as day
care, enrichment, and other education programs for students.
HES
was able to achieve the necessary construction cost savings
primarily by design efficiencies, including reconfiguring
special-purpose rooms that otherwise would stand idle during the
school day into multipurpose rooms that are used more intensively.
The traditional teachers' planning rooms that typically occupy
space between every two classrooms were reconfigured into small,
computer-based media centers shared by the same two classrooms. The
centers contain several computers that offer all the learning
resources typically found in a school library, thereby obviating
the need for a large school library. Because the charter school
plans to have a more streamlined administrative structure than the
typical public school (in 43 of the 50 states, public school
systems have more administrative workers than teachers),23
less administrative office space was needed.
Classrooms were built smaller than the
average size in Florida that fits up to 35 students because of
existing or prospective overcrowding. Pembroke Pines is committed,
however, to limiting class size to no more than 25. Another
important space and cost savings came from contracting out the
daily food service, thereby eliminating the need for costly
commercial kitchen facilities (and staff). Instead, the school has
a much smaller "warming kitchen" in which prepared meals are
brought in each day by the food service contractor and stored in
the warming ovens until served. In a related savings, the
cafeteria, which in many schools is used for only an hour or so a
day, is designed to do double-duty by serving as a general-purpose
meeting room and auditorium. In addition to the savings from these
and other design efficiencies, better management of construction
allowed for lower per-square-foot building costs as well.
As a
result of these cost efficiencies, Pembroke Pines was built for
$8,600 per "student station," compared with the Florida state
experience of between $11,000 and $13,000 for public elementary
schools. These design cost savings and efficiencies appear not to
have deterred parent/student interest in the public charter school:
Applicants to the school exceeded available space, and enrollment
slots had to be allocated by way of a lottery. This occurred
despite the fact that parents of Pembroke Pines students are
required to provide 30 hours per year of volunteer service.
It
is important to note that these savings are due mostly to the
advantages of profit-driven, private-sector design and construction
management efficiencies, compared with the public-sector building
process. Florida does not burden its public-sector construction
with the types of environmental, labor, and equal opportunity
mandates that add to the cost of federally funded construction or
public construction for states that impose such mandates. If
Florida did impose these burdens, then the cost savings of a
Pembroke Pines-type project, if privately financed, would be likely
to grow even larger. This also suggests that the potential cost
benefits of this approach could be quite substantial for the 19
states that have strong prevailing wage laws applied to public
construction.
Public Schools at Private Work
Sites. Florida also is home to another emerging concept in
school public-private partnerships--large corporations that finance
the construction of a public school at major work sites for the
convenience of working parents. This offers parents an attractive
education option, minimizes their morning and evening
transportation demands, and adds the convenience of afterschool day
care services at the same facility. At least two such schools
exist, one sponsored by NationsBank in Jacksonville and another
built by the Orlando Regional Healthcare System. Executives at HES
believe such schools offer the greatest near-term opportunity for
public-private partnerships.24
OTHER ADVANTAGES
OF PUBLIC-PRIVATE PARTNERSHIPS
In
addition to the substantial cost savings public-private partnership
offer compared with current publicly financed and managed school
construction methods, there are other significant advantages.
Timeliness
Public-private partnerships can shorten
the time between the determination that new school facilities are
needed and the completion of the project. In most states and
communities, acquiring funds for major public construction projects
entails a complicated and lengthy process with an uncertain
outcome. Once a need is recognized, hearings must be scheduled and
held by the community's elected body, usually a city or county
council. Depending on state law, the bond issue needed to raise the
money then must be submitted to the voters for approval; this
sometimes must wait until the next election, which may be a year or
two away.
Because there is no assurance that the
voters will approve the bond issue (in 1998, voters rejected 33
percent of school bond issues),25 none of the necessary
work that must be finished prior to construction--including
engineering, design, and bid solicitation--can go forward until the
bond offering is approved. As a result, as many as five years could
pass before the school is ready for occupancy. By placing the
financial responsibility with the developer/owner and eliminating
the need for the public sector to raise the capital, the
time-consuming political and legal approval process can be greatly
shortened with private-sector partnerships, although the time saved
will vary from state to state and community to community depending
on existing procedures and laws.
With
public-private partnerships, once the elected officials decide to
go forward with the new school, they can go right to the bidding
process with competing developer/owners, although instead of
competing on the price to build, developers compete on the
long-term lease rates they will offer.
Flexibility
Under the build/own process that
characterizes most construction of public facilities today, there
is little leeway in devising construction, financing, and operating
arrangements that more closely fit the particular needs of a
community. For rapidly growing communities with a steadily
escalating school-age population, classroom space can be added only
in periodic and costly lumps whose "cost-to-carry" initially will
exceed tax revenues generated by new residents and businesses. As a
consequence, such communities often have higher-than-average tax
rates; many respond simply by prohibiting or severely limiting
population growth by way of restrictive land-use regulations or
high "impact fees" on each new house or apartment.26
The
flexibility of public-private partnerships can overcome these cost
constraints by designing and offering capital project packages a
community can grow to fit. Such fast-growing communities have
capital needs beyond just schools, including libraries, community
colleges, and government office space, all of which may exceed a
community's current borrowing capacity significantly. Such
communities may also be short of other non-public facilities, such
as day care, job training, driver education, and places of
worship.
By
using the Nova Scotia model, developers could build facilities that
initially serve multiple purposes and are used intensively in
off-hours for a variety of community purposes. As the population
(and tax revenue) rises, a combined elementary/middle school and
public library branch could be replaced with separate facilities
for the two schools and another for the public library. Under this
approach, fast-growing communities would face rising rental fees
that more closely match rising tax revenues, instead of the
periodic, large capital expenditures that may impose burdensome
debt service requirements on a still-thin tax base.
For
older, established suburbs with stable overall populations but
widely fluctuating school-age populations due to demographic
cycles, the partnerships of the Nova Scotia approach would give the
community the flexibility to add or delete classroom space at
minimal cost, which would allow 20-year leases with options to
renew or terminate. If, at the end of 20 years--or whatever period
is deemed appropriate--the school-age population declined, the
school system could consolidate the remaining students in a smaller
number of schools while the developer bore the risk of re-renting
the space. In the event that the demographic cycle repeated itself,
the school system could re-contract for new space as may be needed
temporarily. In either event, the risk of holding costly empty
space would fall on the developers/owners, whose expertise and
entrepreneurial skills make them better-suited to recycle the space
quickly and more profitably to its best use.
For
central city schools, in which years of financial mismanagement
have left an inventory of very old and poorly maintained
facilities, declining student enrollment has led to vacant or
underutilized buildings and ongoing consolidation of students and
teachers in better facilities. Here, too, public-private
partnerships could provide the key to promoting rebuilding and
replacement programs, particularly because many central cities have
precarious financial conditions that preclude or limit their access
to bond markets. With a shrinking need for many of the facilities
such school systems currently own, a central city public-private
partnership could incorporate elements of the land-swap programs
that Britain's Department for Education and Employment is trying as
a way of tapping into the value of underutilized assets already
owned by the system.
Such
a program could involve either new schools or, considering the
constraints on land suitable for development in many central
cities, the substantial renovation of existing structures. For
example, a private company could acquire a deteriorated building
under a long-term lease, renovate it, and lease it back to the
school system at a higher rent. Of course, more than just building
repairs could be involved in the renovation: The contract also
could call for the developer to provide a substantial upgrade in
the building's telecommunications and information technology and to
install computers and other learning devices in all the classrooms.
To the extent that the developer could rent out portions of the
facilities to other users on an after-hours basis, the rent paid by
the school system for the improved facility would be less than the
capitalized cost of the renovation, as is the case under Nova
Scotia's plan for new construction.
Community-Wide
Benefits
In
addition to the obvious improvements to educational services that
these new facilities would provide on a less costly basis, the
availability of additional, conveniently located meeting and
classroom space would foster other for- and not-for-profit
activities that benefit the members of the community as well as
school-aged children. Leasing space to one or several day care
providers before and after school hours would benefit working
parents and promote the safety of children who otherwise might be
transported from one facility to another or become "latchkey"
children at home.
Likewise, other non-school-sponsored,
afterschool programs could utilize the space and reduce the time
that children otherwise might spend going from place to place.
Moreover, by putting many afterschool services within a single
facility, the community would allow students greater access to
activities they otherwise might not be able to attend for lack of
transportation. Similarly, programs of interest to adults--whether
civic groups, continuing education, work-related refresher courses,
political meetings, or job training programs--could lease the space
in the school building.
PRIVATE-SECTOR
INTEREST
Although growing evidence from Canada,
Great Britain, and a few U.S. communities suggests that
public-private partnerships for school facilities can be attractive
for public school systems, there is not much documentation to
indicate that the concept offers private U.S. real estate investors
and developers an attractive investment option. That might be
changing, however, as evidence begins to emerge that, here and
there, a few communities and a few entrepreneurs are experimenting
with public-private partnerships for public schools.
For
example, LTC Properties, Inc., in Oxnard, California, a real estate
investment trust holding nearly $500 million in assets, notes the
following change in its investment policy in its quarterly 10Q
report to the U.S. Securities and Exchange Commission. (Up to this
point, the firm had focused exclusively on investment in
assisted-living facilities.)
After a careful ongoing study of the
child-care and education industry, during the six months ended June
30, 1998, the Company invested approximately $7,936,000 in two
private schools and one charter school. These schools are leased to
a publicly-traded company engaged in the operation of private and
charter schools from pre-school through twelfth grade.27
This
example and that of Florida's Haskell Education Services--as well
as reports of exploratory interest by one of the country's major
financial investors and by one of the "big six"
consulting/accounting firms--may represent growing interest on the
part of investors. It also shows that some have realized the
opportunity. This suggests that there could be even greater growth
in private investment in school facilities once school systems and
investors become aware of the opportunity.
THE FEDERAL ROLE
IN SCHOOL CONTSTRUCTION
The Influence of
Tax-Exempt Borrowing
Although the federal government operates
no explicit program to facilitate or fund the construction of
public elementary and secondary schools,28
it nevertheless has an important influence on school construction.
It allows local communities to raise money for public construction
by issuing bonds whose interest payments are exempt from federal
income tax as well as any state income taxes for bondholders
residing in the state of issue. Making such tax preferences
available to investors in municipal bonds means that communities
are able to borrow at lower costs than would be the case otherwise.
In December 1998, when long-term AA taxable corporate bonds yielded
6.34 percent, the high-grade, long-term, tax-exempt municipal bonds
yielded 4.17 percent, or more than two percentage points below the
taxable equivalent.
Although the tax-exempt privilege imparts
an important benefit to communities by enhancing their ability to
afford new schools and other public infrastructure, that same
privilege, under certain circumstances, can deter states from
utilizing public-private partnerships. The cost advantages of the
traditional, all-public approach often appears to be the least
costly option, particularly if the alternative is a new and largely
untried approach. But this need not be the case, as the growing,
albeit limited, experience of some communities with various aspects
of school partnerships suggests.
Potential savings from a well-conceived
public-private partnership could overwhelm whatever cost benefits
derive from using tax-exempt over taxable financing. Specifically,
if (1) construction costs savings of 25 percent or more are
possible (as in Pembroke Pines, Florida); (2) leases can be
negotiated for rent levels equivalent to 85 percent of the (now
lowered, as described in [1]) capitalized cost of the project; and
(3) additional cost savings can be achieved by avoiding state (or
federal) construction mandates and regulations, then the potential
savings from unsubsidized public-private partnership borrowing at a
higher taxable interest rate could more than offset the
savings associated with the use of tax-exempt borrowing.
Such
potential savings, dependent as they are on a new and novel way of
building schools, may be seen as too risky and uncertain for many
school districts to give up the certainty of using traditional
forms of public construction. Considering the difference between
the taxable and tax-exempt rates, as described above, a
public-private partnership utilizing the taxable borrowing rate
would have to generate a cost savings of at least 34 percent,
compared with the traditional mechanism using tax-exempt
financing.
For
example, under the traditional approach with tax-exempt borrowing
(4.17 percent), a school costing $10 million to build would require
annual interest payments of $41,700 per year. But if built through
a public-private partnership borrowing at the taxable rate (6.34
percent), then the same school would have to be built for only
$6,600,000 to equalize such annual interest costs. The potential
cost disparities between the two alternatives may make it difficult
for many school systems to take advantage of the private-sector
alternative. As a consequence, any effort to encourage local school
systems to try a cost-saving alternative may have to be accompanied
by interim subsidies comparable with those available by way of the
existing tax-exempt borrowing privilege available to state and
local governments.
LEGISLATIVE
DIRECTION
Despite the increase in school facility
partnerships here and abroad, there still is little awareness in
the United States among public school officials, real estate
investors, and policymakers of the benefits of public-private
partnerships. These cooperative efforts offer the opportunity for
the public sector to be more efficient in harnessing the resources
and skills of the private sector to build more and better schools.
Without this knowledge of private-sector opportunities, future
legislative initiatives at the state and federal levels to boost
school construction could result in more schools--although probably
not as many as needed, and the additional public money spent would
keep resources from other public needs. They also would run the
risk of becoming another type of federal pork-barrel project, in
which any congruence between spending and need occurred by
chance.
Demonstration
Projects
To
explore innovative alternatives, the federal government and local
officials should establish federal and state demonstration programs
with financial incentives to encourage local public school
officials to sign on. A federal financial incentive program to
demonstrate the feasibility and benefits of public school
construction through public-private partnerships could be
structured so as not to add additional spending to the budget or
increase tax revenue losses. The traditional approach to public
school construction already entails significant federal subsidies
by virtue of the tax-exempt status of the general obligation bonds
that communities issue to fund their schools. To the extent that
public schools would be built or renovated with the subsidies
offered through a new public-private demonstration program, a
portion represents schools that would have been built or renovated
with funds borrowed with tax-exempt municipal bonds. This would not
be likely to be a one-for-one offset in any given year, but the net
"cost" per year could be only a small fraction of the total "cost"
because of this substitution effect.
A Good Starting
Point
A
good platform to initiate a demonstration incentive program could
be the Public School Construction Partnership Act, which was
introduced as S. 2397 by Senator Bob Graham during the 105th
Congress. This bill proposed amending the federal tax code to allow
the use of tax-exempt private activity bonds for the
construction of privately owned school facilities leased back to
the public school systems.
Under current law, each state is provided
an annual allocation, based on population, of tax-exempt private
activity bonds to be used for such purposes as economic
redevelopment, manufacturing, student loans, and home mortgages,
but not public schools. A business as large as a Fortune 500
company can use these bonds to build or refurbish a for-profit
manufacturing facility, but a company that wants to provide a
building to the public school system is ineligible. Senator
Graham's bill would rectify this exclusion and increase each
state's bond allocation--by an additional $10 multiplied by the
state population--so that the additional uses of the tax-exempt
borrowing privilege would not come at the expense of other users,
including major manufacturing corporations.
To
address concerns about the potential for the increased loss of tax
revenue, Senator Graham's bill could be modified to extend the use
of tax-exempt private activity bonds to privately owned public
school facilities but not to increase the state cap on the issuance
of private activity bonds beyond those already scheduled to go into
effect over the next few years. This change would force
corporations, hydroelectric projects, and other for-profit
redevelopment projects to compete with schools for the available
existing federal tax benefit. Alternately, Senator Graham's
proposed increase in the caps and the ensuing loss in federal
revenues could be maintained in the legislation but the revenue
loss could be offset with the inclusion of legislative changes that
would gain revenues.
One
such possible legislative change is to add a somewhat modified
version of the Higher Education Bond Parity Act, which was
introduced as S. 1880 in the 105th Congress by Senator Daniel
Patrick Moynihan (D-NY). S. 1880 would prohibit the use of
tax-exempt general obligation bonds from being used to build costly
stadiums and arenas for the owners of professional sports teams;
the resulting revenue savings would be used to increase the number
of private activity bonds that private universities and colleges
could issue. By including privately owned schools that are leased
to public school systems as investments also eligible for use with
the savings achieved from the Moynihan bill, some of or all the
potential revenue loss from this new program would be offset.
Improving
Flexibility
Congress might want to consider also some
modifications to the Graham bill to allow for more flexibility in
structuring the nature of such arrangements between private
developers and public school systems. As currently written, the
bill would require that the arrangements be of the
"build-own-transfer" (B.O.T.) type, which means that, at the end of
the lease term (which would not exceed the term of the underlying
bond issue), the facility would revert to the school system at no
additional cost. Although this arrangement could be appropriate in
some situations, it would preclude other arrangements that could be
more advantageous to school systems in certain circumstances, and
it also would limit the opportunity to experiment with other
techniques to determine which works better under different
circumstances.
For
example, by allowing a lease arrangement that permitted (or
required) the developer to retain ownership beyond the initial
lease term (the Nova Scotia approach), the developer would have a
powerful incentive to maintain and upgrade the building in order to
encourage the school system to re-lease the facility. In addition,
the school system would avoid the risk of having to retain a
potentially obsolete or unneeded building that could be as old as
20 to 30 years by the lease's end. Permitting leases that let the
developer retain ownership in perpetuity would allow the school
system to negotiate lower annual lease payments than would be the
case if the developer had to relinquish the building at the end of
the lease term.
Another limiting component of the Graham
bill that should be modified is its requirement that nearly all of
a state's allocation to issue such bonds be used for school systems
experiencing rapid growth in student population. This provision
probably would cover most communities in the fast-growing states of
the South and West, but in the slower-growing North and the
Midwestern states, the bill's qualifications would limit the use of
the bonds largely to distant suburbs. It also would prohibit the
program's use (except for $5 million per state) in older central
cities whose declining student populations often occupy old,
deteriorated structures.
Pennsylvania, which has a student
population of just over 12 million, the Graham bill would allow it
to issue up $120 million of such public-private partnership bonds
per year, but $5 million of that amount would have to be shared by
Chester, Harrisburg, Philadelphia, Pittsburgh, and perhaps six
other declining cities in which substandard schools can be the
norm. In such cities, in which renovation rather than new
construction represents the most cost-effective response to school
facility needs, public-private partnerships could help to restore
aging structures, as they do in the PFI Scotland program in
Glasgow, Scotland.
By
allowing states more flexibility in allocating the special bond
proceeds to systems in which the need is greatest, the
public-private partnership approach would have the opportunity to
demonstrate its efficacy and versatility under a variety of
different conditions and needs. And out of these many and varied
demonstration projects would arise a series of successful
techniques, concepts, and approaches that could be implemented by
states and localities across the country.
CONCLUSION
The
many proposals to move the federal government into providing
financial support for public school construction confront Congress
with two considerable risks. The first is the prospect of creating
a new budget-busting spending program that very easily could become
another costly pork-barrel program. The lack of restraint Congress
often demonstrates in regard to such infrastructure programs as
highways and water projects would spill over very easily into a new
school construction program as Members of Congress attempted to
demonstrate their "commitment to education."
The
second risk is that such a program could greatly expand the scope
and power of the federal government into an area that traditionally
has been the responsibility of local and state governments. Even if
the program were oriented initially toward nothing more than
providing cash for school construction, the temptation to add
controlling strings to the cash would be difficult for politicians
to resist--and every one of the added strings would undermine the
local control of our public education system.
Of
the many public school construction proposals that are likely to
come before Congress, the approach embodied in Senator Bob Graham's
Public Schools Partnership Act would allow Congress to avoid these
risks, while at the same time allow local school systems to tap
into the vast financial and management resources that America's
private sector offers.
Ronald D. Utt,
Ph.D., is Grover M. Hermann Fellow in Federal Budgetary
Affairs at The Heritage Foundation.