Funding Capital Projects in Michigan Schools DistrictsArticle | 12.08.2020
School districts face the continual challenge of ensuring students' education in a safe and effective environment. Routine maintenance is only a part of providing a "warm, safe, and dry" facility. The most popular options used to fund capital improvement projects are:
- Voted Bonds
- Non-Voted Bonds
- Sinking Fund
- Lease-Purchase and Installment Purchase Agreements
- General Fund
Placing a millage question on the ballot to fund large capital improvement projects is often used. The ballot question states the dollars' intended use and the impact on the millage or tax rate. Defining the project's scope, schedule, and budget on the ballot requires collaboration between the district, an architect, bond counsel, a financial advisor, and often a construction manager. The district voters decide the issue on Election Day.
As stated in enabling legislation, bond proceeds can purchase, erect, complete, remodel, or equip or re-equip school buildings or other facilities. The monies can also pay for furnishing or refurnishing new or renovating school buildings; acquiring, preparing, developing, or improving sites; purchasing school buses; and obtaining, installing, equipping, or re-equipping school buildings for technology.
Maintenance or repairs are not a permissible use of the dollars, nor are funding operating costs or software upgrades, support, or consulting. Districts, with their business manager, should consult with their bond counsel to verify the allowable uses.
In placing a millage question on the ballot, the School Board must decide if the bonds will be qualified or non-qualified. The Michigan School Loan Revolving Fund (SLRF) program provides the bonds to be "qualified." Administered through the Department of Treasury, the SLRF program applies the State of Michigan's credit rating to the district's bonds. This may result in a lower interest rate allowing more dollars for the project.
Disadvantages of qualified bonds are a longer approval process and the need for Treasury approval to alter projects. To secure support from Treasury for a qualified bond requires preparing an application and an in-person review. If any changes to the project are needed, Treasury approval is required, lengthening the process.
Non-qualified bonds proceed without Treasury involvement. Based on individual circumstances, a district decides the best option.
Situations do allow for the issuance of non-voted bonds. That can occur if the bond debt service is from the general fund or, in some limited cases, from a sinking fund. When added to existing bond indebtedness, the total cannot exceed 5% of the district's State Equalized Value (SEV).
Limitations on the proceeds are the same as voted bonds. A district's financial advisor and bond counsel, working with your business manager, can best inform the board regarding non-voted bonds' applicability.
In Michigan, a Sinking Fund is a millage levied to support school safety improvements, technology improvements, and school buildings' repair and construction. It is a "pay as you go" system that does not require borrowing money or paying interest.
A sinking fund does require voter approval. Unlike a voted bond issue, a sinking fund issue does not specify the use of the funds. Building repairs and improvements, land purchase, security equipment, and instructional technology, including computers, projectors, 1:1 devices, and infrastructure, are permissible uses. Maintenance defined as routine custodial and janitorial services or minor handyman actions are not permitted. Annual audits are required to verify that expenditures comply with state law.
A sinking fund has a three mills maximum for up to ten years. Funds rollover from one budget year to the next, allowing an accumulation to finance more extensive projects. Renewal occurs with voter approval. It represents a viable method.
Lease-Purchase and Installment Purchase Agreements
Districts can purchase real or personal property, including land, buses, and equipment and technology through a Lease-Purchase Agreement (LPA) or an Installment Purchase Agreement (IPA). The difference being at the end of the purchase period, the district owns the asset through an IPA or has the option to buy the asset for the predetermined residual value using an LPA.
The payback period needs to be less than the asset's useful life with a maximum of 15 years through either method. Also, the total balance of IPAs and LPAs has a maximum of 1.25% of the district's taxable value.
IPAs tend to be reasonably straightforward. They clearly state the interest rate, payment terms, and terms and conditions.
LPAs are more complicated. Often there are conflicts between the terms of the LPA and Michigan law. Interest rates may be higher than the prevailing rate charged by a bank.
Whenever considering an LPA or IPA to fund a capital project, districts should review the LPA terms with legal counsel and financial advisors. They can be vehicles to fund capital improvements provided the terms are in the district's best interests.
While difficult given the ever-increasing pressure for funding, districts can plan for capital improvements in their annual budget. Like a sinking fund, a line item for capital expenditures is a “pay as you go” option with the flexibility to address immediate needs. It does not require voter approval, but the funds do not rollover and accumulate from one year to the next.
Michigan school districts have options to fund capital improvement projects. There is no perfect option. A district must utilize the resources of the business manager together with their bond counsel and financial advisor to determine which source of capital improvement funding best meets their needs.