School Funding Change
to School Districts
State House Majority Leader Wayne Smith (R-Brandywine Hundred North) and State Rep. Roger Roy (R-Limestone Hills) today unveiled legislation that they say would avoid a potential crisis by fundamentally changing the way major school projects are financed in Delaware.
Legally mandated limits on state bond debt, combined with the drop in state revenue growth and pressing need for school construction, are threatening to outstrip the resources available for school projects. Reps. Smith and Roy say the bill would address this by changing how public schools pay for major construction, renovation and expansion.
The state currently raises funds to finance school projects by selling bonds. These bonds are direct obligations of the state. The bill, to be designated House Bill 195, would change this process by requiring school districts to sell bonds directly to investors.
As an obligation of the individual school districts, this bonded indebtedness would not count against the state's debt limits. The legislation calls for the state to reimburse local districts for the state's share of the principal and interest expenses attributable to the bonds on an annual basis.
In most states, local school districts sell their own bonds, the representatives said. Rep. Smith said his plan is modeled on structures currently used by Pennsylvania and Minnesota. He said rating agency analysts he spoke with recommended these structures as appropriate models for Delaware.
Rep. Smith said that nothing in his bill affects the current state-local sharing formula. In most cases, local districts are responsible for about 30 percent of their project costs with the state picking up the remainder. If the bill were enacted, Delaware school districts would continue to enjoy the same capital cost situation they do today. Districts would also continue to be bound by existing state law (Title 14, Chapter 21, Section 22) to seek voter approval for any new bond issue.
"Some type of change is needed," Rep. Smith said. "With our current bonding limits, Delaware will soon find itself in the position of having to delay school construction and maintenance projects a year or more. I don't think it's right to tell some school districts they may have to delay a needed new school a year or two because our bonding limit has been reached."
Rep. Smith said he believes the time is quickly approaching when the state's mandated bonding limits will prevent Delaware officials from issuing enough bonds to meet the governor's capital needs and the needs of the school districts. "Delaware has three choices: Delay school projects, change the bonding limits, or allow school districts to sell their own bonds and be reimbursed by the state," Rep. Smith said. "I believe the first choice is unacceptable and the second is unpalatable because it may negatively impact our excellent bond ratings."
"This would provide more flexibility for the school districts to plan and execute their construction projects," said Rep. Roy, one of the bill's prime sponsors and co-chair of the Joint Bond Bill Committee. "We have not been able to keep pace with the demand for school construction and renovation. This proposal would better allow the schools to control their own destiny."
Bonds are issued with a rating from an independent rating organization indicating the trustworthiness of the issuer. Generally, the better the rating, the lower the risk to investors and the lower the rate of interest paid to them. In recent years, Delaware bonds have carried the best ratings available.
Under study for about a year, Rep. Smith sought out the state's bond analysts at Moody's and Standard & Poor's for their input on his proposal. Rep. Smith said analysts from both major bond-rating agencies indicated they were comfortable with the approach and thought such a program could be implemented without affecting the state's current bond ratings.
"I wanted to ensure that we could implement a local school bonding program that would not lead to higher interest rates for state taxpayers," Rep. Smith said. "The rating agencies were helpful in reviewing the factors such a program needed to both ensure the credit quality of the local school debt and the integrity of the state's bond rating."
In other states that have local bonding with state reimbursement, some district bonds are rated slightly lower than state bonds. The difference, usually half a rating, results in an interest rate of about .05 of a percentage point higher (or one-twentieth of a percentage point) than the interest rate of state bond debt at most.
At higher rating levels, there is often little or no difference between rates on double-A and triple-A rated debt. For example, in the case of a school district floating $30 million in bonds to be paid back over a 20-year period, the additional interest expense resulting from this proposal would be between zero and $15,000 per year.
School districts would also bear one-time legal costs associated with issuing their bonds. These costs, averaging about $30,000 per bond issue, would be negligible when spread over the life of the 20-year bond issue.
"It's clear we must do something in the not-too-distant future," Rep. Smith said. "We will be facing a crisis where schools are not built when needed, leaky roofs are not promptly repaired, and regular maintenance is deferred. We need to adjust our system so all schools will be able to pursue their capital programs when they're needed.
"This isn't the only solution, but the alternatives are either adjusting the state's bonding formula or forcing districts to wait in line for needed projects," Rep. Smith said.
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