School Financing Method Under Scrutiny

OKLAHOMA CITY (AP) _ A ``build now, pay later'' approach to constructing new school buildings is gaining popularity among Oklahoma school districts in spite of concerns that it can increase the

Saturday, August 11th 2007, 7:50 pm

By: News On 6

OKLAHOMA CITY (AP) _ A ``build now, pay later'' approach to constructing new school buildings is gaining popularity among Oklahoma school districts in spite of concerns that it can increase the cost of issuing bonds and tie up a school district's bonding capacity for years.

Dozens of school districts are building new structures with lease-purchase deals designed to bypass constitutional limits on taxpayer bond debt, a study by The Oklahoman found.

The attorney general's office has ruled that the approach is legal when properly designed but that each financial deal must be carefully examined to make sure it meets legal requirements.

The nontraditional school financing method has been around for about 10 years and is gaining popularity as school officials find it harder to make capital improvements while staying within the constitutional debt limit.

Advocates tout it as a way for school districts to immediately construct new buildings that cost more than the districts' debt limit instead of building projects in stages over several years. And school projects are less expensive in the long run because school districts avoid higher construction costs.

``The pro of it is you get more money up front and hopefully defeat inflation,'' said Denny Price, superintendent of the Lexington School district, which recently chose the method to build a high school.

But critics say the upfront costs of issuing bonds under the financing method can be four times higher than costs associated with traditional school bond financing.

Opponents analogize the financing method to a person who obtains a second credit card after reaching the credit limit on the first card. They say it ties up school districts' bonding capacity for many years and limits the ability of future school boards to meet unforeseen needs.

Traditionally, school districts have used general obligation bonds to finance construction of schools or buildings. Voters are asked to approve a bond issue of a specific amount. If it passes, property taxes go up a certain percentage for a specific amount of time in the district to pay for the construction.

To prevent excessive debt, framers of the Oklahoma Constitution adopted a provision that prohibits voters from approving debt that exceeds 10 percent of a district's total valuation of taxable property.

For districts with a lot of industry and high property valuations, the constitutional debt limit may never pose a problem. But districts with low valuations and fast-growing student populations can find it virtually impossible to meet their building needs and stay within the constitutional debt limit using only general obligation bonds.

To get around debt limits, some school districts have turned to outside entities to fund construction of new buildings.

Stephen H. McDonald, head of a Norman law firm that has helped structure about 40 bond issues using the nontraditional method, seeks out public trusts to issue revenue bonds to pay for school construction projects that exceed constitutional debt limit.

District voters are asked to approve general obligation bonds of an even larger amount to pay back the revenue bonds.

The general obligation bonds are not issued all at once because that would exceed the debt limit. Instead, the school board issues them in series over a period of years and the proceeds are used to make lease-purchase payments to the issuer of the revenue bonds.

As the district continues to make lease payments, it gradually acquires more and more parts of the building until it eventually owns it all.

Some school officials say the need for alternative financing methods reveals a possible flaw in the constitutional debt limit. Keith Ballard, executive director of the Oklahoma State School board's Association, said the group supports removing or raising the debt limit.

If a school board and local voters want to spend more money than the Constitution allows, to meet a growing district's needs, whey should they be denied that right, Ballard asked.