Financing for School Facilities

Though the number of students attending public schools in Michigan has steadily declined, many schools still face a challenge financing facilities that ensure students are served in a safe and effective environment. Unlike funding the operational costs of running a school, the state plays only a small role in financing school buildings and amenities. Instead, the onus falls largely on school districts’ local taxpayers to provide for capital needs.

While Michigan law allows school districts to use up to 20 percent of the funds they receive through the state’s foundation allowance to finance capital projects, it is very rare for districts to use their main operational funding source for these purposes. Instead, school districts typically borrow money to pay for building and remodeling facilities. According to the U.S. Department of Education’s latest tally, Michigan school districts owed a combined total of $17.8 billion in long-term debt as of June 30, 2014.

(It should be noted that public charter schools do and must use their foundation allowance revenue to finance their facilities costs. This is because, unlike conventional school districts, charter schools cannot levy taxes on local property to finance borrowing through bonds. Therefore, the discussion that follows applies only to conventional school districts.)

Local school boards are legally authorized to take out debt through resolution bonds. The way it works is that districts sell bonds and then levy a tax on local property to pay off the principal and interest owed on the bonds over time. There are limits on how much districts may borrow without asking voters: A district’s combined debt cannot exceed 5 percent of the total “state equalized value” of property located within the district. SEV typically refers to half the assessed market value of a home or business.

In order to raise taxes to pay for construction debt, a school district must receive majority approval from local voters. State law mandates the information and type of language that school districts must use when asking voters to approve of their borrowing and taxing. More than 85 percent of Michigan school districts actively charge taxpayers to pay down various outstanding debts, according to an April 2016 report.

Most states offer school districts some sort of direct aid for facility expenses through reimbursements, matching grants or other appropriations. Michigan is somewhat unique in not offering direct financial aid for capital expenditures. But the state does provide aid to districts for financing their facilities in other ways.

Michigan allows districts to have their debt “qualified” by the state. A qualified loan is one that can use the state’s credit rating, which is almost always more favorable than the rating an individual school district could get and usually translates to lower interest rates and borrowing costs. Essentially, the state guarantees its “faith and credit” that if the district fails to make its payments, the state will come in and bail it out.

This is accomplished through the state’s School Bond Qualification and Loan Program. In addition to using the state’s credit rating, districts can borrow from this program to make bond payments, if their local millage is not sufficient to cover these costs. In order to be eligible for borrowing through this program, school districts must levy at least a seven-mill property tax and agree to complete repayment within six years of having paid off their original bond.

Perhaps because the costs of this program steadily increased over the years, the Legislature enacted reforms in 2012. These capped the amount the state would lend out in qualified debt to $1.8 billion and tightened repayment deadlines, among other things. As of July 2016, 132 school districts owed the state a combined $924.4 million, down from $1.7 billion in the two years previous.

Districts that don’t want to fill out the paperwork or abide by the state’s terms for qualified borrowing can gain voter approval to issue “nonqualified” bonds for capital projects instead. However, the total debt for those voter-approved bonds is limited to 15 percent of SEV, or three times more than can be issued by a simple school board vote. The total debt limits do not apply to state-qualified bonds.

An additional tool available to school districts to fund capital projects is a so-called sinking fund. These were originally established as separate “savings accounts” for certain projected facility costs. Sinking fund levies cannot exceed three mills or last more than 10 years (prior to 2016, these limits were five mills and 20 years). These funds can be used to buy land, build or repair facilities, install infrastructure for technology and security as well as purchase computer equipment and software. About 30 percent of school districts use voter-approved sinking funds, most of them at a rate lower than three mills.

A key distinction to remember about financing school construction is that it operates differently than most all other funds districts have available to them. Instead of flowing from a variety of sources and appropriated annually, money for capital costs is borrowed by school districts and paid back with funds raised from local taxes, with the state playing only a supporting role for these projects.