Local-Funding Options

Bonds (General obligation bonds) The most common way of financing facility needs at the local level is through the sale of general obligation bonds. School districts levy local taxes to repay the principal and interest on the bonds (unless the state helps pay off the debt). Districts usually are required to seek voter approval before they issue bonds and often must adhere to state-set limits on debt levels. In a number of states, voters must approve local bond issues by more than a simple majority.

Most school bonds are “serial”, maturing at different intervals over a period of time and are regulated by the state in some way (e.g., a limit on the amount of bonded indebtedness based on assessed property evaluation in the district).

By selling bonds to the general public, local districts borrow dollars for capital investment with the promise of repayment with interest. Districts levy local taxes to repay the principal and interest on the bonds, and are typically required to seek voter approval before they issues bonds.

California and Idaho both require a two-thirds majority vote to approve bond measures. The most significant limitation of bonds is that districts with smaller tax bases cannot issue bonds for the same amounts as districts with larger tax bases.

Most new school buildings and major renovations are financed using tax-exempt general obligation bonds issued by the local school district. However, many districts face obstacles to issuing bonds. To curtail increases in property taxes, many communities have placed caps on their ability to issue debt, making it impossible for some districts to use bond financing. Further, school districts cannot issue bonds until they have been approved by voters, and resistance to increased property taxes has made it difficult for many communities to gain voter support. Although no comprehensive registry of local school district bonding activity is kept, reports from 19 states that do keep records of school bond referenda show that in 1998 only 54 percent of school facilities bonds placed before voters in these states were approved. (Sara Mead, 2001, School Construction, Policy Report, June 2001, p.3, Progressive Policy Institute)

Reserve Fund. Some districts earmark local taxes over time to accumulate funds for future building needs. (Some states allow school districts to set aside tax funds in order to accumulate monies for future construction needs.) This strategy has the same weakness as issuing bonds — a one-mill property tax levy in a property-poor district raises less money than it does in a property-rich district.

Current revenues or Pay-As-You-Go. In a pay-as-you-go strategy, local property taxes are levied in amounts equal to current building needs, enabling districts to accumulate facilities gradually without issuing bonds. This method is usually available, however, only to wealthy districts, large districts able to compromise on space needs, and/or districts located in places where construction costs are more affordable, although prudent school districts willing to compromise on space needs and located where construction costs are more affordable can sometimes avoid indebtedness for capital expenses.

Georgia's Amendment 2, approved by voters in 1996, allows school districts to impose a one-cent special-purpose sales tax that can be used for capital construction needs. The local sales tax provides communities with an alternative way to pay for school facilities. For many localities, however, especially those with a small sales tax base or those reluctant to increase their sales tax (especially border towns), property tax will remain the predominant revenue source for capital construction.

Authorities and lease-rental financing Through this approach, districts depend on another authority to construct the school building, then lease it from that authority until the bonds used to pay for it have been repaid.

Impact Fees. An impact fee is a tax imposed on new construction to pay for the building, enlargement and/or renovation of school facilities. Impact fees are not revenue-generating mechanisms, but rather a regulatory tool; their purpose is to ensure the necessary public facilities are provided as a condition for new development. California limits its impact fees to $1.72 pre square foot for residential construction and $.28 per square foot for commercial projects. School- related impact fees are rare, however.