FINANCING CAPITAL OUTLAY: CHAPTER FOURTEEN

According to the National Education Association:

Capital Outlay is an expenditure that results in the acquisition of fixed assets or additions to
fixed assets, which are presumed to have benefits for more than one year. It could be for land,
existing buildings, improvements of ground, construction on buildings, additions to buildings,
remodeling of buildings, or initial, additional, and replacement equipment.

Debt Service is an expenditure for the retirement of school district indebtedness, including
bond and loan principal, interest, and service charges.

Capital funding traditionally has been provided from local resources, which reflects local fiscal
capacity and aspiration.

Federal provides negligible amount of aid for capital outlay.

Two sources for financing capital outlay:

Local and state

Some only local

FINANCING CAPITAL FACILITIES: LOCAL OPTIONS

Choice #1: “Pay As You Go” Financing-the ability to finance the construction of school facilities
from current revenues.

Advantages: Disadvantages:

*available only to the large and/or affluent
school districts
*ideal way to finance capital outlays
*quick and easy
*eliminates large sums of money for interest,
the costs of bond attorney fees, and election
costs
*results in sharp increases in the local tax rate
*creates friction among taxpayers and
governmental agencies because of increased
school taxes
*fails to distribute costs among the generations
who benefit from the school facilities
*fails to realize the economic advantages of
borrowing in periods of inflation
Choice #2: Building Reserve Funds are financed by special tax levies and the funds are kept
separate from the school district’s current operating funds.

Advantages: Disadvantages:

*Projects can be constructed without the delays and *Changes in school leadership result in diversion of
expenses associated with gaining voter approval for funds for purposes other than those intended when the
bonds. funds were collected.

*Debt service charges are avoided *Many who contribute will not realize any benefits.

*Local restrictions on taxing or debt limitations will *The taxpayer is only concerned with the total cost of
not interfere with the project the school district’s budget. The higher tax rates create
taxpayer resistance and result in a reduction of the
current budget.

Choice #3: General Obligation Bonds: legal papers issued by the borrower as evidence of debt,
which specify interest rates, payment periods, and security.

Advantages: Disadvantages:

*enjoy tax exempt status from federal and *varies from state to state and even within
state income taxes school districts

* desirable for investors with high incomes *debt limitations in the form of a
percentage of locally assessed valuation of
*relative safety of principal real property

*varies among states regarding the

approval process required prior to the sale
of bonds
FINANCING CAPITAL FACILITIES: STATE OPTIONS
Category #1: Complete State Support-the funding of capital and debt service expenditures is
borne by the state

Advantages:
Disadvantages:
*a higher degree of fiscal equalization is
*control of public schools will become
achieved
focused at the state level
*access to a greater variety and quantity
*uniformity of public schools would not
of resources
recognize the unique needs of localities
*an allotment mechanism based on needs
*construction could be unnecessarily
*if state had to issue bonds, the larger
delayed due to competition for state
issue would result in overall savings in
resources
interest and service charges

Category#2: Equalization Grants-designed to allocate revenues per unit of need inversely to

the fiscal abilities of the local school districts

Advantages:
Disadvantages:
*comparable public school facilities can
*a substantial amount of state resources
be provided without the imposition of an
would have to be dedicated to this
excessive local tax burden
purpose
*frivolous use of state funds would be
*localities would not be able to respond to
curtailed
immediate construction needs
*reduced dependency on local property
tax=additional resources for other
governmental services
Category#3: Percentage Matching-a grant designed to provide a fixed percentage of state
support for local public school facilities projects. The fiscal capacity of the school district is not
taken into account and the total amount of state assistance varies with the cost of each project.

Advantages: Disadvantages:

*local school districts initiate *penalizes local school districts

and can tailor construction with limited fiscal capacity
projects to their own needs
*insufficient appropriations by
*state encourages cost the state would render the
effective construction practices program ineffective

*reduces dependency on *school districts with sufficient

property tax freeing local
capital facilities would not be
resources for other
governmental purposes eligible for state assistance;
citizens would not see direct
benefit from their taxes

Category#4: Flat Grants-a fixed amount of funds allocated by the state to be used to finance
construction. It could be by ADA or ADM or just a fixed amount.

Disadvantages:
Advantages:
*only supplement the local
*control of the building funds
program remains with the local
school district *some school districts would
receive unneeded funds while
*does provide some measure others would have unfunded
of equity needs

*reduces dependency on
property tax

*easily administered
Category#5: Loans-states provide low interest loans to local school districts. Loans are usually
modest. Criteria are used.

Advantages: Disadvantages:

*an economical mechanism for
borrowing funds
*not charged against the local school
district’s debt limitation
*time required to acquire funds is
usually considerably less than the time
required to acquire funds through the
sale of bonds
*state loan funds are extremely limited
*fiscal equalization is not enhanced
*diverts the attention of the legislature
from adequately funding the
construction of public schools
*local control may be diluted through
use of state approval process

*state can encourage cost efficient

construction practices

Category#6: Building Authorities-designed to function at either the state or local level to

circumvent the restrictive taxing or debt limitations of local governments

Advantages: Disadvantages:

*permits the state to assist local school
districts without a constitutional
amendment
*a combination of local, state, and
federal revenues may be used to pay
the costs of lease rental or lease
purchase agreements
*can be used without voter approval
*ignores the more pressing problem of
adequately financing the construction
of public school facilities by evading tax
and debt limitations
*revenue bonds result in higher interest
costs than
*right of taxpayers to voice approval or
disapproval is circumvented
Persistent Fiscal Problems

1. Some states provide no help at all.

2. Federal government provides no help at all.

Constitutional/Statutory Limitations:

1. Restrictive debt and tax rate limitations and variations among states
2. Assessment practices which do not coincide with statutory or constitutional
prescriptions and wide variations in assessment levels among local districts
3. A property tax base which is out of touch with reality
4. Voter reactions to property tax rates
5. Rigid voter qualifications and provisions which require more than a majority vote
6. Rapid increase in school construction costs
7. Overdependence on property tax
8. School district geographical boundaries which isolate commercial and industrial taxable
wealth
9. Needs so great that many districts can not meet their needs no matter what

Equitable State Capital Outlay Programs

1. Quality of school facilities available to the pupils of a school district should not be
determined by the fiscal capacity of the district.
2. Equitable measures of needs for school facilities should be used.
A. School buildings depreciate at a rate of about 2% per year.
B. Need should include pupil growth, projected pupil growth and capital outlay
needs
C. Cost variations should be included
D. Debt service should be included in the measure of need
3. Finance plan should include borrowing plus current revenue
4. Carefully planned and projected over a number of years
5. State should not exercise unnecessary controls
6. Annual continuing plan