Commission on School Construction and Modernizations Continues Examination of K-12 Infrastructure and Financing

October 7, 2021

On September 29, the Commission on School Construction and Modernization met again and reviewed various means of financing K-12 infrastructure in the Commonwealth. Members of the American Institute of Architects (AIA Virginia), the Virginia Department of Education (VDOE), and the Virginia Department of the Treasury provided perspective on this longstanding issue of importance to local governments. VACo supports the work of the Commission to bring attention to this issue and produce recommendations to the General Assembly to provide additional state funding or local financing options to ensure that all of the Commonwealth’s students have access to safe and modern learning environments.

Schools function as anchor institutions within a community. During normal business hours of a typical work week, approximately 1/6 of the total population is located inside a K-12 school building. The quality of school infrastructure has ripple effects across communities. Building and maintaining safe, modern school buildings is essential to ensuring educational equity of outcomes, sustainability, student and staff health, and creation of jobs.

Not surprisingly, the age of school buildings has a direct impact on the need for replacement or renovation. According to representatives from AIA, best practices in the architectural industry indicate that the typical life cycle of a school building is 40-50 years before there is significant need of renovation. A comprehensive renovation can then extend the useful life cycle of a school building by another 20-30 years. However, as previously reported, more than half of all K-12 school buildings are more than 50 years old.

In most school divisions, the costs of facility operations are second only to staff salaries and represent more than 50% of the total costs of facility ownership over the life cycle of a building. As such, every dollar saved in operations (whether through the design and installation of energy efficient materials, solar panels, etc.) is a dollar that can be used to meet other needs over a facility’s lifecycle. As an example, Discovery Elementary School in Arlington County was designed as a “net-zero” school. The cost to operate this one school building is $0.11/square foot, compared with $1.32/ square foot for the average school within the division. Surprisingly, according to AIA representatives, the cost difference per square foot to construct this school to a non-net zero school was non-existent. VACo supports legislation allowing counties to implement renewable energy and energy efficiency goals. This includes the allowance of third-party power purchase agreements (PPAs) to serve municipal electric accounts, as well as other creative financing mechanisms that enable the development of renewable energy sources and energy efficiency programs and measures.

Perhaps correlated to operational costs, superintendents from across the state surveyed by VDOE most frequently ranked HVAC repairs and replacements and school renovations as the highest priority items among renovation categories. This was done with the understanding that limited resources are available to finance school renovations, and that school divisions reported more than $3 billion in needed renovations not contained in existing approved capital improvement plans (CIP). If funding resources were not an issue, it is quite likely that new school construction would be ranked as a higher priority category. The General Assembly and Governor Northam recently approved a package of amendments to the 2021 Appropriations Act to include $250 million for qualifying ventilation improvement projects in public schools, subject to certain conditions. However, the cost to replace all school buildings over 50 years old is estimated to be $24.8 billion. It is unlikely that every school building over 50 years old would need to be replaced; however, the reported $3 billion in needed renovations beyond existing CIPs indicates that fully addressing this problem will take a multi-billion-dollar effort.

Though local governments provide the overwhelming majority of funding for school infrastructure projects, State Treasurer Manju S. Ganeriwala and Public Finance Manager James D. Mahone provided an overview of financing methods currently available to local governments. According to the Debt Capacity Advisory Committee, the Commonwealth could prudently authorize and issue up to $544 million in new tax-supported debt for each year of the FY 2021 and FY 2022 biennium. This could potentially be a tool to help fund school construction and modernization if the General Assembly and Governor were to authorize this state-supported debt for that use.

Without additional state support, local governments have three primary financing approaches to fund school infrastructure: cash; bank loans; and bonds. Bonds may be General Obligation Bonds, Subject to Appropriation Bonds, the Virginia Public School Authority (VPSA), or the Literary Fund. Cost, funding availability and timing considerations will influence the approach taken. Regarding bonds issued through the VPSA, a local general obligation (GO) pledge is required, but unlike other (GO) bonding, a referendum is not required for counties. No out-of-pocket Costs of Issuance are paid by localities, except for local bond counsel opinion, and there are no rating agency fees or economic development authority fees.

Regarding the Literary Fund (LF), though it is a permanent and perpetual school fund established in the Constitution of Virginia for public school purposes, the vast majority of LF revenues are used by the state to pay the state’s share of Teacher Retirement transfers to the Virginia Retirement System (VRS). Since the financial crisis in 2008, the retirement benefit transfers have significantly increased while loans have virtually ceased. This means that not only are public schools not reaping the intended benefits, but the lack of revolving loans has begun to negatively impact the Literary Fund’s long-term health and accessibility.  Under the 2021 Appropriations Act, VDOE and the Department of the Treasury were required to develop recommendations to make the LF a more competitive and attractive financing tool and to increase the fiscal health of the Fund. These recommendations can be read here and seem to have been well received by members of the Commission.

The Commission discussed this information and next steps. According to Commission Chair Senator McClellan, the Commission will discuss recommendations to be made to the General Assembly at its next meeting on December 1, including unenacted legislation from previous sessions of the General Assembly. Commission member Delegate Shelly Simonds reminded the Commission of the special taxing authority first given by the General Assembly to Halifax County in 2019 and then expanded to eight additional localities in 2020. The Commission will review this information at its next meeting. A full recording of the meeting may be downloaded here.

Ultimately, until the Commonwealth provides additional financing options and support to local governments, one of the biggest limitations to financing needed construction and modernization of school infrastructure will continue to be local ability to raise revenues to fund these projects. VACo continues to support efforts to create additional state resources and additional funding options for localities for capital and school construction costs and appreciates the work of the Commission on School Construction and Modernization and other K-12 education and local government stakeholders on this front. We strongly encourage our members to speak with their representatives in the General Assembly about this issue and will continue to attend and report on meetings of the Commission.

VACo Contact:  Jeremy R. Bennett

 

 

 

 

 

 

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