Funding Our Future: Creative Financing Boosts School Construction

The Great Recession has left deep marks on the nation’s school system. According to the Center on Budget and Policy Priorities, elementary and high schools in at least 37 states are receiving less state funding this year compared to 2011. In at least 30 states, school funding now stands below 2008 levels — often far below. Limited federal fiscal aid and reduced state revenues are the main reasons for these drastic spending cuts.

Accordingly, many schools have been forced to tighten their belts to survive in today’s challenging economic climate. They’ve slashed funding for special programs, cut staff positions, eliminated equipment purchases, and reduced facilities operation and maintenance budgets. Despite record-breaking demands of student population growth, many school construction projects and programs are being delayed or put on hold indefinitely.

This difficult business environment has prompted several public educational institutions to look beyond traditional design and construction delivery methods and pursue new financing options. Public-private partnerships (P3s) are emerging as a promising way to tap the resources needed to address schools’ capital needs, setting the stage for significant acceleration in this form of collaboration. Colin Myer, managing director of project financing at FMI, states, “Currently, we are working with several contractors to explore new types of alliances with financial institutions in order to set up consortiums offering a wide array of P3 services for schools and other public entities.”

Public-private partnerships that are focused on renewable energy — solar energy systems specifically — are particularly effective and positive for school districts due to benefits like energy cost savings, reductions in greenhouse gas emissions (GHGs), environmental stewardship, and learning opportunities for students. Al Bucknam, CEO of SunDurance Energy, a major national supplier of solar power solutions to the government and education markets, explains, “The energy budget is the biggest cost item for many schools. The P3 solar energy model lends itself well to achieve meaningful savings: zero dollars upfront and savings on electric bills going forward. This is where educational organizations find most value in these types of partnerships.”

In a public-private partnership, a solar developer or its investors own and operate the photovoltaic (PV) installations on behalf of the school district over a specified time period. The developer then sells the power to the school via a contract known as a power-purchase agreement (PPA). This arrangement allows the private entity to sell power at a lower rate (due to renewable and federal tax credits) to the educational institution and more importantly, it helps keep the educational institution from dipping into its capital budget.

Bucknam adds, “Key to these projects is to find a private party that can take the tax benefits and then sell the power or lease the project back to the public entity. That way, the public entity (in this case the school district) receives the net benefit of lower energy costs and in some cases also the renewable energy credits.”

Elements of financing renewable energy systems – such as federally subsidized bonds, laws, incentives and interest rates – are fluid and subject to change over time. Project costs also vary according to tax law, the economic climate, installation costs, utility tariffs, and the amount of profit that an investor expects from the arrangement. Therefore, each project needs to be carefully planned and evaluated on a case-by-case basis.

In a different P3 scenario, school districts issue bonds and then loan the proceeds of their efforts to private developers, who in turn build the school. Once completed, the facility is leased to the district on a long-term basis at a lesser cost than the construction itself. The developer makes up the cost difference by leasing out the school building after hours, with profits varying depending on the number of additional leases generated.

In cash-strapped states like California, local school districts are starting to pursue such new financing options. Brian Gaunce, principal of Prefast Buildings, explains, “P3s will likely become more important here in California in the K-12 market over the next two to four years. Local school districts are going to be looking for bridge and long-term financing options to meet ongoing demand with lower capital available from the state school facilities program. Essentially, capital for school facility funding in California is being cut in as much as half due to recent state budgetary changes.”

Collaborating with the public sector presents both challenges and opportunities for companies that are accustomed to working with the private sector. When it comes to P3s, public agencies are primarily looking for innovation, creative financing solutions and ways to bring value from the private-side team. A high level of trust and open communication among all project participants is another critical prerequisite for these long-term partnerships. From the outset, owners expect contractors and other stakeholders to be honest and transparent about their financial state of affairs in order to get a better grasp of the risks involved, especially if they are new to P3s.

While it is unlikely that P3s will become the dominant delivery model in the future, FMI expects such partnerships to thrive within specific pockets in certain states; it will certainly represent a sizable, robust niche market worth considering in the future. With the nation facing a $300 billion shortfall in K-12 facilities funding, public-private partnerships are well-positioned to become more widely accepted in the education sector. They also provide the perfect opportunity to help America rebuild its education system — the very cornerstone of our nation’s long-term economic development and prosperity.