Found Money

June 1, 2000
When tax levies and state aid aren't enough to pay for facilities construction and improvements, education institutions seek out alternatives.

It's nice to have a billionaire in the neighborhood.

Seattle Public Schools learned that earlier this year. With billions of dollars in profits to give away to charity, Microsoft founder Bill Gates and his wife established the Bill and Melinda Gates Foundation. It set up shop in Seattle and announced a three-year, $350 million education initiative. To kick off the program, it awarded a grant of $25.9 million to the Seattle school district.

The school district will use the money to accelerate plans to wire and equip every classroom with computers and Internet capabilities, as well as train teachers how to use the technology effectively.

By any measure, $350 million is a lot of money, and the donations will help many schools in the Pacific Northwest and across the nation. But not every school district or college can count on the beneficence of the nation's wealthiest person. And the most common way of acquiring funds-asking voters to approve a tax increase or persuading the state legislature, or the city or county government, to loosen the purse strings-often is not feasible.

So, education administrators have to think creatively to scrape up enough money for improvements, or find alternative ways to upgrade facilities without spending money.

A district might aggressively seek grants from the federal government or private groups. It might set up its own educational foundation to supplement tax revenue. It could form partnerships with other governmental bodies or private organizations to reduce capital costs. It might seek out tax incentives or innovative contracts to get around burdensome financial restraints.

In other cases, a district might circumvent the need for additional facilities by changing its programs. By creating a multi-track year-round schedule, districts can effectively boost the capacity of their schools without building more classrooms.

Other people's money The most direct way for acquiring funds to supplement tax revenue is to have someone with lots of it to give some of it to you. Most colleges and universities have become adept at fundraising. Last year, Harvard University concluded its University Campaign-believed to be the largest higher-education fund drive ever-with $2.6 billion in donations.

Elementary and secondary schools aren't in that league, but businesses and foundations such as the one set up by Gates have funds or equipment they are willing to donate to school districts.

The $25.9 million grant the Gates foundation awarded to Seattle Public Schools focuses not only on improvements in technology, but also improved teaching and learning, and stronger home and community partnerships. The ultimate goal: creating a model school system for Seattle's 48,000 students.

On a much more modest scale of philanthropy, educational foundations created by school districts give education supporters an avenue to donate money to supplement district tax revenues. According to the ERIC Clearinghouse on Educational Management, about 2,000 local educational foundations have been established nationwide.

In most cases, the foundations' endowments are too small to pay for significant facility improvements. Many of them focus instead on teacher grants, student scholarships or curriculum enhancements.

Lease now, own later Schools that need to add space or make infrastructure improvements often have to postpone projects because it is difficult to absorb the upfront costs in a typical school budget. One solution many schools turn to is a lease-purchase agreement. A private company will finance the costs and allow the school or college to pay for the improvements through a lease that lasts several years.

One common form of this arrangement is performance contracting. Energy-management companies pay for upgrades to school buildings that make lighting, heating and cooling more efficient. They sign an agreement with a school that guarantees its upgrades will save enough energy to match, if not surpass, the payments called for in the contract.

The lease-purchase method can be used in other ways. In Philadelphia, the University of the Arts was experiencing sizable enrollment growth and was looking to expand its campus in the heart of the city's downtown. Available land for new facilities was scarce, so the school bought a 17-story former hotel that needed major renovation.

To avoid significant upfront capital costs and accelerate the needed improvements, the university contracted with an energy services company (ESCO) to handle the building upgrades.

The ESCO bought, installed, owns and operates the building's heating, cooling and other mechanical equipment and systems, and leases it back to the university. The company fronted $3 million in costs for the improvements, says John Trojan, the university's chief financial officer. In all, the building upgrades cost more than $5 million. And the university paid for the part not covered by its agreement with the ESCO.

The school signed a 10-year lease to use the system, and at the end of the lease can purchase the system for fair market value.

"They also are responsible for any major repairs to the system," says Trojan. "We have a continuing obligation to perform day-to-day maintenance."

The building opened in the fall of 1999, and includes dance studios, theaters and facilities for media, communications and other liberal arts.

Diverting taxes to itself Sometimes a school district can take advantage of incentives encouraging development to build or renovate facilities more economically. In the Keller Independent School District near Fort Worth, Texas, officials saw such an opportunity, and they dived right in.

The district is building a state-of-the-art aquatic facility on donated land without resorting to a bond election or adversely affecting its wealth status in the Texas school aid formula. When it opens, the swimming and diving teams at the district's two high schools no longer will have to rely on outside facilities for practices and meets.

"We rent some time at local pools that are grossly inadequate," says Bob Templeton, the Keller district's coordinator of demographics and planning.

So, the district agreed with the city of Keller to take part in a Tax Increment Financing (TIF) zone. Property tax revenues from the zone will foot the $7.5 million bill for construction of a district natatorium in the TIF zone, as well as a new city hall and infrastructure improvements.

Tax increment financing is used in many communities across the nation to stimulate development. Typically, it works this way: any property taxes that are generated from development in a TIF zone are collected in a fund instead of being distributed to the various governmental units that have jurisdiction over the area.

The money collected is used to pay for improvements in the TIF zone, usually items such as roads, sewers and other infrastructure. A TIF can last as long as 20 years. In theory, a school district, even though it would be forgoing revenue, would benefit from a TIF because the overall economic benefit of new development would outweigh the loss of tax funds.

In many cases, school districts say the equation doesn't add up and oppose TIFs because they cannot justify the loss of tax revenue. But in Texas, says Templeton, the TIF laws allowed school districts to benefit more directly by earmarking TIF money specifically for school improvements, such as the natatorium.

The zone was established for 15 years, says Templeton, who serves as one of the school district representatives on the TIF board. Based on the anticipated tax revenue from the retail development projected in the TIF zone, the school district estimates it could pay off the natatorium in nine years.

The facility will be built on land owned by the city, which will lease it to the school district for 99 years for $1. It is expected to open in the fall of 2001 and will include a competition swim stadium, practice pools and springboarddiving facilities.

One might ask, why would a district go through the trouble of diverting tax revenue through a TIF instead of receiving the money directly? The main answer lies in twists and turns of the Texas school finance system. The larger a district's tax base, the less money it receives in state aid.

"Property wealth that is generated from a TIF is frozen," says Templeton. "The state (finance formula) does not count that as revenue."

The setup is a good deal for Keller, but in the future, other Texas districts won't be able to take advantage of a TIF in this way.

"The state doesn't allow it anymore," says Templeton. "It closed the loophole."

Maximizing use If you can't build more classrooms, the next best thing is to make better use of the ones you have. Schools that sit idle for the summer months are a longstanding tradition in American education, but it's a tradition that many growing districts can't afford any more.

In California, the student population has grown faster than many districts' ability to construct classrooms, and more than one million students attend schools with some form of year-round scheduling.

The Anaheim City School District has 23 schools and serves 23,000 students in grades K-6. The California district opened a school last summer, and two more are under construction, yet more than half the students are housed in relocatable classrooms, and several schools have first- and second-graders on "staggered" schedules-some attend morning sessions and some attend afternoon sessions.

So, the district uses a year-round schedule in all of its schools to make the space crunch slightly less severe.

"It gives us about 20 percent additional capacity," says Lettie Boggs, the district's assistant superintendent for facilities and operations.

The district began year-round schooling in 1989 and has had it in all its schools for several years. Students and families accept the schedule "once people are used to it and you're doing it well," says Boggs. Schools have four tracks; at any given point, three are in session and one is on a break.

The biggest difficulties are in clerical and maintenance areas. "The office staff has a week to shut down the year and begin the next year," says Boggs.

Equipment and facilities wear out faster with a year-round schedule. And with the buildings always in use, "there's no opportunity to deep clean," she notes.

California has $9.2 billion available for school construction thanks to a 1998 bond issue, and Anaheim has plans for six school expansions and five new schools over the next 10 years. But even adding that space, the district will continue with year-round schools.

"My goals are to get off staggered schedules, reduce kindergarten (student-teacher ratio) to 20 to 1, and get rid of the relocatable classrooms," says Boggs. "We would do all of those before we looked at the year-round schedule."

The Universal Service Fund for Schools and Libraries, known to most of the education world as the "E-rate," has quickly become one of the most popular avenues for school districts to supplement their budgets.

Now in its third year, the E-rate provides schools and libraries discounts on telecommunication services and equipment, and Internet connections. The level of discount-from 20 to 90 percent-is determined by need and based on the number of students in a district who are eligible for the National Free Lunch Program.

The money is collected from all telecommunications in the United States as part of the government's mandate to make affordable communications services available to all communities regardless of location or economic status.

E-rate discounts are helping schools near the Clinton administration's goal of having every classroom in the nation connected to the Internet by this year.

For 2000, the Federal Communications Commission has set the E-rate funding cap at $2.25 billion, the maximum permitted. Still, that amount will cover less than half of the funding requests submitted for this year.

The Schools and Libraries Division of the Universal Service Administrative Company (USAC) says it has received 36,000 applications requesting $4.72 billion in E-rate funding-more than what was requested in the first two years combined. Nearly 60 percent of those applications come from schools and libraries that represent populations where 50 percent or more of students are eligible for free school lunch.

In the first year of the program, USAC received 30,000 applications seeking $2.04 billion and awarded about $1.6 billion. In the second year, it received 32,000 applications seeking $2.4 billion, and awarded $1.9 billion.

About the Author

Mike Kennedy | Senior Editor

Mike Kennedy, senior editor, has written for AS&U on a wide range of educational issues since 1999.

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