EQUITY CENTER

News & Notes

September 2009Vol. 28, No. 5

Advocating School Finance Equity and Adequacy in Texas

Allowing Long-standing Disparities in Facilities Funding to Continue is Totally Indefensible

A decade ago, the Legislature adopted the Existing Debt Allotment (EDA) which provided equalized facilities funding for districts with an equity level of over 91% in the first year. The initial guaranteed yield level (GYL) was set by the legislature at $35 per ADA, but was never increased despite major increases in the actual cost of construction of school facilities. In the very beginning, only 8.8% of students were in districts with enough taxable value to generate more than the state-guaranteed $35 per ADA without state assistance. Generate and keep to be sure—there is no recapture of I&S collections. The 91% of students that were in the system to begin with started to decline as districts’ local property tax yields crept up on, then exceeded the stagnant $35 GYL. In fact, by the 2009-10 school year less than 60% of Texas students will be in EDA-eligible districts. Graph 1 (page 2) details the unabated decline of the EDA equity level.

Even as state equalized facilities funding went from promising to moribund, the average yield for the wealthiest districts (those with 8.8% of students) increased steadily and substantially. These districts were able to build better facilities at lower tax rates. As taxpayers in EDA districts are forced to adopt higher and higher I&S tax rates to pay bonded indebtedness, another aspect of the EDA raised its ugly head—the EDA provides state assistance for only the first 29¢ of I&S tax rate. Beyond that rate up to the 50¢ maximum I&S rate, taxpayers in EDA districts are forced to bear the cost alone–a huge burden for lower-wealth districts.

Table 1 compares the I&S tax rate that would be required for EDA districts to raise the same amount that the average district in the wealthy group could raise in the same year with a 10¢ tax rate. Note that–the average EDA-eligible district will be legally barred from adopting an I&S tax rate that will generate what one dime will generate in the average district in the wealthy group.

(continued on pages 2 & 3)

THE FACILITIES ISSUE

TABLE 1: Illegal I&S Tax Rate Required for Average EDA District to Match Wealthy at 10 cents

Wealthiest Districts (8.8% of ADA) EDA

Calendar

Year

Average Yield

per Penny

Assumed I&S

Tax Rate

Revenue at

10¢ I&S tax

rate

Tax Rate

Required to

Match

2000 80.66 $0.10 807 $0.23

2001 77.03 $0.10 770 $0.22

2002 80.30 $0.10 803 $0.23

2003 91.77 $0.10 918 $0.26

2004 97.84 $0.10 978 $0.28

2005 92.41 $0.10 924 $0.26

2006 103.55 $0.10 1,036 $0.30

2007 119.22 $0.10 1,192 $0.38

2008 138.70 $0.10 1,387 $0.47

2009 145.02 $0.10 1,450 $0.49

2010 165.77 $0.10 1,658 $0.58

Page 2September 2009 Equity Center News & Notes

Declining Percent of Children in Equalized Facilities Funding System

50

55

60

65

70

75

80

85

90

95

0 1 2 3 4 5 6 7 8 9 10

Fiscal Year

Percen

tile of W

ealth

 (ADA)

And, from there it gets even worse. Graph 2 (page 3) shows the yields each year for the past decade, after adjusting for inflation and increases in required building standards. The three lines in the graph were determined by

Simple average of the yields of wealthiest districts with 8.8% of statewide ADA. This best illustrates how the wealthy districts were affected.

Weighted average of the yields of wealthiest districts with 8.8% of statewide ADA. This best illustrates how students in the wealthy districts were affected.

Frozen at a $35 per ADA guaranteed yield for 11 years. This best illustrates all too clearly how the children—and taxpayers—in low- and mid-wealth districts are mistreated.

The state has made a mockery of equity, of efficiency, and of simple, fair treatment when it comes to facilities funding. And as ludicrous as the “equalized” Texas facilities funding system has become, it appears that it will get even worse. Imagine that! u

(continued from FRONT)

Allowing Long-standing Disparities in Facilities Funding to Continue is Totally Indefensible

Page 3September 2009 Equity Center News & Notes

The January 2009 News and Notes reviewed the status of state assistance for facilities funding and laid out a prescription for fixing the system. A more detailed analysis is posted on the Equity Center homepage at www.equitycenter.org.

First the good news: Through the efforts of Rep. Scott Hochberg and with the strong support of Sen. Florence Shapiro the “roll forward” of the Existing Debt Allotment (EDA) has been made automatic. This extremely important action establishes a certainty to facilities funding and eliminates the “Russian Roulette”(Nov 2006 News & Notes) danger poor districts have faced passing bond issues and gambling whether future Legislatures would include new debt in future EDA funding. The Legislature also appropriated an additional $68.9 million to pay for the roll-forward in the coming biennium.

A second piece of good news was that the Legislature also appropriated $75 million to fund new Instructional Facilities Allotment (IFA) awards for the 2010-11 school year. This is just a few million dollars short of the amount that fully funded all eligible IFA projects in the past biennium.

Of course, this is tempered by the fact that no money was appropriated for new IFA awards in 2009-10. This means poor districts attempting to utilize new funding sources available through the Federal Stimulus programs will have to do so this year without IFA access.

The bad news is that growth in local property values, with the resulting increase in tax collections used to reduce the state’s support over the past few years, more than offset any “new” state funding for facilities, not only in dollars per pupil, but in total state dollars appropriated as well. Here are the numbers:

Page 4September 2009 Equity Center News & Notes

Facilities Funding in Texas: Formula Funding Without A Driver

Paul Colbert

*From TEA Summary of Finance State Totals

SchoolYear I&S Collections State Share of

IFAState Share of

EDA

Total State IFA+EDAFacilities

Assistance

State Percent of Total

FacilitiesPayments

2002-03 1,747,382,231 288,479,065 454,750,165 743,229,230 29.8%

2003-04 1,909,248,374 274,036,127 486,032,379 760,068,506 28.5%

2004-05 2,167,397,075 283,769,859 431,231,338 715,001,197 24.8%

2005-06 2,415,546,539 272,121,694 497,436,167 769,557,861 24.2%

2006-07 2,716,688,142 304,825,009 479,734,763 784,559,772 22.4%

2007-08 3,139,864,028 283,922,894 443,804,054 727,726,948 18.8%

2008-09 3,686,059,779 334,631,786 340,042,421 674,674,207 15.5%

Total 17,782,186,168 2,041,786,434 3,133,031,287 5,174,817,721 22.5%

State and Local Funding for School Facilities

Page 5September 2009 Equity Center News & Notes

In 2002-03, a district of average wealth had property value of about $240,000/ADA ($24 yield) and the state was funding over 31.5% of that district’s facilities costs. Last year, the state share was 2.2%, as the average wealth per ADA climbed to about $342,000/ADA, just under the $35 yield. An average-wealth district will likely receive no state facilities support in the coming biennium.

Construction costs have almost doubled. Yet, as the cumulative impact of increased construction cost and rising property values eroded the worth of the frozen $35 yield, statewide average per pupil support declined from about $189/ADA in 2002-03 to $154/ADA in 2008-09. The actual decline in statewide average per pupil aid and the decline in total state funding are reflected in the following chart.

SchoolYear

Total StateIFA+EDAFacilities

Assistancein Millions

Total State IFA+EDA

AssistancePer ADA

TotalAssistanceNeeded to

Maintain $189 Aid Per ADA

TotalAssistance

Needed for 3% Inflation

2002-03 $743.2 $189 $743.2 $743.22003-04 $760.1 $189 $757.5 $780.22004-05 $715.0 $175 $770.4 $817.32005-06 $769.6 $184 $789.6 $862.82006-07 $784.6 $185 $801.9 $902.52007-08 $727.7 $169 $814.4 $944.12008-09 $674.7 $154 $828.1 $988.8

(in millions ) (in millions ) (in millions )

$189 $189$175

$184 $185$169

$154

$600$620$640$660$680$700$720$740$760$780$800

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

$0

$50

$100

$150

$200

Total State IFA+EDA Facilities Assistance in Millions

Total State IFA+EDA Assistance Per ADA

SchoolYear

State Percentof Total

FacilitiesPayments

StateAverage

Wealth Per ADA

State Percent ofAverage Wealth

District'sPayments

2002-03 29.8% 239,562 31.6%2003-04 28.5% 251,404 28.2%2004-05 24.8% 258,129 26.2%2005-06 24.2% 267,513 23.6%2006-07 22.4% 285,675 18.4%2007-08 18.8% 314,095 10.3%2008-09 15.5% 342,294 2.2%

0%

5%

10%

15%

20%

25%

30%

35%

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

State Percent of Total Facilities Payments

State Percent of Average Wealth District Payments

(continued on page 9)

In essence, total state aid for facilities decreased by $110 million over the last three years. Even with the impact of the recession, further increases in property values are likely to keep the state share of facilities funding below the 2006-07 funding level and perhaps even below the appropriation for 2002-03.

The interaction of increased construction costs and the frozen IFA/EDA yield ($35 since 1999), has severely damaged the ability of districts to fund needed facilities–and destroyed the tax relief that IFA and EDA were created to provide. It is impossible to provide that relief when the state is funding only 15.5% of facilities costs, as it was in 2008-09. That is about half the amount the state was funding when it established the EDA in 1999.

The following chart paints the picture. It also shows the impact on a district of average wealth:

Three programs were included in the Recovery Act (more commonly known as the stimulus bill) that significantly extend federal support for debt issuance by school districts. The point of each is to lower borrowing costs for construction or equipment.

(1) The 12-year old Qualified Zone Academy Bonds program (QZAB), which is limited to repairs, renovation, and equipment purchases and installation, was extended for another two years; (2) A similar program for new construction, Qualified School Construction Bonds (QSCB), was enacted and authorized for calendar years 2009 and 2010; (3) An alternative program, Build America Bonds (BAB), is not limited to school districts but may be used by them along with other local political subdivisions. The first BAB was issued by the city of Stevens Point, Wisconsin in March. Recently Carroll ISD and Garland ISD have issued BABs.

Each program concerns the method and terms of selling bonds and notes by school districts and charter schools; they do not create new forms of debt. That can only be done by new state law. Bonds sold under the QZAB program are commonly titled “XYZ ISD Unlimited Tax Qualified Zone Academy Bonds.“ They are issued under the same authority that districts sell ordinary Unlimited Tax Bonds (also known as General Obligation Bonds). Maintenance tax notes sold as QZABs are similarly titled “XYZ ISD Qualified Zone Academy Maintenance Tax Notes.”

What is unusual about QZABs and their new cousins for financing new construction is that they are sold as very-low or zero interest taxable bonds. The purchaser receives an attractive tax credit in lieu of interest payments from the district. For bond purchasers with an appetite for tax credits it is a good alternative to ordinary tax-exempt bonds. The advantage to the school district is obvious: no interest (or very low interest) payments.

A portion of the Qualified School Construction Bonds was earmarked in the Recovery Act for the nation’s 100 largest school districts, including $400 million for 19 large Texas districts. The bill also authorizes an annual amount of tax credits to each state education agency to allocate among its school districts. Approximately $600 million are available to all Texas districts, including $100 million earmarked by the Commissioner for charter schools. TEA has recently acted to open the window for these bonds in Texas for all school districts. A similar amount will be available to all districts in calendar year 2010.

Bonds and notes sold under this program may be voter-approved general obligation bonds, maintenance tax notes, or lease revenue bonds. That choice is up to the district. A district that is eligible under state law for IFA or EDA funding is not affected by QZAB or QSCB method of sale of the bonds or notes.

Build America Bonds do not require action by TEA or any other agency. They also have a unique

Page 6September 2009 Equity Center News & Notes

More “Bang For Your Facilities Bucks” Using New Programs

By Bobby Aikin - The Aikin Group

The rebate goes only to the district. It is not shared with the state.

feature: they can be issued on a similar basis to QZABs or issued as interest-bearing taxable bonds that receive an annual rebate in the amount of 35% of all interest paid in that calendar year. This feature could provide a windfall to Texas school districts receiving IFA/EDA funds.

Since these funds are paid on the full amount of debt service for which I&S taxes are levied the federal rebate would constitute a bonus to the district that is available for any lawful purpose. For example each $100,000 in interest payments qualifies for a $35,000 rebate after state and local shares of debt service are paid. The rebate goes only to the district. It is not shared with the state. In the absence of action by the legislature to capture a share of the rebate, cash-strapped districts may want to consider this option.

These Recovery Act provisions are not permanent. Unless extended by Congress they are effective only through calendar year 2010. Most of the Texas QSCB allocation for 2009 was quickly encumbered. Those considering a project in the near future should begin preparation now for the 2010 allocation.

TEA plays a minimal but critical role in the process, acting as the gatekeeper by receiving applications on a first come, first serve basis. When the Texas allocation for one year is encumbered, the window closes.

Changes in state law have been minimal. HB 3646 makes a long-needed change by rolling forward and making permanent funding under the EDA program, but the actual funding for EDA as well as IFA remains at the same $35/ADA/penny formula amount since enactment of the program 10 years ago. Purchasing power of construction funds has been eroded by inflation by at least 50% over the last decade meaning that tax rates to service debt issued on comparable terms are either twice as high as they should be or projects are trimmed by 50% to fit available funds. This remains a top equity issue for the next legislature.

In the interim be alert to a POSSIBLE change in the interpretation of state law that has significant implications for facilities finance. If made into policy the verbal position of the attorney general’s office on so-called “tax rate swaps” not only throws a kink into fiscal planning but potentially affects the method of finance of hundreds of bond issues.

Bluntly, the AG’s office is REPORTEDLY calling into question the ability of districts to maintain the lowest possible total tax rate (M&O+I&S). The point of contention seems to be the use of Tier One Basic Allotment funds to “compress” the needed I&S rate and swap funding formulas for state funds that match local effort when additional Tier Two M&O funding delivers a higher level of funding equity than IFA/EDA funding,

If implemented, this position undermines the solution crafted through an attorney general’s opinion from the previous Cornyn administration and accompanying state board and commissioner’s rules specifically authorizing Tier One Basic Allotment for debt service after the legislature hastily abolished the direct use of Tier Two funds for debt service ten years ago. u

Page 7September 2009 Equity Center News & Notes

Purchasing power of construction funds has been eroded by inflation by at least 50%...

meaning that tax rates to service debt... are either twice as high as they should be or

projects are trimmed by 50%.

Page 8September 2009 Equity Center News & Notes

USING NEW FEDERAL PROGRAMS TO BALANCE PROJECTSThe Aikin Group is pioneering the use of Qualified School Construction Bonds and Build America Bonds.

PLANNING AND WINNING BOND ELECTIONSOur expertise includes:

• 30 years experience in running winning bond elections.• First hand expertise in early voting strategy. Former State Rep. Aikin wrote Texas’ early voting laws.

PIONEERING AND DEVELOPING ALTERNATIVES TO BOND ELECTIONS We were among the first to offer:

• Lease Revenue Bonds (since 1994). The ideal way to supplement a bond package whose proceeds do not cover project expenses, or to address immediate facilities needs with a lease structured so it can be paid off without penalty from a future bond election.• Maintenance Notes (since 1995). The most flexible and affordable instrument to finance renovation and equipment costs from one to twenty years.• QZAB’s (since 1998). Using a unique federal program to borrow, using bonds or maintenance notes, at low, subsidized interest rates.

REFUNDING AND RESTRUCTURING CURRENT DEBT In addition to saving cash flow by lowering payments on traditional debt we can:

• Refinance IFA supported leases (since 2000). A bond election, and its higher bond rating, can pay off a lease and continue to receive IFA support. • Refinance QZABs and refinanced debt. (since 2003). For the same purposes as refinancing IFA leases. Additionally we have qualified the refinanced debt for state EDA subsidy.

2009 SILVER Sponsor - Harris County Department of Education

Page 9September 2009 Equity Center News & Notes

An additional $160 million above that ($988.8 million) would have been needed to cover an inflation rate of 3%per year. The increased cost of construction far exceeded that. An appropriation of $988 million would haverestored the state share to about the 2006-07 percentage of support. If the state share had been maintained at the2002-03 level, the appropriation would have been $1.3 billion in 2008-09. Even at the 2004-05 percentage ofstate support, 2008-09 aid would have been almost $1.1 billion.

SummaryThe Legislature took two important steps to improve facilitiesfunding, establishing a permanent roll-forward of the EDA andproviding funding for many new IFA projects. However, as long asthe yield remains frozen at $35/ADA, it’s like running on atreadmill. A lot is expended to barely keep pace, while the overalladequacy and equity of the system declines. If a future Legislature once again chooses not to adequately fundthe IFA, as happened in 2003, the decline would become severe. IFA funding must be made automatic andsufficient to cover eligible districts, and the yield for both IFA and EDA must be increased to reflect highercosts. Both can be done if the state share of facilities funding is returned to prior levels. ◆

$743.2

School YearTotal State

IFA + EDA FacilitiesAssistance

$743.22002-03

2003-04

2004-05

2006-07

2005-06

2007-08

$743.2$189

Total StateIFA + EDA Assistance

Per ADA

Total AssistanceNeeded to Maintain$189 Aid Per ADA

Total AssistanceNeeded for 3%

Inflation

$757.5$760.1 $780.2$189

$770.4$715.0 $817.3$175

$814.4$727.7 $944.1$169

$801.9$784.6 $902.5$185

$789.6$769.6 $862.8$184

2008-09 $828.1$674.7 $988.8$154(in millions) (in millions) (in millions)

(continued from page 5)

Facilities Funding in Texas: Formula Funding Without A Driver

As the following table indicates, state IFA/EDA funding would have needed to grow to $828 million, over $150million above actual 2008-09 funding, just to maintain the prior level of funding per student.

An average-wealth district will

likely receive no state facilities

support in the coming biennium.

~ EC XPRESS EMAILS ~If you were a member district last year or a new member this year, you should

be receiving our new EC Xpress weekly email every Tuesday.

(sent to Superintendents and CFO/Business Managers)

IF NOT, please check with your Tech Department to make sure the EquityCenter domain name ‘equitycenter.org’ is listed as a “permitted” or

“allowed” sender (white list) on your district’s email server.

Please call if you have any questions. (512) 478-7313

Page 10September 2009 Equity Center News & Notes

Fulbright & Jaworski L.L.P.Bond Attorneys - www.fulbright.com

W. Jeffrey Kuhn – wkuhn@fulbright.com (210) 270-7131

GOLD SPONSORS

SILVER SPONSORS W.B. Kibler Construction CompanyGeneral Contractor

Joe Spoon – www.wbkconstruction.com(214) 358-4601

Ray, Wood & BonillaState & Local Taxation Attorneys

www.rwblaw.net Buck Wood (512) 328-8877

A. Bargas and Associates, LLCFurniture Distributorwww.abargasco.com

Chico Bargas (800) 344-2821

First Southwest CompanyFinancial Advisorswww.firstsw.com

George Williford (214) 953-8705

JR3 Education Assoc, WebSmart, iCapRetire/ReHire, Finance/SIS Software, Digital Documents

www.jr3online.com (254) 759-1902 Jim Payne – Bob Clemons – David Hankins

The Aikin GroupFacilities Financing and Consulting

Bob Aikin – aikin.group@embarqmail.com(903) 886-1978

Southwest SecuritiesFinancial Advisors

www.swst.comBruce Wood (972) 978-8661

Schwartz & Eichelbaum Wardell Mehl and Hansen, PC

Preventive School Lawwww.edlaw.com (800) 488-9045

WRA Architects, Inc.www.wraarchitects.com

Tony Apel– tapel@wraarchitects.com(214) 750-0077

Harris County Dept of Educationwww.hcde-texas.org

Jesus Amezcua – jamezcua@hcde-texas.org(713) 696-1371

2009 GOLD Sponsor - www.jr3online.com