Commentary on Financing of Public School BuildingsAdded by Nicholas G. Miller in Articles & Blogs, Business Law on October 23, 2017
The financing of public school buildings has been a topic of interest since the early days of Idaho Statehood, owing largely to the requirement imposed at that time by the Idaho Constitution that public debt payable from property taxes requires a 2/3 “supermajority” of voters. Education providers and their supporting advocates have employed four overlapping strategies for financing school buildings in the face of this requirement.
Go to the Voters
The first and most obvious strategy is simply to accept the 2/3 as a given and do the work to secure the vote. The work entails making sure the project is needed and desired by the voters, having an otherwise clean bill of health and mobilizing the voters to vote on election day. This strategy has been relatively successful. Since 2011, of 53 elections proposed by Idaho school districts, 25 passed, or just under 50%, and the percentage is over 50% if multiple failures by the same district or failures by a district followed by a success are excluded. Some have enjoyed almost incredible margins of approval—the Boise School bond secured over 90% approval; the Madison School District over 80%. That the system is not failing completely probably contributes to the results of private polling that show overturning the constitution via an amendment would not be a sure thing.
A second strategy has been to enact legislation that makes a school bond less burdensome to taxpayers. Despite not having a legal obligation to provide facilities (see next paragraph), the State has adopted legislation that supports the repayment of school bonds. This information is communicated in bond campaigns to demonstrate to voters that the taxpayer cost of the bond has been reduced by assistance from the State. Under the Idaho School Bond Guaranty Program, the State sales tax is pledged to guaranty a school bond. Bondholders do not generally fear that a school district will fail to pay its bonds, but the State has a higher credit rating than most school districts, so the guaranty lowers the interest rate. The State also adopted the Bond Levy Equalization Program which provides state appropriations to subsidize a school district’s bond payments. The “equalization” moniker refers to the feature of the program that funds a greater percentage of debt repayment to Districts that are more needy based on a formula using such factors as tax base, wealth levels and unemployment rates. Implemented in 2002, the State has never failed to fully fund the subsidy payments—totaling up to $18 million per year–even in the depths of the recession when education budgets were being cut.
Several legal challenges have been mounted against the 2/3 voter requirement; none has succeeded so far. The principal challenge was a series of cases brought in Idaho court in the 1990’s asking the Supreme Court to find that the 2/3 provision conflicted with another Idaho Constitution provision requiring that the legislation provide a “uniform and thorough education.” Ultimately, the Supreme Court decided that the State’s obligation with respect to facilities is only to intervene if a facility is demonstrably unsafe. Supermajority requirements have been challenged on the basis that they contradict “one person one vote” and equal protection under the US Constitution. In a 1971 decision, the U.S. Supreme Court upheld a supermajority requirement for incurring public debt, finding that such requirement did not violate the Equal Protection Clause where there was no showing of dilution of voting power because of some extraneous condition, such as race, geographic location, or property ownership. The Court went on to state that a supermajority requirement does not violate equal protection merely because votes of those who favored issuance of bonds would have proportionally smaller impact on outcome of election than votes of those who oppose the bonds – absent a showing of denial or dilution. See, Gordon v. Lance, 403 U.S. 1 (1971). Therefore, under Gordon, the supermajority requirement for public debt is permissible, so long as it does not discriminate against any identifiable class in the process.
Seek Financing Alternatives
Some Idaho school districts have used alternatives to a 2/3 voted bond. In addition to the power to incur debt subject to the 2/3 vote, school districts can impose other tax levies with lower voter thresholds. Depending on market values and existing debt burden, districts can impose a plant facilities levy with as low as a 55% vote, providing annual collections up to 10 years. Plant levy passage rates since 2011 are at about 78%. Usually, the plant levy provides annual funds for repairs and major maintenance, but a 2015 Idaho Supreme Court decision allowing financing based on a year to year lease can be combined with the plant levy whereby the revenue from the plant levy makes “lease to own” payments on a new structure. Usually these alternatives will be at higher interest rates than voter bonds, and the annual levy impact may be higher than the impact of a bond levy which can be spread over up to 30 years, but the impetus to seek lower voter approval can be quite strong. Schools can also impose a “supplemental” levy with a 50% vote, and the passage rate of such levies is over 87%. However, the duration of a supplemental levy is a maximum of two years, so it is not a workable mechanism to spread payments over time for facility acquisitions.
Providing new facilities for growth and updating existing facilities rightly commands the attention of parents, education professionals and policy makers. Its importance is mirrored by its complexity.
Hawley Troxell is a recognized bond counsel law firm that is authorized to provide legal opinions on the validity of public bonds. Nick Miller, who also serves as the managing partner of Hawley Troxell, has over 30 years of experience in Idaho bonds. He is the only Idaho lawyer recognized in the American College of Bond Counsel.
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