Summary of Certain Provisions of New School Construction Financing Law and Considerations for Implementation
Recently enacted P.L. 2023, c. 311, approved January 16, 2024, as amended by P.L. 2024, c. 79, approved September 12, 2024, provides a means by which a county and a county improvement authority can assist a local school district with financing and construction of a school capital project. This law allows the district to implement important capital projects without holding a referendum, while still allowing the project to receive debt service aid, otherwise available if the district issued bonds itself. It could also benefit the project with lower annual debt service due to the county’s likely superior credit rating. The state contribution through debt service aid and reduced interest cost due to the county credit would provide a cost-effective means of financing a project.
Under the newly enacted legislation, a school district can lease a school property to a county improvement authority, which would issue its bonds for the financing and construction of a school project. The county improvement authority would then lease the school property to the county and the county would further lease it back to the school district. The school district would be obligated to cover the cost of principal and interest on the authority bonds through its lease payments to the county, and the county would pass through the payments to the authority through its lease to the authority for the payment of the bonds. The leases would remain valid and binding and in effect until the bonds are fully paid off. When the leases expire, the project will be fully vested in the district. The payments would be outside the caps on spending and raising taxes for both the school district and the county. The obligation would not be bounded by the district’s legal borrowing limit, as the district is not issuing school bonds. The law requires the annual district lease payment to be included in each school budget over the life of the bonds.
Of course, the district would need to have an updated Long-Range Facilities Plan and make application to the Department of Education (DOE) for approval of the project and a determination of eligible project costs. The authority would follow steps necessary for it to undertake the project.
The county improvement authority bonds will receive debt service aid otherwise available to the school district project as if the school district had authorized and issued school bonds. The clear advantage to the law is that it allows school districts that otherwise have difficulty getting voter approval to be able to obtain financing at a reduced cost, as the state would still pay its share of the debt service due on the improvement authority bonds and the improvement authority bonds will benefit from the credit enhancement provided by the county.
Board Considerations as to When the Law Should Be Used
A first step is to see if the county and county improvement authority will work with the school district to implement the project this way. The cost of borrowing this way involves many parties and thus, costs. However, it avoids the costs of referenda and the uncertainty of whether one will pass. It may offer credit support that makes the process more cost effective. It would not be tied to the four special election dates or annual election.
However, there are political concerns. If a district decides to use this approach, it should consider possible backlash. Communities usually expect to vote on bond issues for capital projects. Therefore, the district may choose to reserve this method for smaller projects, critical needs related to health and safety, code requirements, or insuring educational adequacy that cannot be addressed in more cost-effective ways.
County Considerations for When to Assist School Districts
The county may have similar concerns about potential political backlash. It may need to develop flexible policies to guide when to engage. Additionally, counties may have concerns about the impact on the county credit if asked to assist many school districts. There may be a limit on the amount of debt a county can back without adversely affecting the county’s credit rating. There is a way though that the county can assist without pledging its credit. The lease might be structured as a pass-through only since the new law only fully obligates the school district, not the county.
Also, not every county has an improvement authority. In counties where there is not one, the public body can seek the assistance of an improvement authority in another county. While there is a history of this occurring, clearly a county may be less interested in assisting districts in other counties.
This is a new law, and we will need to work with the school district, county improvement authority, county and DOE to provide for its implementation where it is needed and wanted. The new law has other important provisions, but that discussion will be left to another day.
(originally published in the Keypost, a publicantion of the New Jersey Association of School Business Officials)