Monday, October 10, 2011
IMPORTANT NEW PUBLIC SCHOOL FINANCE LEGISLATION
On August 1, 2011, Act No. 2011-631 became law in Alabama, marking the first comprehensive reform of the Depression-era laws governing public school finance. As principal architects of Act No. 2011-631, we have experienced the positive effects of this new law on school boards since August 1. As a result of the new law, S&P upgraded its rating of one county school board client from A- to A; another school board client gained access to bond insurance for the first time. Every local school board should become familiar with this Act.
Below are the highlights of Act No. 2011-631:
Sale of Warrants. Under the old law, most school boards were required to select a date for sale of their warrants, publish a notice in the local newspaper and hope that a bank or other institution would submit a reasonable bid on the prescribed date. Enormous volatility in the capital markets since 2008-09 has rendered this model increasingly risky. The new law allows a school board to sell its warrants on a day and time that is most advantageous to the board in the light of existing market conditions.
Combine School Taxes As Security. Under the old law, a school warrant issue was payable solely out of a single tax. If a school board was planning a large capital project, the board would have to issue multiple series of warrants payable out of separate school taxes. This requirement has proved to be increasingly burdensome, resulting in higher interest rates and higher transaction costs. The new law allows school boards to combine multiple school taxes as security for a larger issue, resulting in improved debt service coverage, greater efficiencies, and lower borrowing costs.
Working Capital Financings. Under the new law, school boards may not need to roll over working capital lines of credit from year to year. With the approval of the State Department of Education, a school board now may amortize working capital borrowings over a period longer than one year. Tax considerations will affect the school board’s access to tax-exempt financing for working capital.
Financing All School Property. Under the old law, school boards were permitted to finance only school buildings, playgrounds, and buses. Under the new law, school boards can finance other ancillary facilities such as recreational and sports facilities, stadiums, arenas, performing arts facilities, laboratories, telecommunication facilities, heating, and cooling facilities, and related property.
Refunding City or County Warrants. Under the new law, school boards are permitted to issue warrants in order to unwind existing sale/leaseback obligations or funding agreement obligations issued by cities or counties for the benefit of their local schools. By unwinding such relatively complex financing arrangements, school boards may achieve significant savings because school board credits are often rated higher than comparable city or county credits. This is due, in part, to the fact that school boards, unlike cities and counties in Alabama, enjoy significant state support which enables school board financings to receive greater acceptance by investors.
Assistance By Other Governmental Entities. The new law grants to cities, counties, and other governmental entities, the power to guarantee school warrants, make grants to school boards and provide other types of financial assistance directly to school boards. As a result, it is no longer necessary to employ complex alternative financing arrangements for a school board to receive direct financial assistance from the political jurisdiction that it serves.
This summary is not intended to be a complete summary of Act No. 2011-631.