Financing School Construction (7/90) - Reference Guide #A.8
The successful completion of a school construction project is the end result of careful and thoughtful planning. No school construction project would be complete without a financial plan being established. Construction projects and site purchases may be financed by any one, or any combination of, capital reserve fund, current budgetary appropriation, or borrowed money. While the first two methods avoid interest costs, most districts find it necessary and/or desirable to finance part or all of the cost of large projects by borrowing.
Large construction projects will require long-term commitments to be repaid annually as principal and interest. Debt service will be required for bond issues, bond anticipation notes, and capital notes; and, pursuant to Section 11 of the Local Finance Law, the allowable period of bonding may be limited by the period of probable usefulness. In lieu of bonds, interim financing can be provided by bond anticipation notes for a maximum of five years.
Serial Bonds. (Local Finance Law, Section 21.00) School districts may issued serial bonds for purposes with a "period of probable usefulness," including new buildings, building additions, reconstruction of buildings, site purchase and improvement. The maximum term for serial bonds is 30 years for new Class A buildings, with lesser terms provided for other types of capital projects. No principal payment may exceed any previous payment by more than 50 percent, and all bonds sold subsequent to July 1, 1983 must be in registered form. Voter authorization is required in all districts except New York City, Yonkers, Syracuse, Rochester and Buffalo.
Bond Anticipation Notes. (BANs) (Local Finance Law, Section 23.00) School districts may issue notes in anticipation of the sale of bonds which have been previously authorized. "BANs" make it possible for the district to provide for the temporary financing of capital projects for periods of up to five years, subject to the following provisions:
- Each note, including original notes and renewals, shall mature within one year from the date of issue.
- A portion of the amount borrowed shall be redeemed from a source other than bond proceeds within two years from the original date of issue.
- Not later than the end of each succeeding 12-month period, an additional portion of the amount borrowed shall be redeemed from a source other than bond proceeds.
- The portions to be redeemed from sources other than bond proceeds (meaning budgetary appropriations under debt service) shall not be less than the amounts which would be due if bonds had been issued.
Whenever bond anticipation notes are used, provisions must be made through a budgetary appropriation for payment of the principal amount borrowed within two years from the original date of issuance of the notes. Also, recognize that the use of bond anticipation notes shortens the maximum maturity schedule of the bond issue by the period of time during which the notes are outstanding, since the total period of district indebtedness for the project, including BAN's and bonds, cannot exceed the period of probable usefulness of the project.
Capital Notes. (Local Finance Law, Section 28.00) Capital notes may be used to finance capital projects when it is possible to comply with the requirement that at least 50 percent of the amount borrowed be repaid out of a budgetary appropriation for debt service by the end of the first fiscal year following the fiscal year in which such notes are issued. Union free, central school districts and small city school districts, after an approved referendum may secure capital notes. Such notes must mature no later than the end of the second fiscal year after which they were issued.
According to Education Law, Section 416, Subsection 6, propositions for construction of a new schoolhouse or an addition to a present schoolhouse at the same site shall not be submitted for a vote more than twice during any twelve-month period and in no event shall a proposition be submitted for a vote less than 90 days after a vote on the same or similar proposition. However, the prohibition shall not apply to a proposition to approve an additional amount necessary to carry out a construction project where the voters have approved an initial building project and it is determined that the bids for such project are in excess of the approved amount.
Budgetary appropriations may be used for school construction projects if they are authorized in the annual budget under Interfund Transfer -- Code 9950.9. These may be included in the Annual Budget or in a special proposition, either of which requires voter approval. Such appropriations must be transferred to, and expended from the Capital Fund. Note that the Capital Fund is not a Capital Reserve Fund.
Capital Reserve Fund
Capital Reserve Funds (not to be confused with the Capital Fund) may provide some or all of the funding necessary for a capital project. Establishment of the Capital Reserve Fund and authorization to spend must be in accordance with Section 3651 of the Education Law. The approved proposition must state the purpose of the fund, the ultimate amount thereof, its probable term and the source from which the moneys would be obtained.
A Capital Reserve Fund must be authorized by the voters, and once established,
no expenditure may be made from the fund without specific voter
Capital Reserve Fund moneys must be deposited in a separate bank account for each fund authorized and they must be identified by the name of the purpose for which they were authorized.
Some school districts find themselves in the position of having uncommitted funds remaining when a capital project is completed. These funds usually have been accumulated through earned interest and unspent proceeds of obligations. The Local Finance Law, Section 165.00 states that unspent proceeds from obligations, premiums from sale of obligations, accrued interest on obligations issued, and any earned interest from the investment of proceeds from obligations must be used to reduce the outstanding principal and interest.