Better Debt Policy Can Help Schools Earn Voters' Trust

Across Michigan, school districts are issuing bonds for building projects at a record pace. Indeed, between 1990 and 1996, the amount of state-guaranteed school indebtedness ballooned from $2.5 billion to $6.3 billion. As bonding levels rise, school officials and taxpayers need to better understand the pros and cons of bonding, and to be mindful of the need for responsible debt issuance and management.

Today’s school construction, and the associated need for borrowing, is happening at a time of tight budgets and tax resistance in many districts. Many voters are wary of the size of local district bond issues. Some are distrustful of their schools, and many feel overtaxed already. For these and other reasons, bond elections are often contentious in Michigan.

Schools can do much to help allay the concerns of voters when it comes to bonding. Most importantly, they can commit to capital planning and budgeting on a long-term basis, and not just when they need a bond issue approved. A key part of a sound capital improvement plan is a district’s debt policy, which governs how, when, for what purposes, and to what extent debt may be issued. The many districts that lack an effective debt policy miss out on many advantages that help them obtain needed funds. A sound debt policy such as that proposed in a recent Mackinac Center report can

• help schools avoid common pitfalls of debt issuance and management;

• promote long-term financial stability;

• send a message of responsibility to taxpayers;

• help schools earn better bond ratings from rating agencies;

• enhance regulatory compliance; and

• assure that borrowing is done at the lowest cost to taxpayers.

On all of these counts, there is considerable room for improvement in Michigan schools. For instance, some have engaged in electioneering—the use of public resources to promote bond proposals and influence elections—raising both legal and ethical questions. Some districts have incurred excessive bond interest costs through the use of high-interest "capital appreciation bonds" and through borrowing from the Michigan School Bond Loan Fund. Cases exist where school districts have levied excessive debt taxes, bringing substantially more revenue into their bond repayment accounts than is necessary to meet annual bond payments.

School bonds have traditionally been used only for "bricks and mortar," but under today’s laws schools may bond for recurring short-term needs such as furnishing, equipment, repairs, buses, and computers. In spite of some legal restrictions, this has led to a significant shift of costs formerly considered expenses (not capital) onto bonds. Long-term bonding for short-term needs is poor economics and poor public policy.

Some bond consultants and school officials in charge of issuing bonds have been charged with conflict of interest. Michigan schools can deflate such charges by doing more to increase competition in the issuance of bonds and the procurement of bond-related professional services. All school districts must ensure that public officials, their employees, and consultants avoid gaining undue private benefits—or even the appearance of such benefits—as a result of their official actions.

Many such problems can be remedied through effective debt policy, formally adopted and carefully observed. Key provisions of such a policy would restrict the use of bonds to capital construction, guarantee that indebtedness will be paid off within the useful life of the acquisition, limit total school district indebtedness, schedule debt repayment to minimize total interest cost, and implement guidelines for fund investments.

A sound debt policy stipulates that debt be issued through competitive bidding whenever possible, and that bond-related professional services (including financial advisor, bond counsel, paying agent, registrar, and printing) be obtained based on qualification, through formal requests for proposals. Also included in the policy should be requirements that financial advisors, bond counsel, and broker-dealers each be independent from one another and that they disclose potential conflicts of interest. The direct or indirect use of public funds for the promotion of bond elections should be prohibited, as should campaign contributions to bond or candidate elections by those involved with the issuance of school district bonds.

Michigan schools should take an honest, serious look at their past bonding practices and recognize areas that may be improved. An effective debt policy can help schools promote sound financial practices and secure public support for necessary projects.