Message from the Chair
The Public Eye reviews, from time to time, the activities of the Assembly Standing Committee on Oversight, Analysis and Investigation. This particular issue examines just one topic: financing New York City school construction.
The following is a discussion of relevant issues and proposals concerning New York City school building finance, each of which is complex. Some of the proposals may require legislative changes, and many are accompanied by financial or political obstacles. These proposals warrant serious consideration, discussion and, in the end, action.
The Committee’s mission is to review how well laws and various government programs work, whether they are implemented as intended, and whether they operate efficiently and effectively. Some of the projects we are now pursuing include: security of personal information, Medicaid fraud, and the treatment of people with disabilities by the State Department of Health.
As I move forward, I welcome your guidance and suggestions.
Options for Financing New York City
For far too long, many of New York City’s 1,100 schools have been overcrowded and in poor condition. City schools — which are 61 years old on average — have suffered from periods of neglect, due in part to past City financial crises. Severe overcrowding in many schools limits the City’s ability to reduce class sizes, a primary factor in improving student performance, and some schools have used temporary classrooms for years, restricting the use of playgrounds at those schools.1 All of these problems contribute to preventing students from reaching their potential, and they communicate to students that their schools are not important.2
While both the State and City are contributing more money towards fixing New York City schools and building new ones than they had in the past, more must be done now so that all students have the space and tools they need to learn.
In 2004, the City issued a $13 billion, 5-year capital plan.3 (Six years prior, then City Comptroller Alan Hevesi estimated New York City needed to spend more than $28 billion on its school buildings.) By 2009, the City intends to build 97 new school buildings (creating 66,000 additional classroom seats) and fix many of the serious problems plaguing schools. At its completion, it would reduce class sizes for the remaining 25 percent of students in crowded K-3 classes. The City’s plan presumes the State will contribute half of the money.
A State Assembly proposal to greatly increase aid to New York City in 2004-05, including directing $1.3 billion for school construction (which would have paid for the State’s share in the first year of the City’s capital plan), was rejected by the State Senate and Governor. The Assembly managed to push through significant changes in State school building aid this year (2005-06), which will enable the City to leverage more State aid for school buildings. However, the City’s need is so substantial that this issue will remain pressing for years to come.
An important court case may eventually result in significant increases in school aid to the City, although when that may happen is uncertain. The Campaign for Fiscal Equity (CFE) lawsuit, which charged the State with underfunding New York City schools, was decided in June 2003 by the Court of Appeals. The Court found that New York City students are denied their constitutional right to a sound basic education, and that the condition of schools contributes to this. Trial witnesses cited many significant problems with City schools, such as crowded classrooms, leaking ceilings, crumbling walls and outdated technologies.
In spite of the Assembly Majority’s efforts, the State was unable to adequately address the CFE decision. As a result, the original trial court was left with the responsibility of formulating a remedy. As a portion of that remedy, the Supreme Court justice in March 2005 recommended that the State implement a capital funding plan providing at least $9.2 billion for school buildings in New York City over five years. The Court did not rule on who should pay how much (city or state) and it specifically did not prohibit New York State from requiring New York City to pay some of the funding increases. Governor Pataki has appealed and the case was heard before the Appellate Division October 11, 2005.
The State Constitution sets a limit on the amount of debt New York City can take on. So, even if voters there decide they want to issue billions of dollars in bonds to fix schools, they may not have the ability to do so. The Constitutional debt limit for New York City equals 10 percent of its property tax base for both municipal and school district debt.4 Most other districts in the State can take on greater levels of debt.5
While it is likely that skyrocketing real estate values in New York City will drive up the debt limit in the near future, thereby allowing the City to take on more debt, New York City has come close to reaching its debt limit in recent years.6 And, the City is likely facing large budget deficits in the near future.7
The City could ask the State Legislature to amend the State Constitution by increasing this limit or by allowing New York City to exempt building aid from the City’s debt limit. Just about every other district in the State is allowed to exempt building aid from its debt limit. For example, if the City builds a $50 million school building and gets $25 million in State aid, City debt is $50 million, regardless of how much State building aid the City gets; whereas other school districts throughout the State can deduct building aid from their debt limit, thereby increasing the amount of debt they can ultimately issue.
In the State budget enacted for the 2005-06 school year, the State Assembly pushed through significant changes in the State’s education aid, specifically improving New York City’s ability to get more State money for its school construction and renovation through State Building Aid.8
The State reimburses districts anywhere from 10 to 98 percent of their building costs through building aid.9 The greater a district’s property value, the less building aid it gets.
The most recent changes will mean that State building aid will more fully cover costs unique to New York City school construction, such as site acquisition, building demolition, and those associated with multistory construction, in addition to the actual construction costs. Furthermore, each high-need district will get a 5 percent bump in its aid ratio, increasing the maximum State reimbursement from 95 percent to 98 percent of approved project costs. New York City — considered a high-need district — will have a building aid ratio of about 65 percent.10 This should mean that the State should pay 65 percent of the City’s school building costs.
These recent changes will enable the City to leverage more State funds. As noted by New York State Assembly Speaker Sheldon Silver (D-New York City), “We righted a 40-year ‘wrong’ by passing a historic increase in the building aid for New York City’s schools...”11 For instance, if the City spends $2.6 billion on new construction, as prescribed in its own capital plan, it should receive an amount close to $1.3 billion back from the State. (Before these changes were made, the City only received about 25 to 35 percent of total costs for new construction because building aid did not cover expenses such as site acquisition and building demolition.)
Possible Funding Options
Each of the proposals to increase spending on New York City school construction entails increasing the amount of funding provided by the State and/or the City. A perennial problem the Assembly encounters is the Senate’s and Governor’s reluctance to increase the percentage of dollars targeted for New York City. This political stalemate must be broken to drive any State funding increases to the City for school construction.
The following proposals are offered as ideas for discussions on funding and/or vehicles for delivering funding.
Use Video Lottery Terminal (VLT) Funds to Leverage Capital Funding — In 2004, the State Assembly proposed a policy that would have driven an additional $6.1 billion more in operating aid for schools in New York State (phased in over five years), with New York City receiving almost 70 percent of that funding and more than 86 percent going to high-need districts across the State.
The plan also established a $2.2 billion capital program, of which $1.3 billion would have been targeted to New York City to meet the first-year needs of its capital plan. The funding would have helped school districts statewide renovate and repair unsafe buildings, relieve overcrowded classrooms and update technology. The plan called for dedicating $240 million in VLT revenues, which would have leveraged funding to help meet school infrastructure needs across the State.
The plan was not supported by the Senate or Governor.
Provide State Grants for School Construction — A CFE-supported bill (A100 in 2005), introduced in the Assembly, would authorize the New York State Dormitory Authority to issue up to $10 billion in bonds to provide grants. The grants would be given over a five-year period to school districts for the purpose of relieving overcrowding, reducing class sizes, and other maintenance and facilities projects. Of that amount, New York City would be eligible to receive $9.2 billion in grants. These numbers reflect the CFE Supreme Court remedy. The legislation would provide that the State pay annual appropriations to cover debt service on these bonds.
SED Recommends Changing Building Aid — SED recommended in 2005-06 a simplified cost allowance for State building aid, which would clean up the overly-complicated and imprecise building aid formula.12 To target more funds to New York City, SED’s proposal also included changing the building aid cost allowance to reimburse construction costs unique to New York City, such as site acquisition and building demolition; these are similar to the more broad-based changes the Assembly just pushed through this past year (and which will ensure New York City’s cost allowance better reflects actual costs, as it does for most other school districts in the State).
State Bond Referendum — Allow voters to determine whether the State should markedly increase its support of school construction for the State’s neediest districts by issuing State bonds. The State, although having the second highest per capita debt in the nation, can issue bonds to help fund school construction. The obvious advantage of this is that districts, too cash poor to take advantage of increased State reimbursements, could finally tend to their schools. Another advantage of providing funding this way, outside of the traditional State aid categories, could be that New York City does not experience reductions in other types of school aid.
A similar statewide referendum was defeated by voters in 1997. The School Facility Health and Safety Bond Act, which would have authorized the State to borrow $2.4 billion for school facilities and technology, was doomed to fail in part, according to the Citizens Budget Commission (CBC), because the distribution of funds was not specified or tied to need.13
In regard to New York City, many clauses could be built into such an act, such as requiring the City to maintain a share of construction costs.
Any large increases in State aid should be accompanied by maintenance of effort (MOE) clauses. MOEs can vary greatly in specifics, but they basically require that if the State increases its share, the City would have to maintain its share and not use State money to supplant the local share.
New York City is now subject to an MOE for its local share of total education spending. New York City is required to appropriate at least as much City money (excluding State and federal dollars) as it did in the previous year. This MOE mandate excludes City provisions for pension and debt service, and it allows the City to reduce its support for education by a proportional amount if the City’s revenues decline.
Increase City Funding, Debt Limits
Instead of increasing overall City debt, the City could increase the share of its annual debt spent on education. The current share is about 20 percent.14 The Educational Priorities Panel — a consortium of education advocacy groups — has recommended increasing the City share to 40 percent.15 It should be noted that between 1990 and 2000, the City did increase the share of its capital dollars dedicated to education from 10 to 30 percent.
In its most recent 5-year capital plan, the City presumes that the City and the State will evenly split costs, totaling more than $13 billion, on building new schools and fixing old ones (with $1.3 billion being paid each year by each the City and the State). While the State Assembly did propose giving New York City a capital funding injection of $1.3 billion in 2004-05, it could not persuade the Senate and the Governor to accept this proposal.
Mayor Bloomberg’s proposed FY2005 capital budget — the first year of the City’s 5-year capital plan — included only $1.3 billion for education, rather than the full $2.6 billion the capital plan proposed. After a public outcry denouncing this, Mayor Bloomberg announced in March 2005 that he would appropriate $2.6 billion this year and simply reduce the City’s $1.3 billion share in subsequent years.
The City could issue debt through the TFA without the debt being counted towards the City’s general debt limit. The TFA was created in the late-1990s to enable New York City to borrow beyond its constitutional capacity and more recently to help fund reconstruction of buildings in downtown Manhattan, made necessary after the attacks on Sept. 11, 2001.
The TFA, which has reached its statutory debt limit, can issue debt that is cheaper to finance than general obligation debt (which would be counted against the City’s debt limit) because it is backed by the personal income tax.
The State could approve an increase in the TFA debt limit, and the City could, as the Mayor proposed in the past, use this increased TFA debt to decrease the use of general obligation bonds and lower its financing costs. As an alternative, the Legislature could increase the TFA debt limit and the City could use the bond proceeds to finance school construction. (In either scenario, the State would not be providing funds, only authorizing the City to take on more debt.)
Some education advocates consider raising the TFA’s debt limit a bad idea, in part, because it could be conceived as taking the burden off the State to fully fund the CFE decision and help finance school construction. In his most recent State budget proposal, the Governor recommended a $2.8 billion increase in the TFA debt limit. Some education advocates saw this as the Governor’s attempt to avoid settling the CFE case.
The New York City Educational Construction Fund (ECF) is a public benefit corporation established in 1967 by the New York State Legislature to provide funds for combined occupancy structures, including school facilities in New York City. The Fund serves as a financing and development vehicle for the New York City Department of Education. Similar to borrowing through the TFA, this debt is excluded from the City’s debt limit.
New York State Assembly Education Committee Chair Steven Sanders has introduced legislation that would expand the existing ECF.16 So, instead of only financing schools that are combined with housing or businesses, this legislation would enable ECF to finance single-use schools.
The legislation would enable the State to pay ECF the City’s building aid and enable ECF to issue bonds on behalf of the School Construction Authority (SCA), with a limit of $1.5 billion (exclusive of outstanding debt).
Unlike most other school districts in the State, where local residents can vote whether to take on debt or use current property taxes to increase funds spent on school building improvements, New York City schools are dependent upon City government to make such decisions. State education aid is deposited into New York City’s general fund.17
The State Comptroller recently took up the issue of fiscal dependency of the Big 5 city school districts — New York City, Buffalo, Rochester, Syracuse and Yonkers — and suggested this may be an issue to discuss, regardless of the outcome of CFE.18
Because of the serious financial problems and declining property wealth in upstate cities, State government has stepped in and, at least in the case of Buffalo so far, fashioned a remedy for school buildings. The New York City school system, although still considered a fiscally dependent district, is now under the control of the Mayor. So, while the flow of money and programmatic control are aligned, education dollars are still pitted against funding for other vital City services, such as transportation and health care.
Securitizing building aid would mean borrowing against future building aid payments to secure bonds and build new schools now. This proposal was discussed for many years, but has never gained much ground for a number of reasons.
Many districts use building aid to pay debt service on capital costs associated with school buildings. The City bundles its debt by issuing single general obligation bonds for all services (except water and transportation). When State building aid comes in, it goes directly to the City’s general fund, and is then used for operating costs.
To borrow against future aid payments, the City would have to make a number of procedural changes. Building aid would have to be dedicated to pay for debt service, which would take away some flexibility from the Board of Education’s spending on educational programs. Additionally, State building aid now reimburses building costs already incurred, whereas securitization would apply to proposed projects.
The State recently stepped in to help Buffalo’s schools. The City of Buffalo was experiencing major financial problems and its schools —70 years old on average — were in desperate need of repair and updates. The City school district was so cash poor it was unable to take advantage of an extremely high building aid ratio. So, the City of Buffalo — unable to take on debt as it had used up 95 percent of its constitutional debt limit — couldn’t use the aid available.19
As a result, State and local authorities created the Joint School Construction Board (JSBC) and enacted a series of changes to help Buffalo renovate and update its schools.20 The JSCB is overseeing the design, construction and financing of a multi-phase, 10-year, $1 billion capital program, potentially renovating about 80 buildings.
With recent legislative changes, Buffalo’s building aid ratio will soon be 98 percent (it is now about 94 percent), leaving Buffalo to pick up a relatively small share of the funding, but still a large amount of money. Therefore, the local share will be paid by interest earned on cash from bonds issued through the Erie County Industrial Development Agency (ECIDA) and from a $5 million grant from Erie County.21 The local share will also be paid with savings from an energy performance contract. The debt issued through the ECIDA will not count against the City’s debt limit, and because it’s privately insured and backed by State aid, it received the bond market’s highest ratings and therefore low interest rates.
The prime contractor has guaranteed one price for all projects and guaranteed it will get the maximum cost allowance under building aid (thereby maximizing the share of State aid funding each project). Among other provisions in the legislation, the contractor was given the ability to be exempt from WICKS, i.e. an exemption from State law mandating public construction projects use three separate contractors for heating, plumbing, and electrical duties on projects larger than $50,000.
Many of these tools are currently available to New York City schools. Just as Buffalo can now finance school construction debt through a local IDA, New York City has similar options to finance debt so that is not counted against the debt limit. New York City already has a similar vehicle for overseeing the design and construction of schools, the SCA. Furthermore, the SCA has a five-year exemption from WICKS (and it has reportedly lowered its costs).22 One major difference between the two districts, however, is the level of wealth: New York City’s building aid ratio is significantly lower than Buffalo’s because New York City is considered to be average wealth and Buffalo is considered to be low wealth.
The purpose of this paper is to invite discussion on these issues so that we can address these serious problems sooner rather than later. This summary of funding options is not exhaustive, and certainly other interested parties will recommend alternative approaches. Work in this area must continue.
1 New research shows that children who attend classes of fewer than 20 students in grades K-3 improve their chances of graduating from high school by 80 percent.
2 CFE, Sound Basic Educational Opportunity for All, Part II. Adequate Facilities for All: Reforming New York State’s System for Providing Building Aid to School Districts and for Meeting Schools’ Urgent Capital Needs, April 2004.
3 “Children First, 2005-2009 Five Year Capital Plan, Proposed 2005 Amendment,” City of New York, Department of Education
4 The debt limit actually equals 10 percent of a 5-year rolling average of the full valuation.
5 “Financing Education in New York’s “Big Five” Cities,” May 2005, Office of State Comptroller: New York City and the other large city school districts — Buffalo, Rochester, Syracuse and Yonkers — have municipal debt limits of 10 and 9 percent of their property tax base, respectively, with school district debt included in these limits. Small cities have lower municipal debt limits (7 percent), but separate debt limits for schools (another 5 percent), making the effective debt limit on small city taxpayers for total municipal and school debt 12 percent. Non-city school districts have even more flexibility, with 10 percent limits on school districts in addition to the 7 percent limit on the towns and villages where those districts are located.
6 According to the New York State Deputy Comptroller, as of April 2005, because real estate value has risen so dramatically, the debt margin will increase over time from $3.9 billion in FY2005 to $7.9 billion in FY2010 and then to a possible high of $18 billion at the end of FY2015. The Deputy Comptroller released these numbers while cautioning that debt limit increases do not make new debt affordable. Another report from the State Comptroller says that 78 percent of New York City’s debt limit was exhausted as of 2003.
7 The future budget gaps are predicted in: “Analysis of the Mayor’s Preliminary Budget for 2006,” March 2005, the New York City Independent Budget Office; and, “Review of New York City’s Financial Plan for Fiscal Years 2006 through 2009,” July 2005, Office of the State Comptroller.
8 Building Aid and Building Reorganization Incentive Aid are estimated to total $1,413 million for 2004-05 and $1,464 million for 2005-06. This increase of $51 million represents 4 percent growth over the previous year. (The 2004-05 amount is based on March 2005 SED school aid runs.)
9 In the 2005-06 State budget, maximum State reimbursement for building aid increased from 95 percent to 98 percent.
10 High-need is a category of the State Education Department’s Need/Resource Capacity, which measures each district’s percent of students with extraordinary needs in relation to its ability to raise revenues locally. The term “high-need” refers to districts with a high percentage of students with extraordinary needs — students in poverty and limited English proficient students — and low fiscal capacity. Although New York City’s wealth is just less than the statewide average, it has very high student need.
11 Remarks of Speaker Sheldon Silver, United Federation of Teachers Lobby Day, ESP, The Convention Center, Albany, NY, Tuesday, April 5, 2005.
12 Summarized in the New York State Regents State Aid Proposal for 2006-07, issued April 22, 2005. The formula would be greatly simplified. It would make cost allowance the product of projected pupil enrollment multiplied by allowed square feet. Then aid would be the product of: Per Pupil x Allowed Cost per Square Foot x Regional Cost Factor.
13 The CBC also opined that the only viable solution to New York City’s problems was to use existing school buildings more intensively through year-round schooling and double-shifting. However, it should be noted that many New York City schools are now double- and even triple-shifting and yet they continue to suffer from overcrowding.
14 The New York City Office of Management and Budget, June 2005 Adopted Budget, Fiscal Year 2006. It should be noted that of the total outstanding debt as of 6-30-04 for the City, 31 percent was for education, according to the New York City Office of the Comptroller’s Bureau of Fiscal and Budget Studies report “Fiscal Year 2005 Annual Report of the Comptroller on Capital Debt and Obligations.” That same report projects the percentage for FYs 2005-08 (based on the Capital plan) to be 19.8 percent (or 27.5 percent excluding sewer and water).
15 “Castles in the Sand, Why School Overcrowding Remains a Problem in NYC,” EPP, April 2002.
16 A5124 was introduced by Assemblymember Steven Sanders (D-Manhattan).
17 Schools therefore must compete with other vital municipal services, such as transportation, sanitation, fire and police for both operating and capital funds.
18 “Financing Education in New York’s ‘Big Five’ Cities,” Office of State Comptroller, Division of Local Government Services and Economic Development, May 2005.
20 Similar legislation for Syracuse was passed by both houses at the end of the 2005-06 Legislative Session, but was vetoed by the Governor.
21 All State aid payable to the City or school district is available to pay debt service on bonds, should the school district fail to make a scheduled payment. While the bulk of bondholders’ funds would pay for actual construction, a sizeable chunk of about $19 million will be set aside for a reserve fund. The interest from that reserve fund will help pay most of the local share over the 20-year life of the bonds.
22 SCA in the past year has managed to reduce project costs to $305 per square foot, down from $400 and $500 per square foot, according to SED.
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