Legislators consider adding $1.9 billion school bond for November 2018 ballot

There are signs NC’s system for financing school construction is not working very well

Demographic changes and an expected 3.25 percent decline in student enrollment need to be factored into any decision to approve school spending

Legislation (SB 542/HB866) to authorize a $1.9 billion school bond referendum is working its way through the North Carolina House and the Senate. If approved by both chambers (the governor’s signature is not needed), the referendum would be on the November 2018 ballot. According to the legislation, the funds would be used to finance school construction and renovation projects. All Local Education Agencies (LEAs) in North Carolina would receive money. The formula used to distribute the money would favor economically depressed and fast-growing LEAs.

Several factors are fueling momentum for the bond referendum. The last statewide bond referendum was held 21 years ago. The North Carolina Department of Public Instruction estimates public school capital needs at approximately $8 billion. If new class size ratios are implemented in 2018, local schools will most likely require new or renovated classrooms. North Carolina’s rural areas have been struggling and losing population. Many schools in these areas are old and beyond renovation or repair. Moreover, population losses mean that most of these areas don’t have the tax base to meet the needs. Hurricane Matthew brought these realities to light for many LEAs and underscored the need for upgraded school facilities.

School advocates tell us these problems are not limited to rural or poor districts. Some of the fastest-growing districts in North Carolina have had difficulty meeting capital needs. According to one controversial report, if new classroom ratios are implemented, Wake County Public Schools will require 460 new teachers and the creation of 400 new classrooms. The changes will total $320 million in personnel, capital and operating expenses.[i] Finally, others say the time is right for a new school bond referendum since the last was passed in 1996.

School Construction in North Carolina

North Carolina law clearly delineates which branch of government bears the cost of instructing children or building schools. North Carolina statutes (115C. -408(b)) say:

To insure a quality education for every child in North Carolina, and to assure that the necessary resources are provided, it is the policy of the State of North Carolina to provide from State revenue sources the instructional expenses for current operations of the public school system as defined in the standard course of study. It is the policy of the State of North Carolina that the facilities requirements for a public education system will be met by county governments.

Simply put, state government will bear the responsibility of paying for everyday instructional expenses; local governments will bear the responsibility for capital costs and school construction.

While that division seems straightforward, it has not always played out as planned. Since 1997-98, North Carolina has amassed $14.7 billion in capital outlay for school facilities. This includes funds from the state, and federal and local governments.[ii] North Carolina counties are the local taxing authorities for independently elected school boards. The local county board is the local taxing unit that provides funds for local schools. In most states school districts act as their own independent taxing authority and use the property tax to raise revenue for schools.

In 2015-16, local funds for school capital needs totaled almost $525 million.[iii] According to data provided by the North Carolina Department of Public Instruction, in 2015-16 North Carolina counties provided about 97 percent of all money spent on school capital needs. During the same year, the state provided $14.8 million. The federal government provided no funds for local school construction in 2015-16, even though for thirteen consecutive years from 2001-02 to 2013-14 the federal government provided funding for local school construction costs ranging from as low as $43,251 (2013-14) to as high as $12.8 million (2011-12). In addition, from 1998 through 2012 the federal government provided money for school renovation via what were know known as QZABs or Qualified Zone Academy Bonds. QZABs are a zero-interest bond that require a 10 percent match from a local business partner. Average QZAB funding for North Carolina from 1998 to 2012 was $15.8 million. There was no QZAB funding for local schools in 2015-16.

While state law provides that local counties bear the responsibility for school capital costs, over the years state government has contributed significantly to local school capital funding needs through a variety of programs. For example, North Carolina has provided funding for local school capital construction through statewide school bond referenda. There have been five approved school referenda: in 1949, 1953, 1963, 1973 and 1996. In addition, the state provides funding for local school capital costs through a variety of other programs.

The state also provides direct aid for capital construction costs through the Public-School Building Capital Fund and local sales taxes. The Public School Building Capital Fund has two parts. Since 1987 there has been a part that provides funding based on average daily membership (ADM.) Local schools can let these monies accrue until they want to build. When they do, LEAs can access funds with a 1:3 match from the state. The Tax Reform Act of 2015 however, eliminated the corporate income tax funding. Local schools are still able to access corporate income tax revenue that was allotted but not used in previous years. As of 2015-16, the fund balance for this account was approximately $100 million.

The second such source of funds for local school construction is the North Carolina Education Lottery. Since 2007 the lottery has provided $1.12 billion to local schools for school capital costs.[iv] However, over time the percentage of revenue dedicated to school construction has declined significantly. In 2007, the North Carolina Education Lottery allocated 40 percent of its revenue — or $170 million — for school construction. That ratio remained constant through 2010, then the percentage of revenue declined to 23 percent of all revenue in 2011. It declined to 22 percent in 2012 and 21 percent in 2013 and 2014. In 2015, the percentage of revenue dedicated to school construction declined yet again to 17 percent before increasing slightly to 19 percent in 2015-16. Regrettably, these trend lines reveal that in tough times the legislature has treated lottery money – and with it school construction money – as a cookie jar and used it a source to help fund other programs.

BondReferendumTables



Finally, North Carolina also allows counties to earmark a part of funds derived from corporate income tax revenues for school facilities improvements. These funds come via two one-half-cent increases to the state sales tax. The taxes were approved in 1983 and 1986 and 30 percent (1983) and 60 percent (1986) of the funds from each tax go to school construction costs. All 100 counties levy the tax. Revenue is distributed on a per capita basis and the funding can be used to retire debt or for school construction. Some officials say the funding has allowed local counties to fund bond issues without raising property taxes.

School construction costs are in large part driven by projected student enrollment. While we have heard a lot about the $8.1 billion in projected school construction needs, we haven’t heard much about projected student growth. The results have been interesting. Many North Carolinians think public schools are in a massive growth phase. That’s true for a number of counties but over the next five years (2016-2021) overall K-12 enrollment is expected to decline by 46,833 students, or 3.25 percent. Enrollment declines are expected in grades K-5 (37,084) and 9th-12th (17,845) with a slight increase (8,096) in grades 6-8. Over the following five-year period (2020-21 to 2024-25), overall enrollment is predicted to grow slightly by 6,451 students, a tiny growth rate of 0.46 percent.[v]

These are important trend lines. It should also be noted that estimates for 2015-16 reflect a decline of 46,833 students from 2010-11. School Facilities Survey Estimates also predicted a gain of more than 34,000 students from 2010-15, only to see a decline of over 46,000 students.[vi] This should be a lesson to everyone about the need for accurate population estimates and about the tendency for some districts to inflate projected student enrollment.[vii] Additionally, while the school administrators were talking incessantly about the harmful impacts of the new class size reductions and how it would cause the need for new staff and classrooms, according to the State Facility Needs Survey, “Only one school reported construction needs related to class size reduction policies in the next five years.”[viii]

So, where does all this leave us? The Department of Public Instruction says North Carolina has school construction needs of approximately $8.1 billion. State law says counties are responsible for school construction. Over the years the state has provided various revenue streams (i.e. school bonds, Public School Building Capital Fund and Education Lottery, sales tax increases) to locals only to see the revenue levels significantly reduced.

There is a good argument to be made that the system for financing school construction in North Carolina is not working very well. Combine that with the growing demographic differences between urban and rural counties and you have one financing system, but in large part two different states. Middle and larger county school systems continue to grow, while rural areas continue to lose population. According to the US Census Bureau, 48 of North Carolina’s 100 counties experienced net population losses between 2010 and 2016.[ix] It is difficult to think that many of our rural counties – as currently constructed – would be able to raise enough funding to meet their capital needs. And to what extent should the state help faster-growing local counties with school construction needs, most of which have sufficiently large tax bases to finance the schools themselves? These questions suggest it would be wise to overhaul how school construction projects are financed. New ways to finance school construction is certainly a topic worthy of further discussion and one we will address in a future article.

Until then, we realize there are still numerous school construction needs. However, blindly approving a bond referendum without correcting the underlying problems amounts to nothing more than throwing money away. It’s something North Carolina can’t affford and it’s time to stop.

[i] Alex Granados & Kelly Hinchcliffe, ‘“How do we create 400 classrooms?” NC schools say class size cap will cause scramble for space.” Education NC, March 7, 2017 as found at; https://www.ednc.org/2017/03/07/create-400-classrooms-nc-schools-sayclass-size-cap-will-cause-scramble-space/

[ii] Highlights of the North Carolina Public School Budget, 2017, North Carolina Department of Public Instruction, February 2017, see page 27. Available online at: http://www.ncpublicschools.org/docs/fbs/resources/data/highlights/2017highlights.pdf

[iii] Highlights of the North Carolina Public School Budget, February 2017 North Carolina Department of Public Instruction. p. 27. Available online at: http://www.ncpublicschools.org/docs/fbs/resources/data/highlights/2017highlights.pdf

[iv] History of Lottery Fund Assignment, from “Where the Money Goes” North Carolina Education Lottery web site. Available online at: http://www.nc-educationlottery.org/uploads/docs/History%20of%20Lottery%20Fund%20Assignment%20(Updated%2003-29-16).pdf

[v] Statewide Facility Needs Survey, 2015-16, NC Department of Public Instruction, April 2016, see page 5 and 6. Available online at: http://www.schoolclearinghouse.org/otherinf/FacilityNeedsSurvey/2015%20Facility%20Needs%20Survey%20(SBE).pdf

[vi] Statewide Facility Needs Survey, 2010-11, NC Department of Public Instruction, March 2011 see page 5 and 6. Available online at: http://www.schoolclearinghouse.org/otherinf/FacilityNeedsSurvey/FacilityNeedsSummary2011Final.pdf

[vii] Wake School Estimate Must Be Double Checked, blog post, Civitas Review, December 9, 2014. Available online at: https://www.nccivitas.org/2014/wake-school-estimates-must-double-checked/

[viii] Statewide Facility Needs Survey, 2015-16, NC Department of Public Instruction, April 2016, see page 5 and 6. Available online at: http://www.schoolclearinghouse.org/otherinf/FacilityNeedsSurvey/2015%20Facility%20Needs%20Survey%20(SBE).pdf

[ix] Population Losses in Rural NC Should Prompt Tough Questions, Civitas Review Blog, May 26, 2017. Available at: https://www.nccivitas.org/civitas-review/population-losses-rural-nc-counties-prompt-tough-questions/