I. Underlying Principle for School Construction Financing

Our recommendations are based on a basic principle that had unanimous agreement among all task force members. That principle is the following:

The State of Washington should adequately fund the construction of school facilities that meet minimum reasonable standards for K-12 education. Local communities should be able to freely choose to build beyond the minimum standards with local funding.

Currently, state match is not provided based on the actual costs of school construction. In the past, formulas have been adjusted to provide match based on the amount of money available. Establishing reasonable standards for the construction of modern schools will require appropriations for school facilities that are commensurate with the needs of K-12 education. The establishment of such reasonable standards for modern school construction should be accomplished with advice from experts in education and the construction industry.

In assessing any financing method, our Task Force has adopted the following criteria:

• Education is a broad public benefit, and school construction financing should reflect that broad public benefit;
• School Construction Financing should be equitable, brought to a minimum reasonable standard, with every child having access to adequate basic facilities regardless of the economic demographics of the school district;
• Chosen alternatives for school construction financing should strengthen public support for public education; and
• School construction programs should be consistent with growth management goals, such as affordable housing, concurrency, environmental preservation, and adequate public facilities.

The Task Force firmly believes that funding for schools and school construction should come first in terms of state appropriations. Funding should allow districts to build schools that can be efficiently operated and maintained to educate children throughout the State.

Local communities must be able to choose to supplement state funding in order to address local needs and to ensure quality standards specific to each community.

II. Context of School Construction and Renovation Financing Concerns

These are the problems we see with the current system of financing school construction.

We are concerned with the declining percentage of school construction funding being provided by the State. Figures indicate a decline from 60.89% in 1985 to 33.47% in 1998 in terms of the state's portion of total school construction costs. Based on the higher cost of construction, in western Washington we anticipate that the State's share of school construction costs in western Washington is even lower. (Note: These figures do not represent all costs of school construction financing, such as land costs or site development.)

The decline in state funding has placed significant additional pressures on school districts.

The state school construction funding system does not necessarily contribute to growth management goals. It is deficient in both rapidly growing areas and neighborhoods with aging facilities. In rapidly growing areas like Kent and Issaquah, the state funding system does not keep pace with either the immediate demand for schools or facility planning to meet growth management goals. Indeed, inadequate funding of school construction undermines growth management goals of providing adequate infrastructure concurrent with growth. Further our growth management strategy of encouraging infill and redevelopment of urban centers can not succeed, when established districts like Highline and Seattle School Districts do not receive adequate state support to keep neighborhood schools attractive. Aging buildings in need of repair and modernization do not rank high on the scale for state funding. A revised state system or formula for school construction financing could recognize the importance of promoting such land use goals on a regional basis.

The current system of funding school construction seems to discourage innovation. If a district anticipates the cyclical nature of school enrollment, long-term leasing with capital funds of facilities should be an option. There may be innovative approaches that are not explored -- that may be less expensive and more responsive to student needs -- because of the inflexibility of the current system and state statutes.

While school districts have constructed schools despite the declining state dollars, the increasing demand for other sources of local funding has divided some communities. For example, newcomers with children might opt to support a school construction bond, while long term residents think "newcomers" should pay the bill for new schools.

The Growth Management Act authorizes impact fees as a tool for funding a proportionate share of the cost of new facilities. Impact fees were not intended to pay for the full costs of the facilities. In some communities impact fees are considered to have contributed to the support for school district bond issues. However, as the state's commitment to school construction funding declines, the tension between fees and other sources of funding in some districts has been heightened. For every dollar the State fails to pay in construction costs, it increases the burden on impact fees by $.50 and on local property owners by $.50 under the King County formula.

In one recent case, the District's impact fees became a major controversy in a bond election; the school bond failed. The decline in state funding has contributed to some renewed debate over the role, fairness, effectiveness, and efficiency of school impact fees. These are issues that our Task Force continues to discuss as it makes final recommendations to the King County Executive. We are in agreement that the increased financial burden on local school districts intensifies the potential for conflicts at the local level.

The system of school construction financing needs to be readjusted and updated in order to serve the educational needs of our children. The State should assume the primary responsibility for school construction financing and the State must identify funding alternatives to implement this vision.

III. Some First Steps Toward More Responsive Funding for School Construction

The Task Force has reviewed preliminary recommendations from the Washington State House of Representatives Task Force on School Construction Financing. We strongly applaud the Task Force and its leaders for the productive work. We believe that the recommendations are good first steps that can be taken on the road to improving the system of school construction financing. We also want to move forward with the reforms that can be adopted this legislative session. When we proposed changes to the basic recommendations, those changes are shown underlined.

Legislative Task Force Recommendations that we unanimously support are as follows:

Recommendation #1. Improve investment options for the Permanent School Fund.

The King County Task Force supports this option as a way to increase the flexibility of the State Investment Board that hopefully will generate more dollars for the Permanent School Fund.

Recommendation #2. Change the state standard for construction cost per square foot to reflect actual construction costs, including local variations in construction costs.

The King County Task Force supports the concept of increasing the state cost per square foot allocation; we advise that the new allocations be based on actual construction costs, including local variations in construction costs and off-site costs, rather than the pre-1985 level as recommended by the House Task Force. (Reductions in state funding seem to reflect a decision to meet budget levels rather than to adequately fund school construction.)

Recommendation #3. Review the "75% rule" and the "40%-80% rule" for modernization projects.

The King County Task Force supports this review in order to insure that there are no unintended negative impacts to school districts by changing the state allocation standards for school construction.

Recommendation #4. Provide multiple release dates for state school construction funds.

The King County Task Force supports possible quarterly release dates and agrees with the recommendation that the Legislature modify the 1999-01 capital budget bill to authorize the quarterly release of state school construction funds.

Recommendation #5. Implement recommendations 2-4 by State Board of Education rule making process.

The King County Task Force concurs.

Recommendation #6. Consider Emergency Reserve Fund alternatives.

The King County Task Force agrees that money should flow faster into the Education Construction Account. Lowering the level of the emergency reserve would deposit money for the first time into the Education Construction Account. This change could be accomplished by legislative enactment or by submitting it to the voters for approval.

Recommendation #7. Allow school districts the option to acquire facilities with lease/purchase agreements using capital funds and make the agreements eligible for state assistance.

This recommendation would give school districts more flexibility to respond to the need for facilities with creative community solutions. As the House Task Force report states, "Long-term lease purchase agreements would provide an option to the traditional construction process by enabling districts to quickly respond to explosive enrollment growth and changing student demographics with fewer up-front costs." Legislative action is needed.

Recommendation #8. Allow school districts to use the unused state portion of property tax for school facilities -- Fall Back Levy -- and allow short term borrowing.

School districts should be able to collect the unused portion of the state property tax under appropriate conditions. We are not certain that a double bond or levy failure is the appropriate or the only trigger for such authority. The King County Task Force also recommends that school districts be authorized to borrow funds on a short-term basis secured by this new revenue stream.

Recommendation #9. Require constructability reviews, building commissioning, value engineering and professional construction managers on new school construction projects and provide funds for such purpose.

While the King County Task Force agrees in principle with this recommendation and the cost efficiencies it intends, there is concern that school districts have the funds to conduct these studies. School districts should not have to shift funds within their budgets to meet these new requirements. For example, the funds should not be linked to the state match process since there are districts in King County that are building schools without state match. These districts should be eligible to receive funds to cover the full costs of the studies and the new state mandate. Money should be set aside for school districts to use to meet these requirements.

Recommendation #10. Expand the use of limited general obligation (nonvoter approved) bonds so they can be used for the same capital purposes as voter approved bonds.

This recommendation would give districts the flexibility to use nonvoted debt to pay for construction of new facilities, repair of existing buildings or any use authorized by voter approved debt. Legislative action required.

Recommendation #12. Remove any obstacles that prevent school districts from using tax exempt financing that is available to nonprofit organizations to pay for all or part of the cost of providing new school facilities.

Allowing school districts to participate with nonprofit organizations to finance school construction projects with special tax exempt financing would give another tool to districts. The King County Task Force supports increasing the flexibility for school districts to obtain needed financing and providing opportunities for innovation in the construction of school facilities.

(Note: The King County Task Force could not agree on and thus does not support Recommendation #11 which would authorize capital facility areas for school districts. This recommendation would allow only a portion of a school district to be created for taxing itself to pay for school facilities. Some King County Task Force members liked the flexibility inherent in the recommendation, but several saw this recommendation as further threatening to divide communities and perhaps producing inequities within school districts.)

In addition to the 11 recommendations accepted from the Legislative Task Force Report, the King County Task Force adds three other recommendations:

1) Increase square footage allocation per student.

Before 1983, the standard allocation (90 square feet per K-6 student, 130 square feet per 7-12 student) was greater than it is now. The "standard" now (80 square feet per K-6 student, 110 square feet per 7-8 student, and 120 square feet per 9-12 student) is not enough space in modern schools. Further, the reduced standard eliminates many Districts from eligibility for state match because there appears to be phantom surplus space according to the state standard. Commensurate funding needs to be appropriated. We also note that increasing the square foot per student standard will increase the numbers of districts eligible to receive state match; we assume that funding will be increased to meet possible additional requests.

2) Exempt the state portion of the sales tax on the labor and services component of school construction projects.

On one hand the state is partially funding the construction of new schools, but on the other hand, it is collecting sales taxes on those same construction projects. Exemption of state portion of the sales tax on the labor and services component of school construction would save districts money and allow for more consistent state policy and action.

3) Recognize that timber revenues are not a good source of revenue for the State's share of school construction costs.

The State has relied since 1966 upon revenues from the timber trustlands to fund K-12 construction; prior to 1966 timber trustland revenues went into operating costs of schools. Timberlands did represent the State's major source of wealth in 1889, and the revenues were adequate to meet the education needs of a young state. Now, however, many factors have combined to render the trustlands inadequate as a source of revenue for school construction. Enrollments have grown, school building costs have changed, and environmental and other goals have reduced the revenue production from timber lands. We know some of the funding gap is because demand is greater than the Trust Fund could satisfy under the best production scenario and that the best scenario is limited by environmental constraints mandated by federal and state policy.

Deloitte & Touche LLP's 1996 Economic Analysis prepared for the State Department of Natural Resources estimated the value of the State's trust assets (primarily timber lands) to be almost $7 billion. The largest part of these assets are held in trust for K-12 school construction. These assets are not successfully funding school construction. In fiscal year (FY) 1998, $68,566,622 was received from timber trust assets for common school construction; yet, total school construction expenditures for FY 1998 are $385.6 million. Cash flows from the trust do not match state school construction needs. Revenue from this source has fluctuated widely, with revenues now declining even as school construction needs increase.