Massachusetts School Building Assistance Reform

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Massachusetts School Building Assistance Reform
Jeffrey S. Stearns Deputy Treasurer
Northeast State Treasurers NAUPA Annual
Conference August 23, 2004
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Old School Building Assistance (SBA) Program

• Municipalities initiate school building project
• Apply to state for assistance (subsidy) through
  program
• When project is approved, it is put on waiting
  list for funding
• City or town commences construction
• Construction is funded through short-term
  borrowing by municipality
• When project is completed, municipality issues
  long-term bonds to provide permanent financing
• State makes contract assistance payments over 20
  years to subsidize local bond issue

(Subsidies 50 to 90 of principal and
interest average about 72)
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Even Though SBA Appropriations Have Grown
Dramatically . . .
CAGR 10.2 / yr.

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. . .The SBA Waiting List Has Skyrocketed
Source Massachusetts Department of Education
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SBA Problem

• Existing contract assistance commitments total
  5.5 billion over the next 20 years
• FY04 appropriation is 401.5 million
• Program has been treated (up until now) as an
  entitlement program
• Waiting list now has 425 projects with
  construction costs of approximately 5.9 billion
• One-half of communities have already issued
  short-term notes to begin construction
• Expected wait for state subsidy is now over 10
  years
• High State subsidy level
• Inefficient local financing

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Continuation of Current ProgramWould Balloon
Budget Appropriations
Assumes that existing wait list is funded over
5 years and new demand of 800 million per year
(plus inflation) is funded after a 2 year
moratorium.
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Solution
Reform legislation enacted in August 2004, that

• Dedicates 1 cent of state sales tax to new
  off-budget school building trust
• Phases in pledge over 7 years
• Provides for additional State contributions of 1
  billion in bond proceeds and 150 million in
  surplus cash
• Makes new Trust responsible for paying old
  contract assistance, financing wait list and
  future projects
• continues three year moratorium on new projects
• Reduces average subsidy level by about 10
  percentage points (72 average to 62 average)
• Establishes new independent authority established
  to manage program

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Why 1 of the Sales Tax?

• Revenue source sufficient to fix problem
• Replaces open-ended liability with dedicated
  revenue source
• Growth potential allows for sustainable program
• peak-to-peak 5.01 / yr.
• trough-to-trough 5.84/ yr.
• Easily understandable
• Similar to MBTA arrangement

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New SBA Financing Model
1 of Sales Tax
1 Billion State GO Bonds
Proceeds
(Phased-in Over 7 Years)
Authority Bonds
New School Building Authority
150 Million Cash From State
Debt Service
Fund Waiting List Over 3½ Years With No Cuts
(4.5 Billion State Share)
Finance New Projects (800 Million/Yr. After
3 Year Moratorium)
Pay Old Contract Assistance (5.5 Billion Over 20
Years)
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Result

• Waiting list eliminated in 3½ years
• same year financing by FY2008
• New separate credit established (AA rated?)
• Sustainable over 40 years
• accommodates substantial new demand on an ongoing
  basis (800 million per year inflation)
• Improved program administration

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