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Testimony of Philip M. Dearborn, President, Greater Washington Research Center
Before the Committee on Labor and Human Resources
January 14, 1998




Dorothy Brizill
Bonnie Cain
Jim Dougherty
Gary Imhoff
Phil Mendelson
Mark David Richards
Sandra Seegars


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Good morning, Chairman Jeffords and members of the Committee. I am pleased to appear at your request to present testimony on why the District of Columbia is in such a precarious situation in its ability to secure bonding for projects such as school infrastructure repair.

A minimum of $1.2 billion and up to $2 billion over the next ten years is urgently needed to rehabilitate and build District of Columbia school facilities. This need must be met even though the District is optimistically hoping to be able to issue only $150 million of general obligation bonds annually for all types of capital projects. Bonds to fund the deficit, if issued, will be in addition to this financing. Fortunately, the District should soon achieve an investment grade debt rating and be able to issue bonds with competitive interest rates. Nevertheless, there will still be two hurdles that must be overcome to obtain additional bonding for capital needs..

First, the District will have trouble staying within its Charter debt limit of 14 percent of revenues annually for debt service. At September 30, 1996, debt service was I I. I percent of revenues, an increase of .5 percentage point over 1995. Projections have been made that the limit will be reached within a few years The date will depend on both the volume of new bonds issued and the growth of revenues, but it is apparent that any substantial new funding, without a major increase in revenues, will create a debt limit problem.

Second, the District will be pledging about 75 percent of its property tax revenues in 1998 for debt service on general obligation bonds. Some estimates suggest that the District will reach a practical limit on its ability to pledge property taxes before it even reaches its Charter debt limit. This means that, even if the Congress should raise the 14 percent limit, the District would need to find a new revenue source for debt service or increase property tax rates. Because the District property tax rate is about double the suburban rates on commercial property, an increase could be counterproductive in terms of revenues for any substantial amount of new financing.

While the limited availability of capital financing will affect a variety of needed improvements in District infrastructure, it is certain to be a major crisis for a school system with needs measured in billions..

The Preliminary Facilities Master Plan 2005, issued by the Superintendent's Task Force on Education Infrastructure for the 21st Century, concluded that "a comprehensive strategy affecting both the financing and the management of school modernization will be required to implement a major modernization program and reverse the deterioration of the District's public schools." There are three important elements that must be taken into account in the design of any plan for the financing and modernization of school facilities.

First, the D.C. public school system currently operates over 150 school buildings for a student enrollment of about 77,000. In addition, the system has 14 administrative buildings plus 9 buildings that are either vacant or leased to other organizations. The Superintendent's Task Force estimated that a total of 17.8 million square feet of interior space is under school system control. Costs for maintaining and operating this space exceeded $78 million in 1995. A variety of studies have concluded that the school physical plant is sized for a far larger system than is currently being operated and must be substantially reduced.

Second, 62 percent of the school buildings are over 45 years old, and 88 percent are at least 25 years old. Many of the facilities are functionally and operationally obsolete, and in many instances their reconfiguration and rehabilitation may not be cost effective.

Third, changes in the operation of schools are likely to result from the decentralization implicit in school-based management. In addition, implementation of charter schools may make it necessary to re- think how and where schools are located. Specialty schools, magnet schools, and other programs that draw students from all over the city should be located with good mass transit accessibility.

A key element of any plan should be that it is comprehensive and aimed at rehabilitating or providing new facilities to replace a significant percentage of existing school facilities. It should also include a timetable for phasing and completion of the required work and a plan for financing start-up and implementation costs.

Preparing and implementing such a plan will require a team of experts including architects, real estate experts, lawyers, investment bankers, planners, and government finance specialists, working together with the school administration. Because the team will need substantial time to determine the best approach to financing and operating school facilities, it is imperative that the planning be started as soon as possible. While such efforts may be underway by the new school administration, I am not personally familiar with them.

I was involved in some exploratory work on the subject of school facility planning and financing in 1996. At that time we explored three options for financing school facility needs. I will describe each option very briefly.

Building Authority

The most conventional option would be the creation of a financing and construction authority to provide funding for school facilities separate from the District's general obligation bonding. Such an authority could be created by legislation of City Council and Congress. The authority would be independent of the city government, although its members would probably be appointed by District officials, and it would have authority to issue tax-exempt bonds. Under this or any financing option, it should be assumed that proceeds from the sale of unneeded school facilities will be used to reduce the overall financing requirements. The security for the authority bonds would typically be provided by a stable and secure tax revenue source completely under the control of the authority. Such a revenue source of adequate size to meet the requirements would have to be identified.

Alternatively, a building authority could be created with funding provided by direct loans from the federal government or by lease payments from the school system guaranteed or otherwise assured by the federal government. Depending on the extent to which the debt would be secured by the federal government, the interest would probably be at taxable rates under current federal income tax provisions. Since either approach would require the federal government to make a financial commitment to the city, legislative approval would be more difficult than for a conventional authority secured only by a revenue stream.

The advantages of a building authority are its simplicity and its use in several other cities. It could be put in place quickly and would have few political implications. The disadvantages would be the problem of finding an acceptable revenue source or convincing the federal government to provide or assure financial support. This alternative would also separate responsibility for capital spending from responsibility for maintenance and operation of facilities.

Building and Operating Authority

This option would give the authority responsibility not only for financing and building school facilities, but also for operating the facilities. Operation would include providing utilities, cleaning buildings and grounds, maintaining the facilities, and providing other building services. This responsibility would not impinge on the conduct of educational programs. The financing of the authority would become more complex under this option because the authority would have to have revenue streams adequate to cover both debt service and operating costs. This would probably mean both a dedicated revenue source and lease or contract payments by the school system However, investors might find long-term financing more attractive with the assurance that an independent authority would be providing adequate maintenance and efficient operation.

The advantage of a building and operating authority is a clear assignment of responsibility to an independent agency that is solely concerned with the overall condition of school physical facilities. It would recognize the important relationship between how facilities are constructed and how they are maintained and operated. If an authority or private lessor had responsibility for both capital and operating costs, there would be a strong incentive to build energy and maintenance efficient buildings with good space planning.

For the schools, such an arrangement would relieve them of a major problem unrelated directly to education, and would provide first-class facilities that are properly maintained. It should also be possible to consolidate and close some existing schools by virtue of the opportunity for the children to attend modern well-designed schools. Independent operation of only the facilities, and not the actual delivery of educational services, should minimize parent and community objections that have characterized efforts to privatize educational services. Care would have to be taken to avoid displacing current custodial and maintenance employees.

The disadvantages of this option, in addition to those of a building authority, are the much greater complexity in the design and enactment of legislation that would transfer responsibility for maintenance and operation to the new authority. The status of existing employees involved in the transfer would have to be resolved. Precedent for such a transfer exists in the recent establishment of a convention center authority and in the creation of the airport authority that took over operation of National and Dulles airports from a federal agency.

Private School Facilities Corporation

The District government currently leases a wide array of facilities from private firms, including the Presidential Building where the school system headquarters is located, but because of the unique design characteristics of schools and historical custom, there has been no significant financing and leasing of school buildings by private firms. However, there do not appear to be any legal prohibitions on such leases if private firms were willing to assume the responsibilities and risks of building and leasing school facilities to the government.

A corporation could be created for the sole purpose of building, rehabilitating, and operating school physical facilities. Alternatively, an existing firm or firms could provide such services. The corporation could either be a profit or non-profit entity. It would assume responsibility for financing the capital needs from private sources using future lease payments by the school system as security. Because of the overall condition of the city's credit and because school buildings are not readily adaptable to other uses, the leases would need to be specially assured to warrant the risks of the corporation and its lenders. The private financing could be conventional real estate loans, real estate investment trusts, certificates of participation in the leases, the corporation's own capital, or a combination of these sources.

The advantages of this option would be similar to the building and operating authority, but without the problem of creating an authority with a dedicated tax revenue. In addition, it would be possible to phase in the change so that a corporation could be initially designated to do only several facilities to test the best way to proceed. Alternatively, a corporation could be asked to design a master plan for all school facilities.

The disadvantage of a private corporation is the lack of experience in this type of approach to providing school facilities. Private investors, government officials, developers, and city residents would have to be provided convincing evidence based on careful planning and research that such an approach was feasible and beneficial before proceeding. A possibility would be to initially design a demonstration project for a small, but diverse group of facilities to show the advantages of this approach.

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