Report Title:

Public Schools; Private Construction & Financing; Pilot Project

Description:

Specifies that certificates of participation for new school construction will not be paid out of the department of education's operating budget. Establishes the public school facility financing agreement special fund to finance new schools when new school construction is not fully funded.

HOUSE OF REPRESENTATIVES

H.B. NO.

800

TWENTY-THIRD LEGISLATURE, 2005

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to schools.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that education is universally recognized as the key to Hawaii's future in a global economy. Except for the State's most modern campuses, however, the conditions of many of Hawaii's schools are hampering the educational opportunities of Hawaii's children. Many of the State's rundown, unhealthy, and even dangerous school facilities do not support the kind of learning environment that Hawaii's children deserve.

The legislature finds that one way to address the deterioration of school facilities is to develop public-private partnerships for the construction of new schools throughout the State. In particular, the legislature finds that one highly promising type of public-private partnership that could be used to construct new school facilities is a lease-purchase agreement, in which a private developer either renovates an existing school or demolishes and rebuilds a school, and then leases the facility back to the State for a period of years, with an option to purchase the school at the end of that period. The lease-purchase agreement to finance the construction of the facility would be securitized through the issuance of certificates of participation under chapter 37D, Hawaii Revised Statutes, relating to the management of financing agreements.

Public-private partnerships have already been used successfully by the federal government, for example, for the construction of new facilities at Ford Island, Hawaii. The State has also recently used a public-private partnership to finance the construction of the Kakuhihewa building in Kapolei, Oahu, using certificates of participation.

In addition, the legislature finds that a lease-purchase agreement was previously authorized by House Concurrent Resolution No. 156, H.D. 1 (1994), as a pilot project to request the department of education to enter into such a transaction for the construction of a new elementary school in Kihei, Maui.

According to that concurrent resolution, in response to Kihei, Maui being one of the fastest growing areas in the State, the department of education identified a site in Kihei for a new elementary school, and the board of land and natural resources approved the site and authorized its acquisition. The site's landowner expressed a willingness to design and construct the elementary school to the department of education's specifications and lease the completed facilities to the department for ten to thirty years with an option to purchase it for $1. Lease payments were to be set at an amount that would allow the landowner to recover its own payments on the mortgage used to finance the costs of title clearance and facilities design, development, and construction.

The house concurrent resolution further noted that "the lease-and-purchase is a pilot project that will test the efficiency and expeditiousness of an alternative mechanism through which the State constructs and delivers much-needed classrooms and school facilities with the assistance of the private sector". The completed school at Kihei, named "Kamalii", was eventually constructed as a real estate transaction, rather than as a lease-purchase agreement, in which the State simply purchased the new facility.

Another school in Kahului, Maui, named "Maui Lani", is also being proposed to be constructed through a public-private partnership. Now in the design phase, the landowner-developer will be constructing the school and will sell the school back to the State upon its completion, using the Kihei school development process as a model.

The advantages of using this approach are that it is generally less expensive and faster than constructing schools in the more traditional way. Schools being constructed by the department of education and the department of accounting and general services must be accomplished in two phases as appropriations are generally made over two fiscal years.

Following the first phase, which coincides with the first fiscal year appropriation, the project must be bid out again for the second phase in the second fiscal year and may be awarded to a different contractor. This two-phase approach tends to increase the time and cost needed to complete the project. On the other hand, in a public-private partnership a private contractor can usually obtain a loan for the entire school project and complete the facility in one phase instead of two.

The quick construction of a state-of-the-art school facility immediately addresses the needs of the community, avoids overcrowding at existing facilities, and serves to attract highly qualified teachers, administrators, and parents who want to send their children to exceptional facilities.

The legislature further finds that a public-private partnership approach has been used successfully across the United States. For example, when the Niagara Falls, New York school district was faced with declining school enrollment and a dismal economic situation, by partnering with the private sector, it managed to reverse this trend and substantially upgrade school buildings and technology for students without raising taxes.

The new state-of-the-art high school in Niagara Falls, which opened in September 2000, was financed in part with private funds, through the issuance of certificates of participation, and constructed by a private contractor. The $83,000,000 high school has been described as one of the most advanced and instructionally integrated technological high schools in the country.

Similarly, in Florida, a new charter school opened in 1998 that was constructed with a creative public-private financing plan. Pembroke Pines, a public charter school, hired a private company to build and operate its new facility, saving between twenty-two and thirty-four per cent on the cost of the building. The school used its advantage as a public entity to finance construction of the school with tax-exempt borrowing and then leased the building to the private entity to operate as a charter school.

Public-private partnerships have also been used successfully in other countries. For example, in Nova Scotia, Canada, public-private partnerships are helping to facilitate the construction of new schools. By the end of 1998, as many as forty-one new schools had either been completed or approved for construction, and another twelve were proposed. Scotland has also replaced or renovated fifty-six schools at a total cost of $554,000,000 by shifting the burden of financing to the private sector.

In Hawaii, pursuant to section 302A-1506, Hawaii Revised Statutes, the department of education already has the power to enter into "contracts, leases, lease-purchase agreements, or other transactions" with the private sector as may be necessary to acquire public school facilities and lands, subject to the approval of the comptroller.

In 2002, the department of education pursued the possibility of using certificates of participation as a method of financing construction of new schools to be built on land owned by the developer. In this method of financing, the department of budget and finance enters into an agreement with the developer to "front the financing". However, the department of budget and finance informed the department of education that certificates of participation would be treated as lease payments and would be met as an operating budget item. The department of education concluded that this was not a viable method of financing the construction of a new school.

The legislature finds that a contract between the State and the landowner or developer for outright purchase of title to the property with its school facilities improvements is the preferred method for new school construction because the costs of general obligation bonds for such a transaction are generally lower due to the State's credit rating and exemption of the interest income from the State's federal tax liability. A lease-purchase agreement, in the form of a lease-purchase option provision should be incorporated in these new school construction contracts to serve as a back-up in cases when new school construction is not fully funded.

In order to facilitate the financing and construction of public schools by partnering with the private sector, as well as to address the concerns of the department of education and provide a source of funding for the payment of certificates of participation, this Act:

(1) Establishes a pilot project for the financing and construction of new school facilities through public-private partnerships when new school construction is not fully funded;

(2) Specifies that the use of certificates of participation to finance the construction of new public schools will not be paid out of the department of education's operating budget; and

(3) Establishes the public school facility financing agreement special fund to establish a stable source of funding to finance the private construction of new public schools in Hawaii when new school construction is not fully funded.

The legislature finds that this Act will encourage partnerships with the private sector to benefit Hawaii's school children by facilitating the financing and construction of new, modern school facilities that are built in a timely, efficient manner. Moreover, the legislature finds that allowing the private sector to build new school facilities will generally allow for construction in a shorter time period and more efficiently than could be provided by the State and will help to free up needed funds to address deterioration at other schools.

SECTION 2. Chapter 302A, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§302A-   Public school facility financing agreement special fund. (a) There is created in the treasury of the State the public school facility financing agreement special fund, into which shall be deposited a portion of all general excise tax revenues collected by the department of taxation under section 237-31(4). The special fund shall be used only when new school construction is not fully funded by the legislature in order to meet the obligations of public school facility financing agreements authorized pursuant to chapter 37D. Amounts payable from the special fund shall be limited to "available moneys" as defined in section 37D-1. Appropriations or authorizations from the special fund shall be expended by the superintendent of education.

(b) No later than twenty days prior to the convening of each regular session, the department of education shall submit an annual report to the legislature that shall include a financial statement of the special fund and the status of public school facility financing agreements undertaken pursuant to chapter 37D."

SECTION 3. Section 237-31, Hawaii Revised Statutes, is amended to read as follows:

"§237-31 Remittances. All remittances of taxes imposed by this chapter shall be made by money, bank draft, check, cashier's check, money order, or certificate of deposit to the office of the department of taxation to which the return was transmitted. The department shall issue its receipts therefor to the taxpayer and shall pay the moneys into the state treasury as a state realization, to be kept and accounted for as provided by law; provided that:

(1) The sum from all general excise tax revenues realized by the State that represents the difference between $45,000,000 and the proceeds from the sale of any general obligation bonds authorized for that fiscal year for the purposes of the state educational facilities improvement special fund shall be deposited in the state treasury in each fiscal year to the credit of the state educational facilities improvement special fund;

(2) A sum, not to exceed $5,000,000, from all general excise tax revenues realized by the State shall be deposited in the state treasury in each fiscal year to the credit of the compound interest bond reserve fund; [and]

(3) A sum, not to exceed the amount necessary to meet the obligations of the integrated tax information management systems performance-based contract may be retained and deposited in the state treasury to the credit of the integrated tax information management systems special fund. The sum retained by the director of taxation for deposit to the integrated tax information management systems special fund for each fiscal year shall be limited to amounts appropriated by the legislature. This paragraph shall be repealed on July 1, 2005[.]; and

(4) A sum, not to exceed $       , or the amount necessary to meet the obligations of public school facility financing agreements authorized pursuant to chapter 37D, whichever is less, shall be retained and deposited in the state treasury each fiscal year to the credit of the public school facility financing agreement special fund. The sum retained by the director of taxation for deposit into the public school facility financing agreement special fund for each fiscal year shall be limited to $        , or the amount necessary to meet the obligations of public school facility financing agreements authorized pursuant to chapter 37D, whichever is less."

SECTION 4. Section 302A-1506, Hawaii Revised Statutes, is amended to read as follows:

"[[]§302A-1506[]] Public school facilities. (a) The department may enter into such contracts, leases, lease-purchase agreements, or other transactions, including public school facility financing agreements pursuant to chapter 37D, as may be necessary for the acquisition of public school facilities, including any lands for these facilities, on such terms as it may deem appropriate, subject to approval by the comptroller.

(b) With respect to any public school facility financing agreement authorized pursuant to chapter 37D, the use of certificates of participation to finance the construction of new public school facilities when new school construction is not fully funded shall be paid out of "available moneys" as defined in section 37D-1 and shall not be paid out of the department's operating budget. In the event of a conflict between this section and any other law, this section shall control unless that law specifically provides that this section is being superseded."

SECTION 5. Public-private partnerships; department of education pilot project. (a) The department of education shall implement a pilot project for the financing and construction of new school facilities through public-private partnerships. The pilot project shall include the following elements:

(1) The identification of appropriate schools in each of the counties;

(2) The identification of appropriate private sector firms that have the experience, integrity, and ability to renovate or reconstruct these schools to meet the department of education's specifications;

(3) A review of the most appropriate, most efficient, and least expensive means to develop new facilities in cooperation with the private sector, including lease-purchase agreements to finance the construction of school facilities that are securitized through certificates of participation under chapter 37D, Hawaii Revised Statutes and that are to be used when new school construction is not fully funded by the legislature;

(4) A review of the best means of structuring public-private ventures so that proposals are mutually beneficial to both the public and private sectors;

(5) A review of appropriate provisions to include in agreements with the private sector to limit the State's liability, address security and default issues, and require private contractors to obtain adequate insurance coverage; and

(6) A review of all other issues that impact on and would facilitate the development of public-private partnerships to construct new school facilities.

(b) The department of education shall:

(1) Report preliminary findings and progress in implementing the pilot project to the legislature and the governor no later than twenty days before the convening of the regular session of 2006; and

(2) Submit a final report of findings and recommendations to the legislature and the governor no later than twenty days before the convening of the regular session of 2007.

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect upon its approval.

INTRODUCED BY:

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