Local districts should be able to use new financing mechanisms for their share of Ohio School Facilities Commission (OSFC) projects so long as adequate protections are maintained, the commission recommended Tuesday. Budget Director Tim Keen, chairman of the commission, said the administration will seek to grant districts this new authority in the upcoming capital budget. 

Districts already have statutory authority to use lease-purchase agreements or certificates of participation arrangements to finance construction using their own money, but there’s no explicit authorization for them to do so on projects where OSFC is providing a share of the project cost. The recent state budget, HB64 (R. Smith), ordered a study on risks, benefits and effects of allowing such arrangements for OSFC projects. 

The report lists benefits of the financing arrangements, including greater flexibility for districts to raise their share of funding and greater ability to react quickly to favorable market conditions, as well as the avoidance of tax increases to support voted bond levies. 

Downsides include possible loss of the facility for failure to make lease payments, reduced liquidity and funding predictability, lack of transparency when compared to the typical public debate when pursuing a voted bond levy, and possible concerns about subverting voter intent. On the latter point, OFCC chief counsel Jon Walden noted that while use of a lease-purchase deal in the wake of a district’s bond issue defeat might be controversial, it’s also difficult to know exactly what voters’ motivations are in turning down such ballot requests.

Using such arrangements also brings increased costs, the report notes, since markets recognize the elevated risk of deals in the form of slightly higher interest rates, and because deals can require additional involvement by financial experts, triggering more costs and fees.

The report says that failing to address the use of these financing mechanisms would leave uncertainty in the law, while prohibiting their use in OSFC projects would run contrary to lawmakers’ sentiment in authorizing them for non-OSFC projects. 

Keen said a key factor in his support for the recommendation is the fact that lawmakers had previously authorized schools’ use of such financing in other situations. “Given that, it’s appropriate with the right protections,” he said after Tuesday’s commission meeting.

Those protections, Keen said, include the superior lien the commission holds during constructing and while the books are still open on a project, and the requirement that districts maintain the building for its intended educational purpose or risk having to pay the state back.

Keen said the administration is on board with including the policy change in the capital budget bill, expected to be introduced in a couple weeks, and he said he’s talked with staff for legislative leadership about the proposal as well.

The commission also adopted a resolution Tuesday extending the moratorium on lease-purchase and certificates of participation arrangements for OSFC projects while the General Assembly considers the recommendation.