How School Systems Borrow

In these days of “easy credit,” one receives credit cards in the mail nearly weekly, can readily purchase a car or household items on terms and gets spam daily for “low rates on mortgages.” Although an individual or business may go into debt easily, it is an entirely different matter for a Georgia public school system. Georgia law will not permit the chairman of the board of education or superintendent of schools to simply go to the local bank and sign a form note or lease.

Reflecting the seriousness of long-term obligations and the burden they place on future boards and taxpayers, borrowing by school districts is highly restricted and must be obtained in strict conformity with Georgia law. Georgia Constitution of 1983, Art. 9, Sect. 5, Para. 1(a) provides in part:

“[No political subdivision] shall incur any new debt without the assent of a majority of the qualified voters of such [political subdivision] voting in an election held for that purpose as provided by law.”

While a referendum is required for ordinary debt, there are limited exceptions to the referendum requirement for tax anticipation notes, lease-purchase obligations and certificates of participation, revenue bonds and authority borrowings as described in this article. However, any borrowing for public schools must meet the requirements applicable to one of these categories.

This article applies to county school districts governed by general law. Independent school systems and districts will need to review their individual legislation to determine whether these general rules apply.

General Obligations

General obligations or “G.O.” are debt, usually but not necessarily taking the form of bonds, made by a school district by its board of education representing its full faith and credit and backed by its ad valorem taxing power. A general obligation can be issued for any purpose for which ad valorem taxes may be levied. However, the total of outstanding G.O.’s incurred by a school district may not exceed 10% of the assessed value of all taxable property within its area of operation. Every general obligation debt must have a term not in excess of 30 years, and before incurring the debt the board of education must provide for the assessment and collection of an annual ad valorem tax sufficient to pay into a sinking fund an amount sufficient to pay the principal and interest.

A general obligation must be authorized by a referendum election. To accomplish this, the board of education adopts a resolution calling for a special election for one of the four dates each year on which such a referendum can be held. The call for election must be published 30 days (typically accomplished by publishing five weeks) in the official county newspaper and must include the date of the election, a statement of the question of whether debt shall be incurred in a particular amount and for particular purposes (stated separately unless they constitute one project), the amount of principal to be paid in each year, and the interest rate or maximum interest rate applicable. A bond referendum is conducted generally in the same manner as a general election. If the referendum is held at the time of a general election, the bond issuance question may be included on the ballot for a general election. However, if it is held on the date of a primary, the question should be placed on a separate ballot so that the voters are not required to use a party ballot to vote only in the referendum. Every debt referendum must be “precleared” with the U.S. Department of Justice under Section 5 of the Voting Rights Act of 1965, through a filing that must be completed more than 60 days prior to the election date.

The board of education may divide a school district into several schoolhouse districts. When this has been done, the school district, by its board of education, may issue debt for a particular schoolhouse district, and in such a case only residents of that schoolhouse district vote in a debt referendum and only the property in that schoolhouse district may be taxed for the debt.

Prior to the issuance of bonds, the board of education may notify the State Board of Education of the proposed bonds and direct the State Board of Education to withhold from the school district or system sufficient moneys from any state appropriation to which such school district or system may be entitled and apply so much as shall be necessary to the payment of the principal of and interest due on the bonds. The use of this hold-back procedure may increase the rating on the bonds, resulting in a lower interest rate.


General obligation debt also may be authorized without assessing ad valorem tax when a Special Purpose Local Option Sales Tax for Education Purposes (SPLOST) referendum question includes the language:

“If imposition of the tax is approved by the voters, such votes shall also constitute approval of the issuance of general obligation debt of the [school district] in the principal amount of $______________ for the above purpose.”

When so authorized, SPLOST debt is payable first from SPLOST receipts, although ad valorem taxes would have to be raised if the SPLOST receipts were not actually sufficient to repay the debt. SPLOST debt must be used to pay for SPLOST projects and cannot extend beyond the term of the current SPLOST. The board of education resolution calling for the election must set out the specifics for the debt proposed to be issued with the same level of detail discussed above for ordinary general obligations debt.

This authorization to incur debt to fund SPLOST projects frequently is not included in SPLOST referendum questions. Apparently this is due to school officials’ concerns that voters supporting the SPLOST may not support the referendum for fear of incurring debt. This seems to be a misunderstanding because the debt is to be repaid from the SPLOST receipts that presumably those voters would support and pay otherwise. SPLOST debt frequently can be obtained on very favorable terms due to the twin repayment sources, the SPLOST and the full faith and credit of the school district, and is a great asset. It allows the board of education to commence SPLOST projects promptly after the authorization of the SPLOST, then show the voters the resulting facilities. Without a borrowing, work on the facilities can only commence after complete funding for the project has been collected through taxes, resulting in long delays. SPLOST projects might also be funded in advance by lease-purchase and COPs arrangements, discussed below.

Tax Anticipation Notes

Tax anticipation notes (TANs) allow a county board of education to even out its revenue collections during the course of a year. Boards of education are permitted to incur debt by obtaining TAN borrowings that must be paid off within the same calendar year. The amount of TANs used in a year cannot exceed 75% of the total gross income from taxes of all types (including SPLOST) collected by the board of education in the preceding calendar year, and cannot exceed, of course, the total anticipated revenues (including SPLOST and state appropriations) for the current calendar year. Further, a TAN may not be obtained if there is an unpaid TAN from any prior year.

Although TANs ordinarily are used to smooth out differences between operating expenditures and revenue collections, TANs are sometimes used to fund a capital project when some kind of permanent funding is expected before the end of the year. Of course, this can only be done when the TANs do not exceed 75% of prior year tax revenues. TAN borrowing in anticipation of permanent funding of a capital project may not be prudent if anything could derail the permanent funding, putting the board of education in a financial bind at the end of the year.

When tax anticipation notes are issued to pay operating expenses, the rules on federal tax exemption of interest place limits on the amount and timing of TAN borrowings. The board of education must estimate its largest cumulative cash flow deficit for its general fund and any other amounts that are available to pay general operating expenses, and can always borrow up to the amount of such deficient plus a reasonable reserve of up to 5% of operating expenditures in the prior fiscal year. More restrictive limitations may apply if the board of education seeks to avoid arbitrage rebate responsibilities, and bond counsel should be consulted.

Lease-Purchase Financing

County and independent school systems are empowered to enter into multi-year lease, purchase and lease-purchase contracts for property to be acquired. There are a number of conditions imposed upon such a multi-year contract. The contract must state the total obligation due in each calendar year. Although the contract can provide for automatic renewal unless the board of education takes some positive action, the obligation of the school systems to make payments must terminate absolutely and without further obligation at the close of each calendar year. If the contract is not renewed, the board of education will lose the property financed and may be liable for the stated obligations for the last year for which the contract was renewed.

Such lease-purchase or installment sale contracts may be used as financing. The contract will allocate a portion of the board of education’s payments to principal and a portion to interest. If the payments are made in full, the board of education will own the asset free and clear. In the typical contract, a vendor, GSBA or a third party makes the property available to the board of education in return for monthly, quarterly, semiannual or annual payments corresponding to principal and interest on financing. The principal amount of the contract will be the acquisition and/or construction costs of the property and interest will be determined by agreement with the lender and based on market conditions at closing. The term of the contract will be set by the parties, with consideration given to the useful life of the property financed and the repayment sources.

A board of education must make an annual appropriation for payments expected to be due with respect to the contract during its fiscal year. Should the board of education fail to make an appropriation or should it take affirmative action under the terms of the contract to not renew at the end of the calendar year, called a “nonappropriation,” the property will go to the lender. In addition to the loss of the property, the failure of the board of education to complete the contract could be expected to prevent it from obtaining similar credit in the future.

A lease-purchase financing must be for the full cost or value of the property subject to the contract, so a school system cannot have “equity” in the property. Georgia law prohibits a school system from giving away or forfeiting property the school system owns or pays for, and this would happen if the school system had equity in the property at the outset of a lease-purchase contract and did not renew the contract after the first year. The school system may improperly create such equity if it pays for and does not finance a portion of the cost of the property, or where the school system includes land that it already owns in a financing for buildings or improvements. Legal counsel may be able to assist in structuring around these “equity” issues by narrowing the scope of the property made part of the lease-purchase or by reallocating borrowed funds to a different project.

Lease-purchase financing must be consistent with state allocated capital outlay funds rules. Property paid for in whole or in part with such state funds cannot be made part of the project to be lease-purchased.

There are several other limitations on lease-purchase financing. Property cannot be financed if it has been the subject of a failed referendum within four years. The total combined annual payments of lease-purchase contracts (excluding guaranteed energy savings contracts) and intergovernmental contracts (excluding contracts for education of students) cannot exceed 7½ % of the total local revenue collected for maintenance and operations of the school system for the last completed fiscal year preceding the closing.

Lease-purchase financing frequently is used to finance projects to be paid for by a special purpose local option sales tax, particularly if the SPLOST referendum did not include a debt authorization as discussed above. A SPLOST project cannot be commenced until actual funding is obtained, and the gradual accumulation of sales tax over up to five years may result in a prolonged delay before the voted-for project is actually available. However, if a lease-purchase is used to finance the project after the approval of the SPLOST referendum, the project can be undertaken immediately and the sales tax receipts can be used to make the payments. Lenders look favorably upon such arrangements because the SPLOST receipts cannot be diverted to non-SPLOST projects.

Certificates of Participation

Certificates of Participation (COPs) actually are a variety of lease-purchase contract and are subject to all of the same rules, and then some. Typically, to accomplish a COPs transaction a trustee issues securities that represent percentage interests in the right to receive payments from the board of education under the lease-purchase contract. The board of education will need an underwriter to sell the COPs in the bond market, and similar documentation to that applicable to a bond issue is used. Like many bond issues, the COPs may be insured and the board of education may be required to take on continuing information disclosure obligations. Although there may be more costs and complexity with COPs, the interest rates and term may be more favorable than a privately placed lease-purchase.

Revenue Bonds

School district properties generally do not produce enough revenue to issue revenue bonds. Nevertheless, school districts have the ability to issue revenue bonds for a variety of potentially revenue-producing undertakings such as transportation facilities, libraries, laboratories, dormitories, sports facilities, exhibition facilities and parking. Such revenue bonds do not require voter approval. Revenue bonds represent no call on the full faith and credit and taxing power of the school district, but must be payable solely from revenues of undertakings for which bonds can be issued that are pledged for that purpose. Consequently, revenue bonds can only be used when the undertakings will be self-sustaining from the revenues pledged. However, a number of like or unlike undertakings can be combined so that the revenues from an established, profitable undertaking can support a new or unprofitable undertaking. All revenue bonds, like general obligation and SPLOST bonds, must be validated in court proceedings prior to closing.

Authority Financing

Some boards of education may have available an appropriate authority with power to issue revenue bonds on the school district’s behalf. A school district and an authority may enter into an intergovernmental contract for a term of up to 50 years for the use of facilities. However, both the school district and the authority must have authority under law to undertake that type of facility. If such a contract may be entered into, the authority may have power to issue revenue bonds for a facility to be used by the school district and to pledge the school district’s obligations under the intergovernmental contract as partial or full support for bonds. The contract would constitute the full faith and credit obligation of the school district. This type of financing may be particularly useful in situations where a facility to be financed is not expected, at least initially, to operate in the black. The powers of particular authorities are sometimes unique and frequently limited, so that legal counsel should be consulted to determine whether an authority may finance for the board of education and in what circumstances.


A QZAB, or Qualified Zone Academy Bond, is a type of borrowing sanctioned by federal law that pays a federal income tax credit instead of interest and functions as a federal subsidy for qualifying public schools. The QZAB program is designed to encourage the formation of partnerships between public schools and local businesses. A school must be a “qualified zone academy” to qualify for the program, meaning that it is a public school, and it expects to have at least 35% of its students eligible for free or reduced-cost lunches (or dislocated in a federal enterprise zone). A qualified zone academy must have written commitments from private enterprises to make qualified contributions, including such items as equipment, technical assistance, services as mentors, internships, field trips, and other property or services where the present value is not less than 10% of the QZABs to be issued.

Georgia receives an allocation describing the total amount of QZABs that may be issued in any particular funding round. At least 95% of the proceeds of QZABs must be used for rehabilitating school facilities or providing equipment. Allocations are distributed by the Georgia Department of Education among qualifying school districts and systems.

Although QZABS do not pay interest and are sanctioned under federal law, the QZAB program does not empower a school district or system to borrow and a QZAB must use one of the forms of borrowing discussed above. QZABs often are authorized by a referendum as general obligations of the school district and the principal is repaid by tax assessment. However, if the qualifying project is to be undertaken by a public authority, under the appropriate circumstances the authority may issue the QZABs as revenue bonds and provide the facilities to the school district. Alternatively, in appropriate circumstances, the school district or system may qualify lease-purchase financing as a QZAB.

Going About Borrowing

A good place to begin the process of borrowing is discussion with the board of education attorney and a recognized bond attorney. School district borrowings are not automatically tax-exempt, so bond counsel should be consulted. The attorneys will advise as to the types of borrowing available and the procedures involved, and will prepare the necessary documentation and give the necessary legal opinions.

Although obtaining financing may be as simple as the board of education obtaining a proposal from a bank, a board of education may utilize the services of a placement agent or financial advisor to assure that the board of education obtains the best structure and proposal, or an underwriter to market publicly-sold obligations.

In many cases there will be a paying agent and funds custodian to handle the money flows, and in some instances this will take the form of a corporate trustee. Publicly-sold debt is frequently insured by one of the major bond insurance companies, and publicly-sold obligations are typically rated by Moody’s, S&P or Fitch.


Who said going into debt is easy? By design, credit is not easy for school districts. Although there are a variety of methods for borrowing, described above, the procedures and limitations applicable to each are rigorous. General obligation debt is available for all school district purposes but, like SPLOST debt, requires a voter referendum. Tax anticipation notes provide limited financing within the course of a calendar year. Lease-purchase financing and COPs are available within limits without a referendum or validation proceedings, but are subject to a variety of restrictions. Revenue bonds are rarely used, but are available for certain undertakings capable of producing revenue; the source of payments will have to be satisfactory and, like all other bonds, revenue bonds must be validated in court proceedings. Authority financing might be available if the project is within the powers of an appropriate and available authority.

School officials should take care that a borrowing fits one of the allowable categories and that all of the “hoops” are jumped through. An improper school district borrowing could result in personal liability of the officials that acted. School officials should seek and take the advice of the board of education attorney, bond counsel, GSBA and knowledgeable financial professionals to find appropriate means to finance needed projects.

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