Real Clear Markets

21st Century Schools Require 21st Century Finance

Policymakers can improve - if not reinvent - the American education system.

Recent teacher protests in Chicago show that students and parents suffer when public employee unions and elected officials fight over how to run schools. But there is one issue that should unite both sides: Tapping private sector capital to build schools - whether traditional or alternative - and other education-related infrastructure, leaving more public dollars for the instructional needs of children. Yonkers, a school district in New York State, is doing just that by deploying a solution that has worked well for transportation and other types of public infrastructure: Public-private partnerships (PPPs).

Schools matter. Children spend thousands of hours in them, so the existence of adequate facilities and learning environments within them is important for academic success. Most school districts can't self-finance facilities up-front because they need new and/or improved capacity right now. But where's the money going to come from? Unlike roads, water treatment or other infrastructure assets, traditional public schools don't generate revenue for themselves. And with local governments struggling with declining property taxes and taxpayers unwilling to approve new tax and/or bond measures, school districts need creative new solutions to generate capital for new and modernized K-12 school facilities.

PPPs usher in private sector capital upfront, which is repaid in exchange for maintenance of the facilities over the course of the contract. Maintenance costs over the long-term are lumped in and included as a payment for a set period. Schools use the resources they would have used to repay municipal bonds and maintain the facility to repay a private partner instead, and more cost effectively. Rigorous procurement allows competing private firms to drive down costs within a framework that protects taxpayers.

Under the traditional model, school districts are responsible not only for overseeing education, but also for finance, building/property maintenance and asset management. In contrast, well-structured PPPs can drive down construction costs and lower life-cycle maintenance costs, freeing up resources that can be deployed in the classroom. These benefits should unify school administrators and unions, not to mention parents and children. Superintendent of Yonkers Public Schools Bernard P. Pierorazio recently explained, "(The PPP allows us to) concentrate on what we do best - preparing students to achieve."

Though Canada, New Zealand and several European countries have used PPPs to upgrade or deliver new schools in recent decades, this is a relatively new and growing phenomenon within the United States. But major market players, such as institutional investors and international infrastructure firms, appear ready to meet that need. For example, Yonkers School District earlier this year hired PPP advisors to help determine whether private investment/financing can be used to rebuild 38 schools for $1.7 billion. The buildings are in dire disrepair, with over 95 percent of them deemed "unsatisfactory" by the state.

Experience has shown that PPPs are able to accelerate the delivery of infrastructure projects, getting them on the ground faster, better and cheaper than government's traditional red tape-ridden approach. That responsiveness is critical because the over 25,000-student district is 4,000 seats short and is expected to grow an additional 3,000 seats within the next 10 years, leaving a 7,000 seat shortfall. As Yonkers Board of Education President Paresh Patel notes, "The (PPP) model is a viable solution to the ongoing financial constraints that have limited our ability to provide our students with the modern, well-maintained learning environments they deserve."

Yonkers isn't alone. Last year, the Puerto Rico PPP Authority sought private partners to deliver a dozen new K-12 schools that are being built right now. Schools are one part of a larger PPP strategy being pursued by Governor Luis Fortuno's administration under the "Schools for the 21st Century" PPP program. Fortuno is contracting with private operators to design, build and maintain approximately 100 schools in 78 municipalities across the island. The program was designed as an innovative way to replace many decades-old, crumbling schools in one fell swoop, notable for a jurisdiction that has suffered from poor credit and limited access to infrastructure capital. PPP Authority Executive Director David Alvarez recently explained to Reason Foundation that he sees the PPP program as an indirect path toward improving academic performance by providing and delivering better infrastructure. "[Our] goal is for students to perform better at school-to keep more children in school and to get better results."

Yonkers, Puerto Rico and others are using PPPs because they tap the strength of the private sector to deliver and maintain facilities (which is not a strength of school districts, whose core mission is academic), based on the public sector's need for good learning environments. Their approach is based on rigorous, well-structured PPP contracts that often span hundreds of pages that transfer key financial, project delivery and operational risks from the public sector (read: taxpayers) to the private sector. Exemplary PPP contracts incorporate enforceable provisions that make the private vendor responsible for everything from future repairs and maintenance, to the scope and timing of projects. Policymakers also sometimes include language to incentivize private partners to finish on (or even ahead of) schedule or hedge against both predictable and unpredictable changes in circumstances like inclement weather or fluctuating commodity prices.

PPPs aren't just valuable at providing capital when it's needed, or in holding down long-term asset maintenance costs; they can also be used to prioritize investment in the right facilities, in the right place, at the right time. They do this because projects have to pass rigorous evaluation from the market to determine whether or not it's a worthy investment. Of course, public officials could push a PPP to build something unnecessary, but that's true of traditional bond financing as well. In general, PPPs brings more of a cost-benefit and return on investment mentality to the public sector to drive more effective resource allocation.

Schools have to embrace new ways of delivering education if they're going to prepare students for the 21st century workforce during an increasingly difficult economic and fiscal environment. PPPs are a proven tool that has worked across roads, airports, seaports, and other public infrastructure. Yonkers and Puerto Rico are showing how this tool can be applied to schools so that policymakers can improve - if not reinvent - the American education system.

Harris Kenny is a policy analyst and Leonard Gilroy is the director of government reform at Reason Foundation (reason.org), a Los Angeles-based think tank. This piece originally appeared here on Real Clear Markets on September 20, 2012.

Harris Kenny is Policy Analyst

Leonard Gilroy is Director of Government Reform






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