21st Century Schools Require 21st Century Finance

Today my colleague Leonard Gilroy and I had a piece on Real Clear Markets entitled, “21st Century Schools Require 21st Century Finance.” The piece begins:

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).

We go on to explain that school districts are out of money, so they can’t simply finance, build and operate the new capacity they need on their own. Meanwhile taxpayers are unwilling to approve tax increases. PPPs are an emerging third strategy that addresses these issues. The piece continues:

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.

This is in contrast to the traditional approach, which requires school districts to fulfill many duties that are beyond the scope of their mission and core competencies, specifically:

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.”

We go on to detail success stories in Yonkers and Puerto Rico. For example in Yonkers, the district hired PPP advisors to determine the feasibility of a $1.7 billion procurement to rebuild 38 schools. The district’s buildings are in dire disrepair, with over 95 percent labelled “unsatisfactory” by the State. In Puerto Rico, Governor Luis Fortuño’s PPP Authority is overseeing a partnership for approximately 100 schools in 78 municipalities across the island. It’s easy to understand why this tool is so appealing to policymakers:

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.

The piece later explains other benefits of PPPs and concludes by saying that PPPs represent an opportunity to improve – if not reinvent -the American education system. Read the full piece, available here on Real Clear Markets.