by Earl L. Hoover, Attorney .
The goal is to build an indoor swimming pool, a project which will require a substantial amount of money. The school district went to referendum for the funding—it failed; the park district issued revenue bonds—no one would buy them. Now what?
Current articles and seminars available to IAPD and IPRS members discuss park/school agreements for the purpose of sharing recreational facility time, staffing, and expenses. This article discusses the additional use of a park/school accord for funding the initial construction cost of the facility. The basic proposition is that by spreading the cost of construction over a period of years, the school pays the bulk of the cost from its building fund, while the park uses revenues received during non-school use periods to meet the bulk of operation, maintenance and repair costs. The facility can then be constructed without passing a referendum or increasing taxes.
Selling Revenue Bonds
The method of funding became possible through an amendment to the Park Code. Prior to 1975, if a park district funded the construction of a swimming pool or artificial ice-skating rink through the sale of revenue bonds, the facility could not be leased while the bonds were outstanding. Public Act 79-356, effective August 7, 1975, amended Section 9-1d of the Park Code to permit the facility to be leased to other public bodies while revenue bonds are outstanding.
Under Section 10-22.12 of the School Code, a school district may enter into a lease for a period not to exceed 25 years. Lease payments by the school are a general obligation of the school chargeable against all assets and funds of the school.
Given the foregoing, assume that a park/school agreement is drafted providing that (1) the park will issue revenue bonds, using the proceeds to construct the pool; (2) the park will own, operate, maintain and repair the pool at its expense, using non-school time revenues to defray or, hopefully, meet these costs; (3) the school will lease the pool during school hours and for school events; (4) the lease will be for the period required to retire the revenue bonds and for an annual amount equal to the annual bond retirement schedule.
In selling the revenue bonds, the park pledges the school lease to the bond purchasers in support of the bond payments. The effect is to make the school the guarantor of the park revenue bonds. Revenue bond repayment is no longer strictly dependent upon revenues generated by the pool. To a bond purchaser, the debt obligation resembles more closely a school general obligation bond than a park revenue bond. The result is that the park revenue bonds become an attractive investment and substantially more marketable than would otherwise be the case.
Paying the Bonds
The primary source for the bond retirement is the school lease which is paid out of the school building fund, an annual levy. If the school can allocate annually to the lease from this fund, several steps can be taken to bring the project cost within this annual allocation:
(a) Other schools may sublease from the school in exchange for use of the pool during a portion of the originating school's lease time. This arrangement is particularly well suited for use by a grade school and high school district as it facilitates building a swimming team. Also, municipalities and other units of local government may participate in the lease;
(b) The term of the bond retirement schedule can be increased (up to 25 years), thus lowering the annual lease amount. (However, the longer
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the retirement period, the higher the interest rate.);
(c) The cost of the project can be set at a figure which the school can afford to pay on an annual bond retirement (lease) basis. In the event bids exceeded the set figure, the school could terminate the project;
(d) The total cost of the project may be reduced by the park purchasing equipment for the facility under Section 8-15 of the Park Code. This provision permits purchases on contract not to exceed 10 years. By reducing the project cost, the school lease payments are reduced. As "Section 8-15" contracts must be repaid from annual operating revenues, extreme caution should be used so that other programs of the park are not jeopardized through lack of funds, however.
A potentially troublesome problem arises if revenues from operation of the pool during non-school lease periods are insufficient to meet operation, maintenance and repair costs. The park may not be prepared to meet the deficit out of unrelated funds. The solution is best left to the school. If the school is willing to guarantee these expenses, the bond purchaser will probably be willing to lower the revenue bond interest rate, thus reducing the school lease payments. (In the one instance where this was in fact negotiated, the bond purchaser indicated that he would lower the interest rate by one/half of one percent — a substantial savings which prompted the school to undertake the guarantee.)
Before the school can enter into a lease, it must publish a summary of the lease in a local newspaper. If, within 10 days of publication, 5% of the registered voters file a petition with the school, the lease must be submitted to referendum for approval (Section 10-22.12 of Chapter 122 - Schools). Before the park can issue the revenue bonds it must publish the bond ordinance in a local paper. If, within 10 days of publication, 100 electors of the district file a petition with the park, the bond ordinance must be submitted to referendum for approval (Section 9-la of Chapter 105 -Parks).
B. End of Lease
Once the revenue bonds are retired, the lease terminates. No one can predict what the position or composition of either the school or park board will be when that occurs perhaps 15 or 16 years later. Rather than launching into unrealistic and delicate discussions on the matter, the boards may wish to consider deferring the question with a clause such as follows:
Upon expiration of this lease term, the school and park shall continue to share the facility as they shall agree, in the event the parties are unable to agree, issues
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PARK SCHOOL ACCORDS. . .
in dispute shall be submitted to arbitration.
C. Current Status of Park Code
Currently, only swimming pools and artificial ice-skating rinks may be built using the financing technique discussed in this article. However, a bill permitting this type of funding for indoor or outdoor tennis, handball, racquetball and squash courts, golf courses, and zoos, as well as improvements to any such existing facilities is awaiting signature by the Governor at the present time.
D. Final Look
Space and time do not permit discussion of several other important considerations: payment of architect and attorney fees if the project bids are too high and the school opts to terminate; verification that the school general debt limitation for the lease and park debt limitation for "Section 8-15" purchases are not exceeded; examination of the bond market. Nor has the area of drafting necessary provisions for the lease been explored.
This article has, at best, sketched only a few of the more important considerations involved in using this funding technique. A thorough understanding of the limitations and legal requirements is a prerequisite to any application of the technique. Only then can the value of this technique in obtaining recreational facilities be accurately assessed.
(Editors note: Earl Hoover is a partner in the firm of Overholser, Ray, Flannery & Glick, Ltd.)
Illinois Parks and Recreation 36 September/October, 1976