SCHOOL DEBT POWERS AND PLANNING

South Dakota School Districts have the power to borrow money for any purpose for which the school board is authorized to spend school district funds.[i]  Districts can borrow money for general fund, capital outlay, special education, public service enterprise, trust or agency, bond redemption or the 874 fund.[ii]   These borrowings take the form of general obligation bonds[iii], capital outlay certificates or limited general obligation certificates[iv], notes[v], warrants[vi] and lease-purchase obligations[vii].  The proceeds from the borrowings are used to pay for equipment, vehicles, heating and cooling improvements, new construction and building additions.  Certain property and improvements require that they be financed by debt and not from current operating budgets.The issuance of debt is a complex process with state, federal securities and federal tax law requirements.  Superintendents, Business Managers, Presidents of the School Board and the School Board should educate themselves with the terms, the concepts and the people they may deal they may deal with in a debt issuance.   

Planning for debt

The school board is in charge of organizing, maintaining and locating schools and providing for the educational opportunity and services for all citizens residing in the school district.[viii]  The budget process starts in May of each year with the school board, the superintendent and business manager budget for the upcoming fiscal year.[ix]   The process encompasses political, social, contractual, educational, geographical and economic concerns.   During this process, the district may find a public necessity to issue debt.  “Public necessity” is a substantial or obvious community need in light of attendant circumstances which is more than mere convenience but less than absolute or indispensable need.[x]  Public necessity can be a current need or to conform to a debt theory or policy. 

Necessity or justification to Issue Debt

School boards can declare a necessity to issue debt and be justified upon a number of debt theories.  The most common theories are as follows:Satisfy current need.  Debt is issued to satisfy a current need where there are insufficient funds on hand.   Example:  The bleachers in the high school gym collapsed and there are not sufficient funds in the budget or reserve to pay to replace them.  The district would be justified to borrow to replace the bleachers.Borrow to spread burden upon current and future taxpayers.  Even if the district had funds to pay cash for the bleachers in the above example, the district would be justified in borrowing if the district’s intent was to spread the cost of the bleachers over current and future taxpayers.   Borrowing in this example distributes costs and payments for the project or improvement to those who will benefit from it over its useful life, rather than requiring today’s taxpayers pay for future use.   The theory attempts to maintain moderate debt and debt service payments by effective planning and coordination with the need to replace depreciable assets.  Borrowing in time of inflation. During times of inflation, debt allows future repayment of borrowed money in cheaper dollars.Borrowing to keep liquidity.

Borrowing can improve a district’s liquidity to purchase needed equipment or for project construction and improvements. Debt issuance also does not exhaust current cash-on-hand, allowing such general fund revenues to be used for operating expenses.