Court Facility Funding Considerations

Court Facility Funding Considerations

Construction and renovation of court facilities have often been financed through the issuance of general obligation bonds, but voter resistance, debt limitations, tax caps, and limited resources have necessitated a more varied approach to capital financing. Court Managers play an important role in evaluating court facility finance options.

The first step in obtaining funding support is to assess the options. The assessment of the financial environment will lead to a go or no-go decision. If it is decided that the necessary funds exist to proceed, then another set of decisions must be faced. Keep in mind that a decision to proceed may be based on premises that later prove faulty; for example, an assumption of voter approval of a bond issue.

Elements to consider:

Constraints and Opportunities

Economic Conditions

The most obvious limitation on financing is the economic condition of the borrowing entity. Even in states where the principal burden of financing is on the state, there will be periods when financing is simply unavailable. Many county governments are simply unable to provide adequate facilities. Another constraint is the condition of the bond market itself and interest rates on commercial loans. Sometimes, court facilities are included in a state capital improvement program and lose out to other buildings in the battle for priority. Courts may also be in competition with other courts for scarce resources if they are in a jurisdiction with a long-term capital improvement program for court facilities. Monies accumulated in special funds may be available to initiate a construction effort or at least fund up-front costs.

During periods of very low-interest rates, many governments refinance and generate additional funds for construction. Health or building code reasons may demand that a court facility be erected or renovated quite rapidly, thus opening up an opportunity for non-traditional financing.

Politics

The single biggest issue in financing court facilities has been the extent to which the chosen method of financing bypasses control of voters or legislators. The combination of voter resistance to bond issues and the volatility of the bond market has reduced the attractiveness of general obligation bonds and has increased the use of financing options that do not require the approval of the electorate. This has produced a reaction from governors and legislators, who object to what they consider as an undemocratic circumvention of the taxpayers or the state legislature. This political constraint may make it more difficult to use methods that bypass the legislature or the voters in the future.

Legal Limits

Legal or constitutional limits on debt and taxation and high requirements for voter approval (two-thirds in some jurisdictions), and limits on the use of lease-purchase, certificates of participation, or design-build methods. Conversely, some states have attempted to increase options for court facility financing.

Tax Code

In the early 1980s, it was possible to freely invest the proceeds of tax-exempt bond sales in higher yield investments and to use the arbitrage to finance court facilities or to lower the cost of borrowing. This arbitrage option has been largely foreclosed by amendments to the Internal Revenue Code. These amendments have also reduced the percentage of space in a building that can be used to produce a revenue stream.

Property Considerations

The site may already be owned by the government responsible for facility financing. If not, it may be available by donation, sale at a reduced price, long-term rental at a reduced price, or trade of property with another government entity. If the site must be acquired, an additional expense factor is added to the capital cost.

Acquiring a Building for Renovation

Sometimes, the facility plan calls for the acquisition of a building to be renovated. This adds not only a land acquisition cost but a facility cost. However, such acquisitions are normally made because the property is on the market at a reduced price. If the renovation of an existing building is the chosen path, there may be a need to reallocate court personnel and court functions, adding another cost. Renovation of an existing building that is a historical monument may be complicated, but it may also be a vehicle for attracting additional financing.

Leveraging Equity

Governments have equity in the buildings they own but find it hard to take advantage of this. Under some forms of financing, the value of the building can be used as a means of generating investment in a facility. Moreover, a government can sometimes finance a new facility by selling an existing facility or property.

Paying for Furnishings and Equipment

This cost furnishings and equipment is often capitalized, adding to the cost of borrowing. In some largely state-financed systems, the states pay for equipment and furnishings (particularly computer equipment) and the counties pay for the facility.

Renting versus Owning

Frequently it is financially preferable to rent a facility rather than to acquire it. In such instances, renovation can be passed on to the lessor and the cost included in the rent.

Up-Front Professional Costs

Even before financing can be obtained there are any number of expenses that need to be funded out of currently operating budgets, including:

• Preliminary engineering studies
• Preliminary architectural designs and preparation of contract specifications
• Financial expertise
• Advice of bond counsel
• Underwriting assistance

Even if these expenses are eventually capitalized, they must first be paid for out of operating funds or some revolving fund set up for the purpose of paying front-end costs. These funds may or may not be in the court budget.

Some of the up-front costs are dependent on the method of contracting or financing. Simple methods of financing reduce the need for financial and legal expertise and the assistance of underwriters. The use of design-build financing methods reduces design cost, and if the contractor also arranges the financing, there is a greatly reduced need for the professional expertise of a legal and financial nature. Revenue bonds almost always are the most complicated financing methods and have high up-front costs. However, methods with cheap up-front costs may have high borrowing costs and vice versa.

The costs of professional services can often be reduced by relying on expertise in government agencies or county associations that provide technical assistance. One reason for financing through state building authorities is that these agencies often have staff members familiar with the complexities of financing public facilities that can protect courts without courts having to spend a lot of money on professional advice. Public authorities, however, commonly charge a fee for their services that is reflected in the cost of borrowing.

Courts often do not consider the high costs of these services unless their unavailability prevents a project from starting. Sometimes, what appears to be services provided out of the executive branch budget end up as capitalized costs being paid by the courts. Ultimately, the issue of front-end costs reduces itself to several questions:

• Given the probable method of construction and financing, what services are needed?
• Do the funds exist to acquire these services from private sources, and if not, can they be provided by experts in government agencies?
• Who ultimately bears the cost of these services whether externally or internally provided?

Intergovernmental Cooperation

Governments can overcome financial impediments by enlisting the aid of other government entities or by pooling resources. This aid takes various forms:

Intergovernmental aid, even partial aid, has been an important factor in determining whether a court facility project can proceed.