A vote on the Board of Education's $11.2 billion proposed capital plan has been postponed in light of concerns that the plan would fail to adequately relieve overcrowding in Queens. A more fundamental issue is that some of the plan's funding sources may not materialize, resulting in the need to identify alternative funds or pursue a less ambitious agenda.

In November 1998, the Board of Education released its proposed capital plan for 2000 to 2004. After soliciting comments in a round of public hearings, the Board revised the plan and was expected to vote on it in late March and then send it to the Mayor and the City Council for final approval. The plan is still being negotiated, however, and the Board has postponed its vote; as we go to press, the vote has not been rescheduled. As of the last published revision (February 1999), the $11.2 billion plan would increase capacity by at least 75,600 seats (including 44,900 in 64 new schools) and fund a wide variety of rehabilitation and repair projects for hundreds of existing schools.

The capital needs of the city's public schools are daunting, as the system has been struggling to absorb enrollment increases (over 140,000 students since 1990) in facilities that are often outdated-the majority of buildings were constructed before 1950-and in a poor state of repair. In recent years, several factors have exacerbated the Board's facilities problems, including court orders compelling the Board to fix hazardous conditions, state initiatives to expand prekindergarten classes and reduce class sizes in early grades, and new Regents requirements for additional science labs. The Board's plan-despite being far more expensive and ambitious than previous ones-would still not solve the problem of overcrowding in all parts of the city, nor would it restore all buildings to a state of good repair.

Questions have been raised about the capital plan, including the priority given to new construction, BOE's ability to actually manage such a vast effort, and the criteria used in selecting projects. A crucial budgetary issue is the viability of proposals for financing the plan. The five-year capital plan for 1995 to 1999, which was never fully funded, included only city funds; the proposed plan relies on other funding sources in addition to city funds. While some of the proposed funding sources are fairly secure, others are more speculative. If major portions of the funding fail to materialize, as was the case with the previous plan, the Board and the Mayor would need to identify alternative funds or pursue a less ambitious capital agenda. The City Council, which has also raised concerns about the speculative nature of some of the funding sources, recently called on the Board to develop a contingency plan that could be used if portions of the funding fall through.

City contribution. City capital contributions, at $6.1 billion, are the biggest funding source in the plan. Even though the Mayor's 10-year capital strategy assumes that level of spending, the city may be hard-pressed to deliver because of limits imposed under the state constitution on the amount of outstanding city debt. In addition, both the Mayor and City Council Speaker want to use tobacco settlement payments to finance a portion of the city's contribution. The Mayor has proposed issuing bonds backed by the settlement proceeds that would be exempt from the debt limit, while the Speaker has proposed using the settlement to fund pay-as-you-go capital spending.

State building aid. The plan also calls for raising $2.6 billion by selling bonds backed by anticipated state building aid funds. Building aid is credited as BOE revenue, so securitizing a portion of the aid that the Board receives for approved construction projects would create a hole of $185 million per year in the operating budget. The Board plans to use expected increases in building aid to fill that gap. Building aid is projected to grow because of changes in the formulas that benefit the city. In addition, BOE will receive more building aid because the formulas are driven by the amount of capital spending undertaken by a school district. Therefore, as the city spends more under the capital plan, it can expect to receive more building aid. The Board projects that enough additional aid would be generated by the third year of the plan to cover the $185 million needed for anticipated annual debt service on these bonds.

This proposal to leverage the benefits of more capital spending raises several concerns. First, using anticipated building aid that is already included in the Board's baseline budget to service new bonds means that those funds would not be available for capital investments in later decades, although the Board is assuming that enough new aid would result from the leveraging to offset the loss. Second, the building aid formula can be counted on to provide the new revenue needed to cover the debt service only if the formula is not changed in the future. Given that the state makes annual changes to school aid formulas, with the primary focus on the total amount of aid rather than on individual types of aid, this assumption may not hold. Third, the amount of aid that can be leveraged will depend on how much capital spending the city ultimately contributes. Because $6.1 billion is an ambitious figure, especially in light of the recent substantial growth of outstanding city debt, there is reason for concern. Finally, proceeding with this proposal would require the enactment of state legislation and approval by the City Comptroller.

Expense budget savings. A third funding source outlined in the plan is $750 million in operating budget savings ($150 million per year for five years). Some of these savings - a total of $195 million - would be required to fill the operating budget gap in the first two years of the plan created by capitalizing building aid. The remaining $555 million would be used for pay-as-you-go capital. Although the Board's recent history of recurring surpluses offers some grounds for optimism, it is risky to build a capital plan on savings that depend on future expense budget efficiencies or surpluses. Recognizing this risk, the plan states that the pay-as-you-go projects could be postponed if unanticipated budget gaps occur during the five-year period.

Other funding sources. The remaining funds identified in the plan are from federal and state sources; many are risky because they would require significant policy changes in Albany and Washington. The funds least likely to materialize include $400 million in payment of prior-year state aid claims (funding for which has not been appropriated by the state), $300 million in savings from repeal of the Wicks Law, and $160 million in federal Qualified Zone Academy Bonds.

Some sources of intergovernmental aid included in the plan are considered secure, however. For example, the plan counts on $70 million in state funds, earmarked under the Clean Water/Clean Air Bond Act of 1996, for conversion of coal-fired boilers in schools.

Preventative maintenance. The proposed capital plan includes a strategy to devote greater resources to preventative maintenance in school facilities. A City Comptroller report, Dilemma in the Millennium: Capital Needs of the World's Capital City (1998), estimates that the Board spends only one-tenth of the maintenance dollars that would be spent under private industry standards. Maintenance has historically been underfunded; it is generally considered low priority during the budget process because spending in most other educational policy areas is prescribed by federal and state regulations.

According to the Board, $122 million in the 1999 expense budget has been allocated to facility maintenance, including $33 million in minor maintenance aid from the state. The Board's strategy would boost maintenance spending in the expense budget to $274 million by 2004-a large improvement over the status quo, albeit much less than would be required to keep education facilities in a state of good repair. Fulfilling this strategy may be difficult, however, because it depends on additional building aid growth above the amount needed to finance capital expenditures.

The Mayor's preliminary budget includes no additional funds for school maintenance. Moreover, the Governor has proposed folding the minor maintenance aid into a block grant at a considerably lower level, a move that would likely impede the Board's facilities strategy. Other than asking the state to restore minor maintenance aid, the Chancellor has omitted maintenance funding initiatives from his budget request.

Recent developments. The Board of Education had been expected to approve its new five-year capital plan on March 24th and send it on to the Mayor and City Council for approval. However, the vote was postponed after concerns were raised by the Queens Borough President, the City Council Speaker, and others that the plan failed to adequately relieve overcrowding in Queens. While the capital plan would provide some relief for overcrowded districts in the borough, the officials contend that more should be done.

Elementary and middle schools in Queens are already at 108 percent of capacity. While enrollment in kindergarten through grade eight in each of the other boroughs is expected to decline over the next ten years, strong enrollment growth is expected in Queens during the same period. Additional factors that will contribute to a capacity shortage in Queens over the next several years are citywide programs to provide space for universal prekindergarten, reduce class sizes, and phase out temporary classrooms-which Queens relies on particularly heavily. Without a new capital plan in place, the combination of these additional pressures and increasing enrollment will result in community school districts in Queens operating at 140 percent of capacity by 2007. Even if all of the new capacity called for in the proposed plan were put in place-and Queens is slated to get three-fifths of the new seats-community school districts in Queens would still operate at 115 percent of capacity by 2007.

The Board's proposed capital plan already reflects difficult choices among pressing needs throughout the city. Nevertheless, over the next few weeks the Board will be looking at ways to modify the plan to add more capacity in Queens without reducing specific allocations to the four other boroughs, each of which has pressing facility needs. Among the measures under consideration to further increase school capacity in Queens is a reduction in funds designated for computers or emergency repairs citywide. Further complicating the issue is the possibility that the plan will not be fully funded and that the Board will have to make cuts to absorb any funding shortfall.

IBO will keep you posted as the plan is modified and the approval process proceeds.