Revenue bonds do not require voter approval, and they made up 44% of total outstanding K–12 debt in 2023.
Iowans are familiar with the bond votes that occur every year for local government, especially those for local school districts wanting to build new facilities or renovate existing ones. Thankfully, the Constitution of the State of Iowa places a limit on how much debt each local government, including schools, can impose. State law also mandates 60% support from voters for bonds to be approved. What would happen if a significant amount of the debt outstanding by Iowa school districts did not have to be voter approved and did not count toward the constitutional limit? Unfortunately, Iowans are finding out.
Unlike traditional general obligation bonds, revenue bonds do not require voter approval, only simple majority votes by school boards. They also provide a legal loophole allowing schools to bypass the constitutional debt limit. As a rare opportunity for low-level financing, revenue bonds would not be concerning, but they make up 44% of total outstanding K–12 debt, amounting to nearly $2.3 billion in 2023.
Growth Over Time
This financing scheme has seen significant growth in Iowa over the last few years. A revenue bond requires a source of revenue that the government entity can commit to payments, and a recent legislative change gave schools access to money ripe for bonding.
In 2008, Iowa law changed, repealing the School Infrastructure Local Option (SILO) Sales Tax and increasing the state sales tax from 5% to 6%. The increase was designated for either school infrastructure purposes or property tax relief through a new program called Secure an Advanced Vision for Education (SAVE). SAVE was meant to sunset at the end of calendar year 2029, but legislation passed during the 2019 legislative session (HF 546) extended the state sales tax increase until the end of 2050.
The extension allowed schools to continue using their SAVE allocations (distributed to each school district on a per-pupil basis) to leverage revenue bonds until 2050, provided voters agreed to one-time revenue purpose statements (RPSs) forgoing the alternative tax savings. The effect was quick and dramatic, as the following chart shows.
Notice the increase in outstanding debt after 2019. Outstanding revenue bond debt held by Iowa K–12 schools had been $2.1 billion and on track to decline in upcoming years. With the SAVE program set to expire, time was running out for bonds issued for multiple years. Instead, from 2015 to today, outstanding revenue bonds have increased 19%, and more than 9% since 2019 alone. With inflation amplifying sales tax revenue, more revenue bond debt is expected.
Why Voters Don't Know
Many school districts have already convinced voters to approve new RPSs. Those voters will not be given the chance to weigh in on their districts’ SAVE decisions for another 25+ years, and much can happen in that time. The use of SAVE dollars to back revenue bonds, for instance, has become more commonplace over the years. By fiscal year 2023, nearly half of the $658 million school districts received from SAVE was used to pay off debt. This trend is not likely to end anytime soon, as more than $2.3 billion in revenue bonds is outstanding from Iowa school districts and increasing.
When lawmakers created the RPS vote, their intent was to increase transparency and engage voters for decisions made by school districts. Unfortunately, that goal has not come to fruition; the public rarely understands these elections, and they attract very low voter turnout. With the lengthy extension period legislators granted to districts, many voters may never have the chance to participate in the RPS election process because most localities will only have two such elections over a 40+ year period.
The only minimal attempt to engage citizens in revenue bond decision-making is a requirement for a public hearing if a school district proposes an athletic infrastructure project using SAVE funds. After the hearing, a vote may be petitioned for the public to vote on the use of the funds, but this three-step process makes public votes the exception, not the rule.
Why This Is A Problem
Imagine the following problematic scenario. A school district holds an election to approve a general obligation bond for a construction project. Voters reject the measure. So, the school board has a meeting and votes to use its SAVE dollars to issue a revenue bond that funds the project voters have already rejected, in whole or in part. This outcome violates basic good-governance principles and inevitably increases distrust in public due process.
Even where the process is morally sound, it puts property taxpayers at risk. While revenue bonds are supposed to be paid using state support through the SAVE program, the sales tax comes with no guarantee. What if another pandemic or other historic event stops people from buying taxable products and the sales tax revenue is not enough to support a school district’s payments? Many economic events, such as the Great Recession of 2008, have a direct impact on a state’s tax revenue, but debt payments must be made. At such times, the responsibility falls on the local property taxpayer.
How to Fix the Problem
The ultimate problems are that voters do not have a say on how revenue bonds are used, because they are approved by simple school board majority votes, and the outstanding debt does not count toward the constitutional debt limit. Therefore, legislators should revisit the SAVE program and take the following actions:
Print a PDF