Cost of Hyattsville Middle, other schools increased by “debt for debt” payment method
"Double paying the interest" in Phase II would cost an additional $479 million
The cost of six new middle schools “went up 50%” due to the payment structure, according to Stanley A. Earley, Director of Management and Budget for Prince George’s County. Prince George’s County Public Schools (PGCPS) built the school through a public-private partnership (P3) and plans to make monthly payments out of the Capital Improvement Program (CIP) budget instead of the general operating budget, a payment structure described as “debt for debt” by Jason Washington, who oversees (P3) construction for the school system. The CIP money for the monthly payments will come from county-issued debt, whereas the operating budget is primarily funded through current-year tax dollars. The school system does not plan to repeat this payment structure for Phase II.
Earley and Washington appeared before the county council on January 23, 2024 to answer councilmembers’ questions about Phase I and Phase II of the school system’s Blueprint Schools Program. The program funds new school construction through a P3 financing model, also known as alternative construction financing. The school system finished Phase I, which built a new Hyattsville Middle School building along with five others, in 2023. In Phase II, PGCPS plans to construct eight elementary and K-8 schools, including a rebuilt Hyattsville Elementary School.
To better understand school construction finance, think of CIP money like a mortgage and operating money like a paycheck. Most people, when they want to buy a house, take out a mortgage and pay the bank back, plus interest, over 30 years, while they use their paycheck to cover day-to-day costs like groceries. Whether the school system uses P3 financing or traditional financing, it essentially takes out a mortgage to build new schools.
When it comes time to pay off the mortgage, most people pay the monthly bill with their paycheck. But for Phase I, PGCPS decided to pay this monthly bill out of CIP funds, borrowing money via bonds and then using that borrowed money to make its school mortgage payment. To compare it to household finance, it’s like if every time a person needed to pay her mortgage payment, she went to the bank first and borrowed the money to pay the mortgage. Earley described it as “double paying the interest.”
With traditional financing, where the county issues bonds and uses the bond proceeds to build new schools, the payments on the debt are called debt service. Under P3 financing, the payments are called an availability payment. Either way PGCPS is paying off the school construction costs over a number of years. Debt service is usually paid for out of general operating revenues, not by using funds from additional debt.
In Phase I, Prince George’s County Community & Education Partners (PGCEP) — a special purpose entity of Gilbane, Stantec, Honeywell, and Fengate Asset Management — built the six new middle schools for the county. PGCEP will also maintain the buildings for 30 years. PGCPS then pays the developer back with monthly “availability payments'' for 30 years beginning in 2023. About 75% of the availability payment covers the upfront construction cost, while the remaining money covers ongoing maintenance. The school system also made smaller payments when the schools were half-complete and when the new buildings were ready for students.
According to Earley’s statements in January, the Phase I payment structure was the result of a “misunderstanding” between the county and the school system. The county thought the school system would pay the availability payments from the operating budget, while the school system planned to pay out of the CIP budget. Earley also said that the county and the school system agreed that Phase II availability payments would come out of the operating budget, because paying for them out of the CIP budget would cost an additional $479 million and would not be cost effective.
Since the January county council meeting, the county has agreed to cover the school system’s portion of the Phase II availability payment. The proposed fiscal year 2025 budget, released in March 2024, includes $32.6 million “to support the Board’s share of the Alternative Construction Financing projects.” Washington told the PGCPS Board of Education that the school system was “no longer a payor into this process” at the school board meeting on May 9, 2024.
The county can only take on a certain amount of debt without threatening its AAA credit rating, and also has a statutory debt limit of 6% of its “assessable base,” or the total value of real property in the county. Currently, the county has debt worth about 1.5% of its assessable base, in line with county policy. The proposed FY 2025 county budget includes $184.3 million for net debt service costs, a 5.6% increase from FY 2024.