Private sector powers new wave of public school construction

Private sector powers new wave of public school construction

New York school district will build and renovate 40 schools thanks to "P3 partnership" with firm

It was a daunting project, seemingly impossible to fund with traditional municipal bonds, says Yonkers (N.Y.) Public Schools Superintendent Bernard Pierorazio.

In 2010, a building condition study showed that his district needed $480 million for capital improvements to existing school buildings, while new schools needed to be built given an expected enrollment increase of 3,000 by 2020, for a total of $1.2 billion.

Rather than throwing up their hands, district leaders in Yonkers began looking for new ways to solve old problems. They settled on a public-private partnership, also known as P3.

By partnering with the private sector, administrators at Yonkers Public Schools plan to build, rebuild or refurbish 40 schools over a 15-year period, and to get the work done in a “better, faster and cheaper” way than the traditional approach to school construction, Pierorazio says. The district has potential partners, but there is no start date set and no signed contract yet because they are still awaiting final approval from the state legislature.

“Building schools with public-private partnerships is going to be the wave of the future,” Pierorazio says. “There are many large school districts that have major construction needs, with no way to bond their way out of these situations. When you go in a corporate building, everything is in great shape, the water fountains work, everything works. So when we partner with private industry, our K12 schools can benefit from those same efficiencies.”

While Yonkers may be the first U.S. district to undertake a systemwide construction project via P3, other schools across the country have already found success with P3s on smaller projects, according to the National Council for Public Private Partnerships (NCPPP). Many colleges and universities have used P3s to build dormitories and facilities.

“Interest in building schools with P3s is absolutely growing,” says Richard Norment, NCPPP’s executive director. “That’s because of the ongoing financial crunch at all levels of government, and because of the successful examples of what has been done in the use of P3s for both building and maintaining schools.”

Enjoying efficiencies

The Yonkers P3 plan is modeled largely on successful P3s worldwide, such as in Alberta, Canada, where more than 20 new schools have been built with private partners in recent years. The Yonkers plan uses a design-build-finance-maintain model, which is one of several different P3 models and means that private partners will provide design, construction, financing and ongoing maintenance for the buildings, in return for agreed-upon payments from the school system.

The district will pay nothing until the schools are ready to be used, and then it will make “availability payments,” which will be reduced if the partner fails to meet contractually-defined performance standards. For instance, if the HVAC unit isn’t working, the school system will not pay for it during those days it is not working up to par.

The partner also guarantees to maintain and update the buildings for 30 years. Over the life of the project, the school district will save tens of millions of dollars over the cost of the traditional bonding model, says Joe Bracchitta, chief administrative officer of Yonkers Public Schools. It also will relinquish the headaches of managing construction and contracts, the work will be completed quicker, and the payments made over a 30-year period will include all maintenance and upgrades, Bracchitta says.

In return, Yonkers’ private partners will receive ongoing work—the first phase, which includes renovations of six schools, is projected to create 13,000 jobs—and a solid, long-term investment that will pay off for years to come.

“We’re in the business of educating kids; we’re not in the construction business or the maintenance business,” Bracchitta says. “Our partners are. They can do this well and make a low, slow profit that is reliable. We’re a safe investment; we’re never going to move our home office to New Jersey or Berlin.”

The Yonkers plan was recently named among the world’s 100 most innovative urban infrastructure projects by KPMG Global Infrastructure. The projects that were selected “tackle infrastructure challenges and balance the needs of the population, the economy and the environment,” according to KPMG.

But getting it off the ground is a slow process. The district has worked with consultants to develop the project framework, conduct a feasibility study and communicate the plan’s value to stakeholders. District executives are also working with state lawmakers to tweak legislation about school bond payments to include “availability payments” for P3 projects. Current legislation only addresses the typical bond repayments for new school construction.

Yonkers district administrators continue to educate state officials about their plan and its value for the future of school construction, but they have had no trouble convincing private industry. Numerous representatives from the building construction trades and private investment firms have met with district leaders and shown great interest in the project, Pierorazio says.

While Yonkers believes a P3 is the ideal solution for its building challenges, “it’s not a panacea,” Bracchitta says. “There’s no one-size-fits-all approach. Someone leading a small, well-funded district may not realize the same savings with a P3 because they don’t have the problems of deferred maintenance that a large, urban district has.” However, the model offers potential for several smaller or rural districts to band together and attract partners for results similar to a larger district, Bracchitta says.

Avoiding surprises

In 2001, the Virginia state legislature passed its Public-Private Educational Facilities Infrastructure Act (PPEA), which was designed to bring private sector expertise to public projects and encourage innovative approaches to financing construction and renovation. Since then, various public school districts have used the resources available through PPEA to undertake construction projects via P3s.

For the Fredericksburg (Va.) City Public Schools, which built two schools under PPEA in 2005 and 2006, the best part of using a P3 was the guaranteed up-front price. “We knew exactly what it would cost before we began, so we knew what bonds we needed,” says Robert Burch, the district’s director of operations. “Six months after signing on, [the price of] steel tripled and gasoline shot up. If we hadn’t had an agreed upon price, we would have ended up paying a lot more.”

Fredericksburg partnered with Richmond-based Moseley Architects and Lynchburg-based English Construction for the project. “It was a genuine collaboration,” Burch says. “Whenever there was a problem, the three partners sat down and worked it out to everyone’s satisfaction, because everyone had something invested in the project.”

When building schools in the traditional, design-bid-build model, Burch says his office had been “flooded” with change orders. “Suddenly, what you wanted isn’t available and you have to use something different that costs more,” he says. With the P3, the price was guaranteed and it was the private partners’ responsibility to make the job work within that budget. Both schools were completed on time and under budget.

While Burch says he would never want to build another school outside the P3 model, the trend has slowed down some in Virginia, says Doug Westmoreland, vice president of Moseley Architects. “It was very popular when the PPEA first passed, and there are still some proposals out there, but the economy has made an impact,” Westmoreland says. “Many districts have begun asking for schools ‘as cheap as you can give me,’ and that has turned a lot of contractors and architects off. The basis [for pursuing P3 projects via PPEA] is still valid, but the economy has affected the activity.”

Although a still-struggling economy has affected P3 activity in Virginia, Westmoreland still believes the model is the best way for district leaders to achieve the greatest value, because they are no longer “at the mercy of the lowest bid,” he says.

Before undertaking such a project, he advises districts to talk to others who have done it, preferably in the same state, since laws vary. He also advises against selecting a partner based solely on the lowest bid. “Lots of people give you a low price but don’t include many things in the contract that you’ll end up adding later,” Westmoreland says. “You may be comparing apples and oranges.”

Finding a win-win

While long-term investments are sometimes sufficient, some districts have entered partnerships that offer even more lucrative payoffs, such as ongoing revenue, for their private partners. Projects that generate a long-term revenue stream while constructing needed school facilities achieve the most success for all parties, says NCPPP’s Norment.

“[P3s] are not philanthropy,” Norment says. “Frequently, there is confusion because many people think of the private sector as a resource to turn to solve their problems. But this is a contractual relationship.”

For instance, in 1993, when the District of Columbia Public Schools’ financial crisis threatened to close the dilapidated James F. Oyster Elementary School, a group of concerned parents and school officials began looking for options. Eventually, they formed a P3 between D.C. Public Schools, the District of Columbia government and LCOR Incorporated, a national real estate development company.

LCOR purchased an underused portion of school property to develop a 212-unit apartment building. As part of the deal, LCOR built a new, 47,000-square-foot school building and community activity areas. The developer made a payment in lieu of taxes (PILOTS) to the city, which required D.C. to pass a legislative measure permitting PILOTS. Rather than paying taxes on the land purchase, LCOR makes an annual payment of $804,000 to the city, which is put toward the repayment of the school district’s 35-year bond. Proceeds from the sale of the land, along with the city’s $11-million bond issuance, financed the new school.

The number of successful P3 schools like Oyster, which was completed in 2001, continues to grow. For districts seeking innovative ways to finance school construction projects, P3s offer broad opportunities, not only for financing, but also for surprising solutions to age-old building problems.

“Rather than getting design specs in your contract, districts working with P3s just need to get performance specs in there,” Norment says. “Private partners can come up with creative ways to perform what you need, whether it’s energy efficiency or just achieving the classroom space you desire. When you do a P3, get ready to see some creative, innovative design.”

Nancy Mann Jackson is a freelance writer based in Huntsville, Ala.


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