Fixing Our Infrastructure? How About Schools?

Originally published in The American Prospect on May 23, 2017.
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Last year, amid the heated presidential primaries, national news outlets took a break from the contest to cover a public education issue that rarely gets attention. School teachers in Detroit, barred by state law from going on strike, staged a series of “sick outs” (where so many teachers call in sick that it forces the schools to shut down) to protest the condition of their dilapidated, underfunde­d schools. On one day in mid-January, 64 public schools were closed—more than half in the city—as teachers rallied together for more resources. From The New York Times and The Washington Post to CNN and Fox News, millions of Americans were confronted with jarring images of Detroit children wearing winter coats in class because their schools lacked functional heating systems, of severely damaged facilities, of mold and leaky ceilings, of roaches and mice crawling on the floors.

These problems extend far beyond Detroit. Public school facilities—mostly ignored in discussions of the nation’s crumbling roads, bridges, ports, and highways—face an urgent infrastructure crisis of their own. Indeed, it has been getting worse for decades: In 1995 the U.S. Government Accountability Office issued a report estimating that $112 billion was needed to repair and modernize the nation’s school facilities, and that as many as 28 million students attended schools deemed unhealthy, uncomfortable, and unsafe. The problem was most acute for poor students and racial minorities. In 1997, President Bill Clinton declared, “We cannot expect our children to raise themselves up in schools that are literally falling down. With the student population at an all time high, and record numbers of school buildings falling into disrepair, this has now become a serious national concern.”

But little progress was made, and inequities between rich and poor school districts grew wider. By 2013, the American Society of Civil Engineers gave public school facilities a “D+” grade on its national report card. The group found that school construction had diminished to approximately half the level spent before the Great Recession, even as public school enrollment continued to grow. By one 2016 estimate, it would take $145 billion a year to properly repair and maintain the nation’s school buildings.

Now, a small group of legislators and political consultants—mostly hailing from Virginia—say they have a policy solution to upgrade America’s old school buildings, one that’s actually ripe for advancement under President Donald Trump. The proposal? Tweak the tax code so that old school buildings can access federal historic preservation tax credits—a financing tool the president himself took advantage of when he transformed the Old Post Office in Washington, D.C., into a luxury Trump hotel.

Supporters of this approach estimate that between 15,000 and 20,000 school buildings—out of roughly 100,000 nationwide—would be eligible for the tax credit, and could therefore save school districts between 30 and 40 percent of their rehabilitation costs. The reason school districts haven’t taken advantage of this option, advocates say, is due to an arcane loophole in the tax code that prohibits historic credits from financing repairs unless the properties are transformed into something distinctly new. While this rule—dubbed “the prior use” rule—was originally created to prevent nonprofits from “double dipping” their tax savings, in effect, it means that rich businessmen can get help turning old federal buildings into luxury hotels, but cash-strapped communities can’t access the federal financing to modernize their crumbling schools.

DESPITE THE RULES PREVENTING school districts from accessing historic preservation tax credits to fund infrastructure upgrades, Virginia lawmakers have twice managed to convince the IRS to make exceptions—both times by making the case that a local public school would be transformed into a regional magnet school, something substantively different from what it once was. Advocates say that these successful examples of school renovation serve as proof that the historic tax credit approach could work to fix thousands of old school buildings across the country, if only the tax code were tweaked.

The Maggie L. Walker Governor’s School, a regional magnet school located in Richmond, Virginia, is regularly ranked as one of the top public high schools in the United States. But when this magnet program was founded in 1991—then named the Governor’s School for Government and International Studies—it was housed on the second floor of another Richmond school, Thomas Jefferson High. Learning conditions were cramped, and the promising program could barely exist, let alone grow.

Bob Mooney, a Richmond entrepreneur, had a son enrolled in the program and teamed up with other parents to see if they could find a new facility for the magnet school. The group approached Tim Kaine, then Richmond’s mayor, who now serves as a U.S. senator.

The building Kaine and the parents identified as a potential new home for the magnet program had been abandoned for years. It was formerly the Maggie L. Walker High School—named for the first woman, and the first African American, to charter a U.S. bank. The art deco-style school had opened in the 1930s, and, as mandated by the state’s Jim Crow laws, exclusively served black students. Though it was later abandoned, the building was on the National Register of Historic Places in recognition of its historical role educating black students during segregation.

“I was elected to the Richmond city council in 1994, that building was in my district, it was vacant, blighted, graffiti all over it—vandals had taken out the copper pipes,” recalls Senator Kaine. “It was also not perceived as being in a safe neighborhood, and it took me a long time to convince the 13 jurisdictions [that participate in the regional magnet school] that this was a good idea.”

But once Kaine persuaded all the localities to get behind moving the magnet program into the empty, old building, the next challenge was to fund its rehabilitation. Since the building was designated historic, federal historic tax credits seemed like a promising possibility, if only they could get around the “prior use” rule. What if lawyers could convince the IRS that a regional magnet school for gifted students, where at least 50 percent of students would come from outside of Richmond, was sufficiently “different” than the local public school it used to be?

The federal government bought the argument, and awarded the project historic rehabilitation tax credits for renovations, which began in August 1999. The combination of syndicated state and federal tax credits covered a third of the total $23 million investment; another third was picked up by the 13 jurisdictions that send students to the school, and the last third was paid for by private donations—a fundraising effort Bob Mooney spearheaded. Though the building had to be sold to private hands to access the tax credits, the school has since been sold back into the public sector.

Walking through Maggie L. Walker today, its historic charm and modernized feel is hard to ignore. Plaques of the various families, philanthropists and businesses that helped fund the school’s rehabilitation hang throughout the building. The new school is also touted as a model of successful community revitalization. Since its renovation, the surrounding Jackson Ward neighborhood has seen an increase in economic development and residential construction. “This school is still the best example of regional cooperation that we have in central Virginia,” Mooney told me, as we sat together in the building’s front office.

 

THE PERSON MOST RESPONSIBLE for promoting this tax-credit policy idea beyond the confines of Maggie L. Walker is Paul Goldman, a longtime Democratic political strategist in Virginia, who has championed this proposal’s merits for more than a decade. You could even say he’s obsessed.

In the late 1980s, Goldman managed the winning gubernatorial campaign for Doug Wilder, the nation’s first African American governor, and remained a close Wilder adviser throughout the 1990s. In 2004, Wilder launched a campaign for mayor of Richmond, and after winning, Goldman came on to work for him, tasked with “shaking things up.”

Goldman says that’s when he noticed many Richmond schools were in bad shape, and wanted to see if there was a way to improve them. Wilder warned Goldman that refurbishing schools is very expensive, but encouraged him to explore the options. That’s when Goldman learned about the rehabilitation of Maggie L. Walker.

At the end of 2005, Goldman met with Tim Kaine, then Virginia’s governor-elect, to discuss what Kaine had done as mayor with the Walker school. Goldman encouraged Kaine to think about changing the federal tax code, so jurisdictions all over the U.S. could do what he’d been able to do as mayor. A true believer in the idea, Goldman spent the rest of the decade bringing more Virginia politicos on board—including Republican governor Bob McDonnell, former Republican governor George Allen, and Republican House Majority Leader Eric Cantor.

Political momentum for the idea picked up in 2010, when Rutgers University and the National Trust Community Investment Corporation published the first annual report on the economic impact of the federal historic tax credit, finding it led to significant positive benefits in income, tax revenue, and job creation. Given the unemployment and slow economic growth following the Great Recession, the tax-credit school infrastructure proposal started to attract more notice.

In 2011, Kaine (then in-between his terms as governor and senator), Senators Jim Webb and Mark Warner, Representative Cantor and Governor McDonnell outlined their bipartisan support for the Rehabilitation of Historic Schools Act, a congressional bill that would grant public schools access to the rehabilitation tax credits. It didn’t pass, and they tried again in 2012, this time getting an endorsement from the National Education Association, which called it “a common-sense approach to addressing some of our school modernization needs.”

But the legislation again went nowhere, and supporters wouldn’t try again for another half-decade.

“There has been kind of a logjam in Congress, and for years people have been saying that comprehensive tax reform is just around the corner,” says Kaine. “So long as that’s true, there’s been a reluctance to take up narrow fixes to the tax code. People say, ‘just keep it on the table and we’ll get to it eventually.’”

But Goldman felt frustrated that more Democrats weren’t getting on board with the tax credit idea, given their stated desires to improve public education. He felt liberals were stubbornly resisting it because tax credits are more generally favored by Republicans, and because the proposal wouldn’t solve all of the nation’s school infrastructure problems.

Now, with Trump in office, and discussions of tax reform and infrastructure spending back on the table, Goldman and his allies see a fresh opportunity to push the idea forward. “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” Trump declared in his first speech following the election. “We’re going to rebuild our infrastructure, which will become, by the way, second to none.”

A few weeks later, however, Trump said that America’s education system is “flush with cash.” Nevertheless, supporters got to work. In February, two rookie congressmen, Donald McEachin and Dwight Evans, co-sponsored a bill, the Rehabilitation of Historic Schools Act of 2017, which was included in legislative package the executive committee of the Congressional Black Caucus handed to Trump in March. (Though Evans is based in Philadelphia and most of the proposal’s supporters have been Goldman’s connections in Virginia, Evans says he’s known Goldman since the mid 1980s, when he helped in Evans’s race for lieutenant governor.)

Also in March, Goldman, George Allen, and Mark Rozell, the dean of George Mason’s public policy school, argued in Politico that the IRS rule barring public schools from accessing the historic tax credits “strikes at the heart of Trump’s campaign message: Washington is rigged for the well-connected while ordinary Americans are left behind.” They pointed to the 2016 Republican Party platform, which pledged to “remove legal roadblocks to public-private partnership agreements…that bring outside investment to meet a community’s needs.” The Democrats’ platform, they noted, called for new investments in infrastructure, including public schools.

This confluence of support makes Kaine optimistic. “The Trump administration likes the idea of funding things with tax credits, and they really like public-private partnerships,” he says. “So this is a tax reform that fits in right in with the philosophy that they’re describing.”

Last week Kaine and Warner took the plunge and introduced the School Infrastructure Modernization Act, which would waive the ‘prior use’ rule for school renovation projects that use historic rehabilitation tax credits.

Goldman believes that Trump’s history of using the credits could make him more amenable to using them for schools, too. But John Leith-Tetrault, the chairman of the Historic Tax Credit coalition, isn’t so sure. “I don’t think that because Trump used the credit that he’s necessarily inclined to protect them,” he says, noting that the one-page tax reform outline the Trump administration released in April says the president would pay for a reduction in corporate taxes by getting rid of “special interest” tax preferences, which could include historic tax credits.

Margaret Parsons, a tax credit consultant who has worked with Goldman on this issue, agrees there’s a chance that advocates are “rearranging decks on the sinking Titanic,” given that the historic tax credit program could be eliminated altogether.

DESPITE THE ENTHUSIASM FROM Goldman and his allies, the historic rehabilitation tax credit proposal has garnered some criticism and skepticism.

For one thing, critics note, these tax credit deals are very complicated, and public school districts could face huge economic risks as they navigate such transactions. Mary Filardo, the executive director of the 21st Century School Fund—a national nonprofit that advocates for improved school facilities—says while the use of historic tax credits could be a genuinely useful tool for some districts with old building stock, there are real changes that would need to take place on the state and local level to make it a truly viable option for schools, beyond just tweaking the federal tax code.

“In order for a school district to get the benefit of the historic tax credit, it has to enter into a sale and then lease back agreement with a developer,” says Filardo. “Neither school districts, nor states, currently have the in-house expertise to enter into or manage these types of public-private partnerships.”

Under the terms of the tax code, the sale-leaseback agreement requires transferring the public school to a private entity for at least five years. Donald Cohen, executive director of In the Public Interest, an anti-privatization nonprofit, says he doesn’t think it’s a good idea to give public schools over to private entities—“full stop.”

While the Maggie L. Walker school was sold back to the public sector after five years, critics note that there is no rule that says the private entity has to sell it back. Paul Goldman dismisses these concerns as “fake news” and says the private investors would have no interest in keeping the schools, and would very likely sell buildings back.

“People say, Paul, a lot of localities don’t know how to do this, they could get taken advantage of, but that’s a pretty low view of the locality,” he says. “They could hire an expert. It’s just the fear of change, and the resistance to doing something a different way.”

But another challenge that comes with using the tax-credit financing approach is that districts would still likely need to raise a significant amount of funds privately. “The PTAs can’t do this type of fundraising; you’d need to have people from the business community or from family foundations,” says Mooney, who helped raise $7 million for Maggie Walker. “We’re talking about contributions of $50,000, $100,000 up to $500,000. It’s a lot of money.”

Critics say that financing schools with tax-free municipal bonds, generally paid for over the course of 30 years, is a much safer way to finance school infrastructure. One critic called the historic tax-credit approach a “boutique fix.”

But supporters of the tax credit proposal generally waive off these concerns, accusing critics of letting perfect be the enemy of the good. “The will to help the non-white majority in public schools is key,” Goldman said.

ON MAY 17, ON THE 63RD anniversary of Brown v. Board of Education, House Democrats unveiled a new comprehensive school infrastructure bill—the Rebuild America’s Schools Act of 2017. The legislation, which combines a $50 billion grant program and a $50 billion tax credit bond program targeted at high-poverty schools, intentionally did not include anything about historic rehabilitation tax credits.

“The historic rehabilitation tax credit would not help all schools in need of repair—only those that are certified historic structures or were built before 1936,” says a Democratic aide involved in crafting the bill. “The purpose of the historic rehabilitation tax credit was not to ensure equity in school facilities, while that is the purpose of the Rebuild America’s Schools Act.”

Disagreements over the proper role for the federal government in fixing America’s public school infrastructure get at the heart of the debate.

When I asked Kaine if he supported the tax credit approach as a second-best option given the difficulty of directly appropriating funds, he said no, that he actually thinks it’s a very good approach for the federal government, since K-12 infrastructure has not been a federal priority in the past.

“If we were going to do something more robust at the federal level [for schools], it’d be a little non-traditional; there wouldn’t be much precedent for putting federal dollars into renovating K-12 facilities,” he says. “That’s a state and local responsibility. However the tax credit program already exists, so this could be a way to be consistent with earlier federal precedent. We could still be helpful but it would remain a local responsibility.”

Others argue that increasing the federal government’s role in directly helping districts meet the soaring costs of modernizing school buildings could go a long way towards helping schools, especially ones in districts that lack wealthy tax bases. Mary Filardo of the 21st Century School Fund thinks districts should be able to leverage up to 10 percent of their Title I funds to help pay for capital expenses—right now, Title I funds can only go toward operating spending. She also thinks the federal government should consider contributing at least 10 percent toward districts’ capital budgets, just as it contributes 10 percent to districts’ operating budgets. Filardo notes that in the decade following the GAO’s 1995 report, despite the growth in the U.S. economy, the nation’s most disadvantaged students still received about half the funding for their school buildings ($4,800 per student) as their more affluent peers ($9,361 per student). The risk of leaving school facility repair and maintenance up to state and local communities, she says, only ensures that the widening inequality between rich and poor districts will continue apace.

For now, advocates might just try to push forward every idea they can. “Yes, the historic tax credit idea may not be a solution for every public school; in some districts a bond election is a better decision,” says Parsons. “But the idea that there could be an option for historic schools that is not on the table now is powerful.”

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