CapEx vs. OpEx: The Financial Case for Sustainable Facilities and Transportation

As Fayetteville Public Schools continues to study future facility and transportation needs and funding options, I believe it’s helpful to frame the conversation by differentiating between our Capital Expenses and Operating Expenses. By doing so, we will see that investments in sustainable facilities and transportation is not only the right thing to do - these investments are strategic, cost-effective, and engaging for students, as well.

When we examine the funding options that support Capital Expenses versus Operating Expenses, we will find that our funding options for Capital Expenses are very likely to grow over time, while our funding for Operating Expenses are at risk of growing more slowly than we'd like or even stagnating. Once we understand this fact, we should seek out opportunities to invest our Capital Expenses in ways that reduce our Operating Expenses. In other words, in the context of facilities and transportation decisions, it’s better to spend more money upfront on Capital Expenses if those investments will help us save money over time, reducing our Operating Expenses. This preserves limited Operating Expenses for our core mission - serving students.

Let’s take a step back and quickly define these terms.

Capital expenses refer to the purchase of land, buildings, equipment, vehicles, and the construction of new facilities. In general, capital expenses are characterized by large upfront costs. These are fixed assets that require replacement from time to time, such as roofs, HVAC, and parking lots. We put money aside to address these in a timely fashion using a replacement cycle.

Operating expenses are the day-to-day costs of running a school district. Teacher and staff salaries, fuel, utilities, professional development, and supplies are examples of operating expenses, with the largest by far being staff salaries. In general, operating expenses recur every month.

Public schools are highly regulated organizations, and rightly so. Our primary funding streams - local, state, and federal taxpayer dollars - each have their own purpose, and the use of each type of fund comes with specific restrictions and limitations.

In general, Capital Expenses are funded with bond proceeds - loans backed by local property tax millage. In a growing community like Fayetteville, where new buildings are being built, and property values are increasing, we expect this to grow over time. As we pay down our current bonds, we can refund those bonds without raising taxes, providing new dollars for facilities construction, purchase, and renovation. This is the mechanism we used to generate $113 million in 2020 to improve every building and build two new facilities without raising taxes. Bond funds can ONLY be used for land, new construction, renovation, and a small portion of a bond issuance can be used for busses and equipment.

Likewise, Operating Expenses are funded by a mix of local, state, and federal dollars. Federal dollars are a relatively small portion of the budget and are almost always restricted to specific programs such as Special Education, support for English Language Learners, and food for students.

A substantial portion of our Operating Expenses are provided by Foundation Funding from the state, which for the 2022-23 school year is $7,413 per student. These are funded by local property tax millage and supplemented by the state. This is the primary source of funds for teacher and staff salaries, enrichment programs, sports, the arts, career and technical education, and professional development. In other words, these are the dollars that we use to educate all of our children.

A couple of caveats to this.

• Curriculum materials are treated as operating expenses that we fund every few years on a rotating basis for each subject, so in some ways they could be considered capital expenses - but they cannot be funded by bonds.

• Busses and vehicles are capital expenses that are typically funded from the operating budget.

Of course, there are many more caveats and nuances to the complicated school budgeting process, but this is a basic overview.

While our community and school district will continue to grow, the growth of our operating budget could be stagnated by the recently signed into law Arkansas LEARNS Act, if a significant portion of our current and future students shift to private, charter, or home school.

However, given the strength of our local real estate market and the rapid growth and high quality of life we enjoy in Fayetteville, the property tax base that allows us to issue bonds (again, ideally without raising taxes) is VERY likely to grow. This is particularly true as the city continues to improve zoning and development rules with the goal of allowing more compact, mixed-use, and walkable development patterns, which generate significantly more taxes on a per-acre basis when compared to a more sprawling development pattern.

Once we accept these future funding expectations, we can understand that it would be wise to intentionally explore three opportunities:

• Net Zero facilities

• Electric busses

• School locations that reduce transportation costs

A Net Zero building is any facility (school or otherwise) that produces as much energy in a given year as it consumes. This is typically achieved through a mixture of smart design, energy-efficient building technology, and solar power. They typically cost 5-10% more upfront, and save energy costs over time, recouping the upfront investment in roughly 5-10 years. As solar and other energy technologies have become both more efficient and more cost-effective over the past decade, these buildings are increasingly cost-effective for the private sector. If they are cost-effective for the private sector, which typically uses a 5-7 year investment horizon, then they are VERY cost-effective for school districts, as we plan to use our new construction facilities for 60+ years. By spending a little more money upfront (when we have plenty of bond capacity) we save operating expenses over time, freeing up operating resources to support salaries and students.

In addition to cost savings, sustainable buildings improve occupant health through improved air quality. Studies show that they can improve attendance for students and teachers by reducing sick days and improve teacher and staff retention. In addition to being a wise use of taxpayer resources, Net Zero buildings align with the current and future interests of our customers - our students. Students want us to grow our sustainability programs, and I believe we could develop educational programs that highlight sustainable building features, providing project-based learning opportunities in engineering, construction, data analysis, and other high-demand fields.

We can make the same case for electric buses. The typical range for an electric bus is 150 miles, and the typical school bus route is 40-60 miles, so we know the technology works. While there is an upfront cost for charging infrastructure, and the buses themselves are more expensive, fuel costs are significantly lower (and more easily predictable) over time. The large batteries in electric buses can serve as energy storage allowing the district to sell energy back to the electric utility, creating new revenue opportunities for the district and further improving the return on investment.

Lower-income students are more likely to ride the bus and more likely to have asthma, so the air quality benefits of electric versus diesel are particularly important for buses. And on top of that, there is a generous (but competitive) electric school bus grant program available through the federal government’s Bipartisan Infrastructure Law that would cover 80% of the cost of busses and charging infrastructure. This makes BOTH the capital and operating expenses lower for electric buses if we submit a successful grant application. I am a strong advocate for applying for this grant to begin an electric bus pilot program.

Centrally located schools may be located on more expensive land, but they will reduce transportation costs for the district and our families while saving valuable time for families, students, and bus drivers. Thoughtfully designed, centrally located facilities are also more likely to increase the number of students who can walk and bike to school, which has been shown to improve outcomes for students.

More than any generation before them, Gen Z wants to know the “Why.” They are inspired by work and school projects that make the world a better place. I believe we will see improved student engagement as we continue to make thoughtful and cost-effective sustainability investments in our facilities and transportation systems, creating engaging internal internships and project-based learning opportunities for our students in the process. These investments are cost-effective, they are strategic in a post-LEARNS environment, they demonstrate to our community and our students that we are operating with their values in mind, and they’re simply the right thing to do.