by Mike Burns, Managing Director, and Mark Weekley, Senior Vice President, Baird Ohio Public Finance
Recent legislative changes in Ohio, combined with a broader anti-tax climate, have created significant uncertainty around future school funding. As a result, many school districts are questioning whether now is the right time to move forward with capital improvement projects.
A Growing Challenge for Ohio School Districts
For some districts, capital projects may involve enhancements that are desirable but not immediately necessary. However, many projects are not optional. Aging school facilities require ongoing investment in roofs, HVAC systems, windows, pavement, security upgrades, and other infrastructure necessary to maintain safe and effective learning environments. These needs cannot be deferred indefinitely without increasing costs and operational risks.
Given the uncertainty surrounding future revenues, how should districts approach funding these essential projects?
The answer will vary by district. Every school district has unique financial circumstances, cash reserves, facility needs, and long-term planning considerations. While options such as bond issues, permanent improvement levies, or revenues generated through new economic development projects may be available, this article focuses on a question many treasurers are currently facing:
Should the district pay for capital improvements with cash, or should it finance the project?
The Case for Using Cash
Over the last several years, many Ohio school districts have transferred funds from their General Fund to a Capital Projects Fund (Fund 070). One important advantage is that if a district begins deficit spending in future years, funds can be transferred back to the General Fund if needed. Given the financial pressures some districts are experiencing as a result of changes in state funding, maintaining financial flexibility remains important.
Using available cash, particularly funds already designated for capital improvements, is often viewed as the most straightforward funding approach. Advantages include:
• No interest costs associated with borrowing
• Quicker and simpler project funding
• Capital funds are used for their intended purpose
• The perception that paying cash is always the least expensive option
For districts with substantial reserves and strong long-term financial forecasts, utilizing cash may be an appropriate solution. However, paying cash is not always the most financially advantageous option.
Why Maintaining Cash Reserves May Be More Important Than Ever
One of the strongest arguments for financing a capital project is preserving liquidity.
With ongoing uncertainty regarding public school funding and continued challenges in passing operating levies, many districts are projecting future operating deficits. While a district may have substantial cash balances today, those reserves can decline quickly.
Cash reserves serve an important purpose beyond funding construction projects. They provide valuable time.
Maintaining reserves can allow a district to:
• Navigate periods of deficit spending
• Delay the need for an operating or permanent improvement levy
• Address unforeseen financial challenges
• Avoid immediate expenditure reductions
Once cash reserves are spent on a capital project, those funds are no longer available to support operations. For this reason, many districts have chosen to finance capital improvements while preserving cash balances to protect their financial flexibility over the coming years.
Understanding the True Cost of Financing
Many school officials assume financing is significantly more expensive than paying cash. In today's interest rate environment, however, that assumption may not always hold true.
Consider a hypothetical $3 million capital improvement project.
A district could pay for the project using available cash. While this avoids borrowing costs, it also means those funds are gone from reserves which provides financial flexibility and no longer generating investment income for the district.
Alternatively, the district could finance the project through a Lease Purchase Agreement or Certificates of Participation (COPs). As of August 2026, financing rates for many Ohio school districts have generally been available in the range of approximately 3.80% to 4.00% for a 10-year fixed term, although rates are subject to change.
At the same time, districts investing through STAR Ohio were earning approximately 3.87% as of August 28, 2026.
When the financing rate and investment earnings rate are comparable, the difference between financing costs and investment earnings can result in net earnings to the school district which results in being financially beneficial to the school district to pursue the financing instead of utilizing cash. Or, in some cases the net cost to the school district is minimal and therefore, preserving the cash reserves for financial flexibility becomes a more valuable consideration than avoiding the minimal interest expense.
Don't Ignore Future Inflation
Another important consideration is inflation.
Construction and capital project costs have increased significantly over the last several years. While inflation rates have moderated from previous highs, many vendors and architects continue to project cost increases for future projects.
Before making a funding decision, districts should discuss anticipated cost escalations with their architect, engineer, or project vendor.
Questions to consider include:
• Will future project phases cost significantly more if delayed?
• Would completing additional work today reduce future capital or operating expenses?
• Can current cash balances support all anticipated phases of the project?
• Would financing allow the district to complete more work upfront and avoid future inflationary increases?
In some cases, a district may have enough cash to fund the first phase of a project or portion of the project but not enough cash to fund the entire project or future phases of the project. Inflationary cost increases are real, and they are expensive. Completing the entire project or multiple phases of the project sooner rather than later may require financing, but could save the school district significantly on the cost of the project.
Key Questions Treasurers Should Ask
Before deciding between cash and financing, school treasurers should evaluate:
• What are the district's projected financial conditions over the foreseeable future?
• How much cash should be maintained for operational flexibility?
• What capital needs are expected beyond the current project?
• What investment income could be earned if reserves are retained?
• What financing options and terms are available?
• How might future construction cost increases affect project timing and ability to afford the project?
Final Thoughts
Both cash funding and financing can be effective tools for addressing school facility needs. Each approach involves advantages, tradeoffs, and risks that should be evaluated within the context of the district's unique financial circumstances.
Using cash may reduce financing costs and simplify project funding, but don’t be shortsighted and assume this is the right decision for the district without exploring the district’s options. Financing may preserve reserves, provide additional flexibility for managing future financial uncertainties and even be more financially beneficial to the district due to generating “net” interest earnings. Neither approach is inherently better in all situations, so the district should always consider both options before making a final decision.
By carefully reviewing financial forecasts, reserve levels, project timelines, and market conditions, districts can make informed decisions that support both their facility needs and their long-term financial objectives.
Disclaimer:
Interest rates are fluctuating daily, so for the purpose of this article we are providing estimated range of interest rates as of August, 2026. The actual interest rate as of the date of this article is printed may still be in this range of rates or could be higher or lower than this range of rates. In addition, the STAR Ohio rate is as of August 28, 2026 as illustrated on its website. This rate will change as well.