Legislative staff urge fixes to state school capital funding formula as costs surge

Legislative staff on Thursday told the Legislative Education Study Committee and Legislative Finance Committee that New Mexico’s formula for dividing state and local school capital costs needs targeted changes to reflect modern construction prices, bond limits and district revenue reality.

The joint LESC/LFC report presented by senior staff said the formula’s underlying approach is sound but identified three chronic mismatches: a construction-cost constant that is far below recent project prices, long revenue-planning windows that don’t match districts’ actual bonding cycles, and adequacy standards changes that shift square footage assumptions. "Since 2004, PSCOC has distributed over $3,000,000,000 in awards funding," said Drew Weaver, a program evaluator with the Legislative Finance Committee, to highlight the scale of state capital activity.

Why it matters: The formula determines each district’s required "local match" for Public School Capital Outlay Council awards. If the formula understates costs or overstates local capacity, poorer or indebted districts face unaffordable local shares, triggering a rise in waiver requests and stalled projects.

What staff found: The formula still uses a constant of roughly $307 per square foot to estimate replacement costs, while PSFA project data and recent estimates put average project costs far higher — staff cited 2023 averages near $695–$700 per square foot on recent builds. The formula also models district revenue as a very long-term average (a 45-year replacement horizon and a fixed mill-rate assumption) that can miss the reality of short-term debt caps, concurrent projects and bonding constraints.

Recommendations: Staff outlined several paths lawmakers could consider: (1) rescale the construction-cost input annually to reflect inflation (as some other states do); (2) adopt an upper cap on the state’s liability for cost overruns, following models in other states; or (3) move toward a project-by-project framework that preserves the formula’s equity focus while using more project-specific cost estimates. Staff also suggested revising the revenue-horizon calculation to a 10–15 year planning window and incorporating measures of debt load and sustained mill-rate effort into the formula.

Adequacy standards and temporary relief: Presenters noted that PSCOC’s January 2025 adequacy updates increased allowable gross square footage — roughly +10% at elementary schools, +7% at middle schools and +5% at high schools — which lowers calculated local shares on paper but can still leave districts exposed when per-project prices are much higher. Legislative changes this year (Senate Bill 82, which extended reductions first enacted in SB 131) temporarily reduced local matches — including a 50% reduction for some very small microdistricts — but those reductions are set to sunset at the end of FY26.

Implementation concerns: Staff warned that formula fixes alone won’t prevent project delay. Many projects stall at the application or planning phase; PSFA staff urged stronger guardrails such as clearer eligibility thresholds for awards, required preventive-maintenance benchmarks, and procedures to rescind or re-prioritize awards where projects become seriously delayed.

Next steps: LESC and LFC staff recommended continued collaboration with PSFA to model different formula changes during the 2026 interim and present legislative options for the 2027 session, including hold‑harmless provisions to limit sudden local-match increases for specific districts.