School Facilities Update: Legislature Sizes Up November Bond

On Wednesday afternoon, a joint legislative committee had a robust conversation about the school facilities bond slated for the November 2016 ballot. After an overview on current law, legislators raised critical issues regarding the state’s School Facilities Program and whether the benefits of the $9 billion bond will outweigh its potential costs. Scroll down to read our recap of the discussion.

The joint informational hearing was led by the chairs of the Senate Committee on Education, and Assembly Committees on Education and Higher Education. Click here to view the committee’s background materials.

  • Overview & Background

The Legislative Analyst’s Office (LAO) presented an overview of the traditional sources of public infrastructure funding, namely voter-approved general obligation (GO) bonds. Click here to read the LAO’s overview.

Since 1998, California has raised approximately $35.5 billion through state GO bonds and another $68 billion locally (see LAO, p. 7). For K-12, however, state level GO bonds were essentially exhausted in 2012 – six years after the most recent bond campaign. Other financing sources available to school districts include parcel taxes and developer fees.

The LAO further explained that the Leroy F. Greene School Facilities Act of 1998 School Facilities Program (SFP) approves and distributes state facilities funding using the State Allocation Board (SAB). The background materials also includes a summary of the program written by the Office of Public School Construction.

  • The November Bond Initiative

The $9 billion bond (which maintains the current provisions of the SFP for the K-12 portion of the initiative) was the main event. As proponents of the initiative, the Coalition for Adequate School Housing (CASH) and California Building Industry Association (CBIA) spoke in favor of the bond.

Jenny Hannah, Chair of CASH, characterized the bond as an equity issue, where rural and less wealthy districts often do not possess the financial resources available to larger, wealthier districts to raise local school construction revenues. For every $1 billion spent on school facilities, she argued, 13,000 local jobs are created.

  • Questions & Criticisms from Legislators

Most—if not all—of the legislators present supported the initiative. They were nevertheless critical of how the current system is working for schools. Here are some select questions and responses:

Will the bond meet the demand for new construction? While actual need is not known, the SAB has approved about $300 million in projects within a pipeline that includes nearly $2 billion in requests. The current state process does not gather any information about the number of existing facilities, the condition of those facilities, nor the potential demand for additional facilities.

What are the problems with the current SFP? Virtually everyone agreed the SFP has evolved into a complicated funding process. Department of Finance representatives noted the following: (1) the 130 pages of regulations render compliance costly and complex; (2) a first-come, first-served process disadvantages small school districts without dedicated staff; (3) debt service is onerous for the state.

Can we change the current SFP rules if the bond passes? The initiative requires the current SFP statutory rules (as they existed on Jan. 1, 2015) to remain in place for all $9 billion. SAB regulations that implement the statute, however, may be changed, and so may the other laws not found in the Leroy Greene section of code.

How will the bond alter the state’s total debt service costs? The November bond would increase debt service costs by $500 million per year, which will raise the state’s overall cost to $5.8 billion annually. In sum, the state’s cost is $17.6 billion over the 35-year life of the bond, assuming a five-percent interest rate. The debt service for K-12 and community college facilities bonds accounts for 2.1 percent of the General Fund.

How do we measure whether SFP funds are spent “effectively” on projects? We have no diagnostic tool to measure, nor a definition for, “effective” spending. Do we mean project quality? A link to student achievement? Incentivizing new housing? Most local bonds are overseen by an advisory board.

The governor does not support the initiative – what is his alternative? Even though the Department of Finance’s representatives stopped short of stating the Governor’s opposition to the bond, they did expressed concern with the current SFP program and advocated for increasing priority to poorer schools and prioritizing facilities with health and safety issues. They proposed (as they have in prior years) that a district’s funding amount should be based on a sliding scale that considers the district’s per pupil assessed valuation. They also discussed expanding “local tools,” e.g., increasing the districts’ bonding capacity by raising the assessed valuation caps from 1.25 percent and 2.5 percent, and raising local tax valuation rates from the current $30 per $100,000 and $60 per $100,000 per home. (The Governor had expressed interest in exploring a June bond alternative to the November initiative earlier this year, but the resulting legislative proposal failed to move.)

Since this was an informational hearing, the Legislature took no action and made no recommendations. Participants were generally supportive of the November bond and, at different times in the hearing, posed questions about amending the SFP model, should the November bond fail. Clearly, there were no answers to these queries. We do not expect further legislative hearings and discussions on this issue until after the November bond elections.

Prepared by Susan Stuart, Richard Gonzalez, and Derick Lennox.

Susan Stuart, Partner Capitol Advisors Group, LLC.