Kevin Dayton

July 21, 2015

Tricks of the Trade: Questionable Behavior with Bonds (Section 6 of 9)

See the complete California Policy Center report For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction (complete, printable PDF Version, 4 MB, 361 pages)

Links to all sections of this study readable online:

Executive Summary: “For the Kids” – Comprehensive Review of California School Bonds (1 of 9)

More Borrowing for California Educational Construction in 2016 (2 of 9)

Quantifying and Explaining California’s Educational Construction Debt (3 of 9)

How California School and College Districts Acquire and Manage Debt (4 of 9)

Capital Appreciation Bonds: Disturbing Repayment Terms (5 of 9)

You are here: Tricks of the Trade: Questionable Behavior with Bonds (6 of 9)

The System Is Skewed to Pass Bond Measures (7 of 9)

More Trouble with Bond Finance for Educational Construction (8 of 9)

Improving Oversight, Accountability, and Fiscal Responsibility (9 of 9)

Guide to all Tables and Appendices – Comprehensive Reference for Researchers

Tricks of the Trade: Questionable Behavior with Bonds

Californians who want more spending on educational construction often express their resentment of a 2000 law limiting taxes and debt resulting from bond sales. It was passed in order to strengthen campaign arguments to voters in support of Proposition 39, which lowered the approval threshold for local bond measures from two-thirds to 55%. (See Table 11 in Section 5 for the limits.)

School districts have adopted several strategies to get around these limits in state law. One of them is very obscure but 100% successful: obtaining waivers from the State Board of Education.

Meanwhile, some districts are stretching legal definitions to use proceeds from bond sales to pay for items that resemble instructional material more than construction. One example is personal portable electronics such as iPads. Some of the state’s largest districts are purchasing this kind of technology while giving little assurance to the public that long term bonds aren’t the source of the money. This equipment may be obsolete well before the bonds mature, meaning that future generations will pay for these devices long after they are outdated and discarded.

Debt and Tax Limits Waived When School Districts Want to Borrow More Money

Research by the California Policy Center now allows the People of California to see — for the first time — a chart listing all California K-12 school district requests to the state for waivers to sell bonds for school construction. These waivers allow school districts to circumvent state laws enacted in conjunction with Proposition 39 and meant to set limits on taxes and debt burdens imposed on property owners.

State law (California Education Code Sections 3050-33053) allows the California Board of Education to grant waivers from numerous sections of the California Education Code, including bond indebtedness limitations. This power is obscure but significant, and until now a compilation of the history of bond indebtedness waivers has not been available to the public.

Out of the 51 waiver requests from 2000 through 2014, only one received notable public attention. In 2013, the fourth waiver request since 2002 from the West Contra Costa Unified School District became controversial when some local taxpayer activists and a columnist for the Contra Costa Times criticized the district for repeatedly seeking waivers to borrow yet more money for construction through bond sales.

To develop a bond indebtedness waiver chart and provide the public with comprehensive information about the waivers, the California Policy Center obtained a document from the California Department of Education listing school district requests since 2000 to the California Board of Education for bond indebtedness waivers. Staff indicated that this listing was an “internal working file and has not been reviewed or validated for accuracy.”

California Policy Center researchers checked the data, corrected inaccuracies, and expanded on the data using meeting agendas, staff reports, and meeting minutes. Now the public has a useful resource for considering public policy related to bond indebtedness waivers.

Table A-3 provides complete history of school district requests to the California Board of Education for waivers from tax and debt limits to borrow more money for school construction by selling bonds to investors. Preliminary activity in the first three months of 2015 is also included.

Request a Waiver, Get a Waiver

From 2000 through 2014, California K-12 school districts requested 51 waivers from sections of the California Education Code that do one or both of the following:

Prohibit the total amount of bonds issued (the total amount of principal) from exceeding 1.25 percent or 2.50 percent of the most recent assessed aggregate value of taxable property in the district. (Elementary and high school districts have a 1.25% limit; unified school districts a 2.5% limit.)
Prohibit the total amount of bonds issued as authorized by one bond measure from requiring a property tax that exceeded $30 or $60 per year per one hundred thousand dollars ($100,000) of taxable property. (Elementary and high school districts have a $30 limit; unified school districts a $60 limit.)

Out of these 51 waiver requests, school districts ended up withdrawing three of them. The State Board of Education approved all 48 other waiver requests, without one dissenting board vote.

The 100% approval rate for waiver requests is not surprising. In 2013, the State Board of Education took action on 518 waiver requests for all sections of the California Education Code and approved 97% of them. Under state law, the California Board of Education is generally obligated to grant such waivers as long as the request is submitted correctly and the waiver doesn’t violate seven criteria specifically listed in state law:

The educational needs of the pupils are not adequately addressed.
The waiver affects a program that requires the existence of a schoolsite council and the schoolsite council did not approve the request.
The appropriate councils or advisory committees, including bilingual advisory committees, did not have an adequate opportunity to review the request and the request did not include a written summary of any objections to the request by the councils or advisory committees.
Pupil or school personnel protections are jeopardized.
Guarantees of parental involvement are jeopardized.
The request would substantially increase state costs.
The exclusive representative of employees, if any…was not a participant in the development of the waiver.

None of those seven criteria relate to local fiscal policies, meaning there is no obvious justification in state law for the Board of Education to deny a waiver from state laws related to bond indebtedness. Nonetheless, the Board of Education has chosen to impose conditions on bond indebtedness waivers and sometimes incorporated changes from the original requests at the recommendation of California Department of Education personnel. But the Board of Education has also rejected recommendations from the Department of Education, most notably in 2013 when the board repeatedly rejected a staff recommendation that school districts applying for waivers should not be permitted to sell Capital Appreciation Bonds.

Case Study: West Contra Costa Unified School District

This school district based in Richmond is perhaps the most egregious example in California of unrestrained bond finance for a construction program. One individual was disproportionately responsible for leading the district to almost $2 billion in debt service. It remains to be seen if his legacy will be as a hero for disadvantaged students in dilapidated schools or as a politician who undermined the district’s always-tenuous fiscal stability.

During his time on the West Contra Costa Unified School District board of trustees from 1993 to 2014, Charles Ramsey claimed to work for the interests of students in this district. Ramsey played a leading role in the political deals and fundraising (through a Political Action Committee named “For the Children of West County”) needed to win voter approval of six out of eight bond measures proposed from 1998 through 2014. Those six successful bond measures authorized the district to borrow a total of $1.63 billion via bond sales.

His emailed reaction after the school district received its fourth tax and debt waiver from the State Board of Education was typical:

…I did all I could to change the attitudes that constantly plague our community and tried to make the world a better place. No longer can people sit back and point fingers about us and now I can proudly say that WE DID IT!!!! Once again and now we can add Measure E to the list of successes with the debt limit waiver now applied to this phenomenal bond program. And once again, a loud and boisterous THANK YOU. For all of us and in the end it is all about the West Contra Costa Unified School District kids!!!

The district has debt service of $1.83 billion and continues in 2015 to issue bonds that don’t mature for 40 years. It has issued Capital Appreciation Bonds. It has requested four waivers from the State Board of Education to exceed tax and debt limits, even earning attention from local news media for abuse of this obscure process. In the context of reporting on the district’s fourth waiver request, Contra Costa Times columnist Dan Borenstein asserted the following:

The West Contra Costa school district should slow its deceptive school construction program because it’s pushing too much debt onto property owners and will soon exceed tax limits it promised voters…In their quest to rebuild or replace every school, district officials are moving too fast, behaving irresponsibly and overtaxing poor and working-class residents…District officials need to start thinking about property owners who foot the bill. New schools are nice, but they must also be affordable.

Borenstein also suggested that the campaigns for the bond measures were deceptive, both in general and in specifics: “Each time they went to the ballot, district officials presented that particular bond measure to voters as if it were the only one. They never mentioned the outstanding debt taxpayers already owed from prior measures.” He also criticized a “buried” reference in a three-page long paragraph in a fourteen-page ballot statement stating that the district would have authority to seek a waiver from tax and debt limits cited elsewhere in the ballot material.

The US Securities and Exchange Commission has investigated financing of the district’s bond program, and the Federal Bureau of Investigation has also made inquiries. A grand jury questioned Charles Ramsey about his relationship to corrupt officials involved with the bond-funded construction program at the Sweetwater Union High School District in Chula Vista.

There have been continual questions about the district’s management of its construction program over its history. Frequent change orders, cost overruns, and unusually high construction costs per square foot have attracted many critics over the years. In addition, enrollment at the West Contra Costa Unified School District is expected to decline.

Finally, one corporation – Chevron – owns 11.62% of the assessed valuation of property in the district. Chevron’s refinery operation in Richmond is perpetually targeted by environmental and social justice groups, some of which hope to close it down. Although the district is vulnerable to a future drop in assessed valuations, the closing of the Chevron refinery would be a financial disaster to the district (and the City of Richmond).

Borrowing Money for Technology Using Bonds

California community college districts and school districts continually claim funding shortfalls for operating expenses. Yet it’s easier for an educational district to get voter authorization to borrow money for construction than it is to get voter approval to impose a parcel tax to obtain supplemental revenue.

This tempts some districts to stretch credulity and declare that voters authorized bond proceeds to be spent on items tenuously related to building a school and providing it with furniture and equipment. And despite the many protections in Proposition 39, sometimes the application of bond funds to operating expenses cannot be prevented.

The Los Angeles Unified School District and the San Diego Unified School District have borrowed money through bond sales and used the proceeds to buy portable electronic tablets for students. These districts rationalize the practice by claiming that voters consented to it when they approved Proposition 39 in 2000 and then subsequently approved local district bond measures.

Recently several districts have asked voters to approve Ed-Tech Bonds^®, a trademarked arrangement of bond sales marketed by Dale Scott & Company that permit a district to issue an ongoing series of new short-term bond issues to pay for technology that becomes outdated after a few years. Voters seem to support the idea of using money borrowed from short-term bonds for technology, as long as the district explains the concept openly and establishes reasonable limits.

But the Los Angeles Unified School District and the San Diego Unified School District have used construction bond proceeds to buy iPads for students to use in the classroom and even take home. Because the useful life of these devices is limited, these school boards may be making a fiscally irresponsible policy decision when financing their purchases with borrowed money from bond sales.

Why Any Educational District Can Borrow Money Via Bond Sales and Use It to Buy iPads

No group or individual has put forward a strong legal argument for the idea that school districts cannot use Proposition 39 bond proceeds to buy personal portable electronic devices. In contrast, the arguments are strong for the idea that voters gave educational districts the authority to do this, as long as the districts don’t stray too far from the purposes of Proposition 39.

Perhaps the most notorious example of questionable use of bond funds is the ill-fated Common Core Technology Project Plan at the Los Angeles Unified School District (LAUSD). The former superintendent proposed that funds from Measure R and Measure Y would be used for the first phase of a program to buy electronic tablets (specifically, iPads produced by Apple, Inc.) for students to take home. The iPads would come with software developed by another company.

On September 7, 2012, a law firm provided the superintendent with a memorandum entitled “Use of Los Angeles Uniﬁed School District Measures R, Y and Q General Obligation Bond Proceeds for Certain Costs Related to the District’s Common Core Technology Project Plan.” It asserted that borrowed money from bond sales authorized by measures that comply with Proposition 39 could be used for (1) costs of acquiring electronic tablets, (2) costs of acquiring hardware and installing software, and even (3) costs of hiring “technology specialists who will train the District’s internal technology support teams to operate and maintain the Common Core Technology project, and technology adoption trainers who will train other school site trainers.”

The memo also exposed a oversight in the Proposition 39 language:

There is no statutory definition of many of the terms used in Proposition 39, such as what constitutes the construction, replacement or furnishing and equipping of school facilities for Proposition 39 purposes. Thus, there is no controlling legal authority expressly stating whether costs related to the Common Core Technology Project would constitute the construction, replacement or furnishing and equipping of school facilities for purposes of Proposition 39…the District should remain aware that there is no controlling legal authority expressly stating what constitutes the “equipping of school facilities” for purposes of Proposition 39. The provisions of Proposition 39 relating to the expenditure of general obligation bond proceeds for equipping of school facilities have not been interpreted by any court or other legal authority and, to our knowledge, are not pending before any court.

In practice, educational districts and their bond financial advisers were setting the standards:

Broad agreement, however exists among issuers of general obligation bonds and their advisors that costs directly connected to the construction, acquisition, equipping and furnishing of school facilities may properly be paid from proceeds from the sale of Proposition 39 Bonds, if such costs (i) are “capitalizable” under generally accepted accounting principles applied in accordance with the policies and procedures of the California School Accounting Manual, and (ii) constitute construction, reconstruction, rehabilitation, replacement, furnishing or equipping costs of a project listed on one or more bond measures passed pursuant to Proposition 39.

In effect, the parties getting the borrowed money and getting the transaction fees for the bond sales have determined how that money should be properly spent.

Los Angeles Unified School District Defies Criticism, Pushes Forward

Despite this memo, the LAUSD superintendent’s plan to use borrowed money to buy iPads with installed software generated controversy across the political spectrum. For example, both the United Teachers of Los Angeles (the teachers’ union) and the Howard Jarvis Taxpayers Association objected to it. Opponents claimed that voters never had an expectation that the bond measures would allow LAUSD to borrow money to buy personal student iPads with software. In addition, a rumor spread that LAUSD would use the proceeds of long-term bonds to buy technology only useful for a few years at most.

While LAUSD officials denied that they were going to sell long-term bonds for iPads, this argument gained attention from news media and inspired ridicule among critics. The same criticism also gained a following against the San Diego Unified School District. And the critics had a point: there was nothing in state law to prevent a school district from selling a 40-year Capital Appreciation Bond to buy an iPad with a lifespan of three years.

A major force in slowing down the rush to adopt this Common Core Technology Project at LAUSD was the district’s Citizens Bond Oversight Committee, established at LAUSD even before Proposition 39 was enacted. After significant deliberation and disagreement, this committee expressed numerous concerns but concluded that the district could legally buy portable electronic devices using funds that voters approved the district to borrow via bond sales authorized in a ballot measure that complied with Proposition 39.

This conclusion was stated in a November 18, 2013 letter from the Bond Oversight Committee Information Technology Task Force to the LAUSD School Construction Bond Citizens’ Oversight Committee:

On November 15, 2013, after months of discussions with the Office of the General Counsel (“OGC”) and many requests for a legal opinion supporting the District’s use of bond funds to pay for the majority of costs associated with the CCTP, the OGC issued a written reasoned memorandum opinion stating, among other things, that after performing its due diligence, including, but not limited to, conducting several telephone meetings with and reviewing past communications from the District’s bond counsel, in the OGC’s opinion there is legal support for the use of bond funds to purchase devices such as tablets for the purpose of equipping schools with those devices, to purchase the software packages to be used on the devices, and to allow students, teachers and staff to take the devices home. We find this opinion acceptable.

This memo is once again referenced in a letter from the head of the Bond Oversight Committee to a retired superintendent of the Los Angeles Unified School District:

Our own review of the CCTP has led us to conclude that the District’s actions to date are legal and not imprudent, and we have been assured by the District that the repayment period for the bonds used to finance this project will be reasonably related to the expected life of the assets purchased…we had requested, received, and closely reviewed a letter from the Office of the General Counsel to the District (“OGC”) setting out the reasoned basis for its opinion that bond funds may be used to purchase devices such as tablets for the purpose of equipping schools with those devices, to purchase the software packages to be used on the devices, and to allow students, teachers and staff to take the devices home.

The letter from the head of the Bond Oversight Committee to the retired LAUSD superintendent also anticipated arguments soon to be advanced by the California Legislative Counsel:

Measure Q did not mention iPads as something that bond proceeds would buy because the ballot measure was passed in November 2008 and iPads were not available to the public until April 2010. It is not possible for a bond measure to anticipate specific technological devices before they are available.
The Measure Q bond project list states that bond funds may be used for computer and communications projects, including, but not limited to “hardware and software for information-technology applications” undertaken at some or all of the District’s schools and associated facilities.
LAUSD has been using bond funds for technology, including computers in the classroom, since after voters approved Proposition BB in 1997. In addition, voters were aware from the language in the ballot statements that bond proceeds would be used for technology.

On April 19, 2015, the Los Angeles Times reported that the Securities and Exchange Commission has opened an informal inquiry into LAUSD practices because the district did not mention in its Official Statements that bond proceeds would be used to purchase iPads.

The California Legislature Turns Its Attention to the Practice

In 2014, Assemblyman Curt Hagman introduced Assembly Bill 1754 in response to public criticism about using bond proceeds for personal portable technology. Under his bill, educational districts would have been prohibited from borrowing money from the sale of bonds authorized by measures passed under the criteria of Proposition 39 to purchase portable electronic devices, including laptops and tablets, unless the technology was closely connected to instruction within the classroom, was not assigned to individual students, and was not permitted to leave the school site for more than one school day.

AB 1754 also would have prohibited educational districts from using bond proceeds to buy basic or supplemental instructional materials. To supplement his bill, Hagman asked the Joint Legislative Audit Committee to hold an oversight hearing to review the LAUSD iPad program. In his letter to the committee asking for an audit, Hagman wrote that “there have been discussions on the legality of using 25-year construction bond money to purchase the iPads (which have a lifespan of only 3-5 years).”

The audit committee hearing did not happen. And the bill failed to pass out of committee despite no opposition votes. Three committee members voted for it and four others did not vote.

While this bill was under consideration, the California Legislative Counsel produced a letter defending the use of Proposition 39 bond money to buy laptops and tablets. It asserted that Proposition 39 generally allows an educational district to buy portable electronic devices using funds that voters approved the district to borrow via bond sales authorized in a ballot measure that complied with Proposition 39.

The letter provided three major reasons why educational districts can do this:

Language in Proposition 39 states that bond proceeds may be used to provide access to information technology and specifically cites computers and the Internet. In addition, the argument in favor of Proposition 39 contained in the ballot pamphlet shows that voters were aware that bond proceeds would give schools access to information technology.
“Furnishing and equipping” cited in Proposition 39 includes the purchase of goods that satisfy the broad purposes of the law. It is incorrect to narrowly interpret Proposition 39 as authorizing the sale of bonds only for construction activities that support information technology access.
Courts reasonably regard laws as somewhat flexible to reflect changing conditions over time. Under this principle, a court would likely construe Proposition 39 to authorize the use of bond proceeds to purchase technological devices not in existence or wide use at the time of its passage, such as laptops and electronic tablets, so long as the intended use of those devices is similar to the use of desktop computers and is otherwise consistent with the purposes of the proposition. It is incorrect to narrowly interpret Proposition 39 rigidly limiting purchases of technology to desktop computers because that’s what voters recognized as technology when they approved the ballot measure in 2000.

Even Defenders of the Practice Admit There Needs to Be Limits

Are laptops and tablets analogous to desktop computers that were the prevalent technology in schools when voters approved Proposition 39 in 2000? Some would argue that laptops and tablets are more like textbooks than furniture or equipment.

Even more questionable is the software installed in the laptops or tablets. Can software be defined as “equipment” if it is bought together as a package with the hardware?

Another question: Is it proper to use bond proceeds to pay for personnel who train others to use the laptops or tablets and the software that comes installed in them?

Finally, does federal law allow a local government to issue long-term tax-exempt bonds to buy or replace items with an approximate three-year lifespan?

In 2015, Assemblyman Scott Wilk introduced Assembly Bill 882, which was originally a similar effort to Assemblyman Hagman’s Assembly Bill 1754 (in 2014) to stamp out the use of bond proceeds for portable electronic devices. But unlike Hagman’s bill, Wilk’s bill passed out of its first committee and moved through the Assembly. The bill was approved after Assemblyman Wilk agreed to an amendment requested by California’s Coalition for Adequate School Housing (C.A.S.H.), a primary backer of educational construction bonds.

As of July 14, 2015, Assembly Bill 882 declares that the term of a bond used for the purposes of furnishing and equipping classrooms, including purchasing electronic equipment, shall not exceed 120 percent of the average reasonably expected economic life of the furnishings and equipment. CASH says this provision conforms the practice to federal tax rules.

Assembly Bill 882 also clarifies that portable electronic devices, including laptops and tablets, may be purchased with Proposition 39 bond funds only for the equipping of school facilities and be used for instruction-related purposes in school facilities. Those devices cannot be assigned to individual pupils or removed from the school site on a daily basis.

Even if Assembly Bill 882 is enacted into law, it would only apply to bonds approved by voters after January 1, 2016. LAUSD and the San Diego Unified School District would still be able to fund their programs with bond proceeds, as long as voters allowed them to continue it.

Clarifying the Definition of “Furnishing and Equipment” in Proposition 39

Technology is not the only ambiguous aspect of “furnishings and equipment.” Board meeting agendas at the West Contra Costa Unified School District routinely include consent items to spend money to move equipment and furniture with proceeds of bond sales. Is this a prudent way to spend borrowed money that must be paid back over years, with interest? It’s another example of a school or college district taking advantage of a vague provision in state law.

Sources

“Daniel Borenstein: Time to Slow West Contra Costa’s Deceptive School Construction Program,” Contra Costa Times, March 1, 2013, accessed June 28, 2015, www.contracostatimes.com/ci_22699375/daniel-borenstein-time-slow-west-contra-costas-deceptive

“Charles Ramsey’s Legacy in the West Contra Costa School District,” Contra Costa Times, December 12, 2014, accessed June 28, 2015, www.contracostatimes.com/richmond/ci_27126352/charles-ramseys-legacy-west-contra-costa-school-district

“Last Impediment Removed for WCCUSD Bond Program to be Completed,” City of Richmond Councilmember Tom Butt, May 10, 2013, accessed June 28, 2015, www.tombutt.com/forum/2013/1305010.htm

“Grand Jury Proceedings in State of California v. Alioto et al., December 6, 2012,” San Diego Union-Tribune, accessed June 28, 2015, http://media.utsandiego.com/news/documents/2013/06/07/Volume18.pdf

“Ed-Tech Bonds^®,” Dale Scott & Company, accessed June 28, 2015, www.dalescott.com/what-we-do-2/ed-tech-bonds/

“Use of Los Angeles Uniﬁed School District Measures R, Y and Q General Obligation Bond Proceeds for Certain Costs Related to the District’s Common Core Technology Project Plan,” Los Angeles Unified School District, September 7, 2012, accessed June 28, 2015, http://bit.ly/1KplzTM

“The District’s Common Core Technology Project (“CCTP”) Phase 2 Proposal,” Los Angeles Unified School District, November 18, 2013, accessed June 28, 2015, http://bit.ly/1BQ3v1U

Letter from the Bond Oversight Committee Chair to William J. Johnston, Los Angeles Unified School District, February 14, 2014, accessed June 28, 2015, http://bit.ly/1LxtRZ5

“SEC Launches Informal Inquiry into LAUSD’s Use of Bonds for iPads,” Los Angeles Times, April 19, 2015, accessed June 28, 2015, www.latimes.com/local/education/la-me-lausd-ipads-inquiry-20150417-story.html

“Text – AB 1754 School Bonds: Portable Electronic Devices and Instructional Materials,” California Legislative Information, April 24, 2014, accessed June 28, 2015, http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB1754&search_keywords=

Letter of Assemblyman Curt Hagman to California Joint Legislative Audit Committee, October 17, 2013, accessed June 28, 2015, laborissuessolutions.com/wp-content/uploads/2013/10/2013-10-17-Hagman-Letter-to-Joint-Legislative-Audit-Cmte-LAUSD-iPad-investigation.pdf

Letter of California Legislative Counsel to Assemblywoman Joan Buchanan, April 1, 2014, accessed June 28, 2015, media.utsandiego.com/news/documents/2014/05/09/LegCounseliPads.pdf

“Text – AB 882 School Bonds: Term of Bonds: Furnishing and Equipping Classrooms,” California Legislative Information, June 25, 2015, accessed June 28, 2015, leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160AB882&search_keywords=

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