Finding California’s Biggest Payees

California lags behind other states in transparency because it has not produced an on-line checkbook, showing detailed spending information by payee. The state does tell us how tax money is allocated by purposes (health, education, corrections, etc.), but it doesn’t tell us who receives this money.

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Treasurer’s New Web Site Reveals a Bad Deal for Fullerton Taxpayers

On November 17, State Treasurer John Chiang launched a new web site that provides information on bonds issued by California state and local governments. The site, at http://debtwatch.treasurer.ca.gov, has detailed data on over 50,000 bonds sold to investors over the last thirty years.

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How CalPERS has Created a Ticking Time Bomb

During the Stockton bankruptcy Judge Klein called CalPERS the “bully with a glass jaw.” Klein meant that CalPERS, as a servicing company, has no standing in the bankruptcy because the pension obligation is between the public agency and their employees and retirees.
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California Ranks 50th in State Spending Transparency: What We Can Do About It

Although many California political leaders espouse their support for transparency, the state lags behind most others in opening its spending data to public scrutiny.  So while Lieutenant Governor Gavin Newsom, has called on governments to “lean into [the] notion of openness and transparency,” the state he may soon lead is leaning in quite the opposite direction.

In its March 2015 report card, the US Public Interest Research Group (US PIRG) gave California a grade of “F” for its efforts to provide spending transparency – a distinction shared only by two other states, Alaska and Idaho.  US PIRG also assigned each state a more granular numerical score on a 0-100 scale. California’s score of 34 placed it last among the fifty states – 9 points below Alaska.  US PIRG notes:

California…is weighed down by the bureaucratic fragmentation of its information. While the state has made some interesting and useful data sets available to the general public … California does not succeed in providing a “one-stop” transparency portal.

Bureaucratic fragmentation has also frustrated private efforts to elicit the state’s checkbook. In 2013, American Transparency – a not-for-profit that operates openthebooks.com – filed a Public Records Act with the State Controller’s Office (SCO) requesting detailed state spending data. SCO’s legal counsel rebuffed the request on the grounds that the controller does not hold all the spending records, and is not required under the Public Records Act to create records not already in its possession. Apparently state spending data is scattered across roughly 500 agencies, departments and commissions which pay some or all of their vendors directly.

The fragmentation issue might be resolved by Senate Bill 573 which would require the governor to hire a Chief Data Officer, who would then be tasked with creating a state-wide open data portal leveraging information from all state agencies. The bill, proposed by Dr. Richard Pan (D-Sacramento), received favorable publicity but was tabled by the Senate Appropriations Committee on August 27. Pan would have to re-introduce the bill next year if he wants it to pass before the next legislature is seated.

In the meantime, it will be up to civil society organizations to advance state spending transparency. As a part of our state’s civil society, we at the California Policy Center are eager to help.

Starting with Medi-Cal Reimbursements

Ideally, a state checkbook should contain all vendor payments. It need not include employee salaries because these are already published by both SCO and by Transparent California. While it would be extremely challenging for one or more outside organizations to compile all of this spending, a large portion of it can be assembled by examining a few of California’s largest agencies.

The entity that makes the most vendor payments is the Department of Healthcare Services which administers the state Medi-Cal program. In the last fiscal year, Medi-Ca106191228-20140630-Audl payments totaled $87 billion, including $17 billion from the General Fund, $14 billion from Special Funds and $56 billion in Federal Funds.

So just getting our hands around the payments made by this one department would go a very long way toward documenting the state’s overall spending.  Over the next few weeks, the California Policy Center will compile a DHCS checkbook to demonstrate the benefits of state spending transparency.

Our preliminary review suggests that the number one recipient of Medi-Cal funding is Los Angeles County USC Medical Center, known locally as LAC+USC. The 664-bed county hospital received over $700 million in Medi-Cal funds during the fiscal year ended June 30, 2014. LAC+USC is one of three LA County public medical centers. The two other county hospitals together received an additional $700 million in Medi-Cal funding during the same fiscal year, yielding a total of over $1.4 billion in state and federal Medi-Cal funds devoted to LA County hospitals. Medi-Cal reimbursements accounted for over 70% of all three hospitals’ patient revenues.

The prevailing view is that Medi-Cal payments are too low to adequately compensate providers. But, in the case of LAC+USC, the hospital reported $77 million of “Net Income”, i.e. revenues in excess of expenses, also known as “profit” in the private sector.  That said, it should be noted that the hospital suffered a loss on operations, and was profitable because it received $284 million in non-operating revenue.

Most of LAC+USC’s expenditures take the form of employee compensation and benefits, as well as physician fees. These three categories accounted for over $900 million of the hospital’s $1.375 billion in total operating expenses.

A review of 2013 Transparent California data shows that nine out of the ten highest paid Los Angeles County employees are physicians – apparently affiliated with one or more of the three County hospitals. All nine of these doctors received total compensation from the County in excess of $500,000 during calendar year 2013.

It appears that at least a couple of these individuals received compensation from other medical facilities. For example, Dr. John Peter Gruen, a neurosurgeon who received a total of $628,001 in County compensation is also affiliated with Huntington Memorial Hospital in Pasadena and Keck Medical Center of USC.

As this brief analysis suggests, the ability to obtain state spending details and juxtapose this information with other data sets should yield new insights into how our tax dollars are being managed. Next month, look to this space for much more information about California Medi-Cal spending.

 *   *   *

About the author:  Marc Joffe is a policy analyst for the California Policy Center. He is also the founder Public Sector Credit Solutions, established in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Will California Voters Support Pension Reform?

A bipartisan coalition led by former San Jose Mayor Chuck Reed and former City Councilman Carl DeMaio have filed a pension reform ballot measure in California. The group seeks to qualify the measure for a possible November 2016 vote by California voters.

The California Policy Center examined polling conducted by a variety of sources and CPC also commissioned its own polling study through the polling firm Penn Schoen Berland. CPC’s poll utilized online interviews in English and Spanish from August 17-21, 2015 among n=1,002 likely voters in California.

Overwhelming Public Support for Pension Reform

CPC’s review of a number of statewide polls conducted in recent years confirms that California voters have shown overwhelming support for pension reform.

A statewide poll issued by the Public Policy Institute of California in September found that 72 percent of likely voters say public pension costs are a problem and 70 percent say voters should make decisions about retirement benefits. As in previous PPIC polls, 70 percent favor giving new government employees a 401(k)-style plan rather than a pension. The change has strong bipartisan support: Republicans 74 percent, independents 69 percent, and Democrats 65 percent.

The CPC poll used several questions to examine voters knowledge of and assessment of issues facing state and local government pension funds – as well as the level of compensation and benefit packages provided to government employees.

(1) Would you say the financial health of the pension funds for state and local government employees in California are in a better place, worse place, or about the same place as they were ten years ago?

(%) California
Likely Voters
Better place 14
Worse place 46
About the same place 25
Don’t know 15

(2)  As far as you know, are CalPERS and CalSTRS in debt or do they have a surplus?

(%) California
Likely Voters
In debt 30
Have a surplus 16
Don’t know / unsure 55

(3)  As far as you know, on average, are state and local government employees…?

(%) California
Likely Voters
Paid more than employees in the private sector 41
Paid less than employees in the private sector 34
About the same 25

(4)  As far as you know, on average, do state and local government employees…?

(%) California
Likely Voters
Get bigger pensions than employees in the private sector 60
Get smaller pensions than employees in the private sector 19
About the same 21

 *   *   *

Attorney General’s Title and Summary Impacts Support

In August, the DeMaio and Reed blasted Attorney General Kamala Harris for issuing what they called a “biased” Title and Summary of the pension reform measure the coalition filed. The Title and Summary is what voters actually see on the ballot and the Attorney General has a Constitutional obligation to provide a fair and accurate description.

Putting aside the debate over whether the Title and Summary is fair and accurate, the polling shows the Attorney General’s Title and Summary from a polling perspective does indeed have a major negative impact on the ballot proposal.

In March 2015, the coalition conducted its own poll of California voters that demonstrated solid support for the concepts contained in the ballot proposal – specifically asking this question:

Would you vote yes – in favor of, or no – against a ballot measure that would give voters the right to reform pension benefits for state and local government workers, would require voter approval before obligating taxpayers to guarantee lifetime pensions benefits for new state and local government employees, and would require new government employees to contribute at least half the cost of their retirement benefits?

California Voter Support for Pension Reform

20151116-CPC-DeMaio

CPC’s poll used the Title and Summary provided by the Attorney General – with the Title and Summary crafted by the AG resulting in less support for the measure.

PUBLIC EMPLOYEES. PENSION AND RETIREE HEALTHCARE BENEFITS. INITIATIVE CONSTITUTIONAL AMENDMENT. Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including those working in K-12 schools, higher education, hospitals, and police protection, for future work performed. Adds initiative/referendum powers to Constitution, for determining public employee compensation and retirement benefits. Bars government employers from enrolling new employees in defined benefit plans, paying more than one-half cost of new employees’ retirement benefits, or enhancing retirement benefits, unless first approved by voters. Limits placement of financial conditions upon government employers closing defined benefit plans to new employees. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Significant effects—savings and costs—on state and local governments relating to compensation for governmental employees. The magnitude and timing of these effects would depend heavily on future decisions made by voters, governmental employers, and the courts.

California Voter Support for Pension Reform
Using Attorney General’s Title & Summary

(%) California
Likely Voters
Vote yes to support 36
Vote no to oppose 33
Undecided 32

 *   *   *

Many Arguments in Favor of Pension Reform Poll Well

After testing the Title and Summary, CPC polled arguments that might be used by proponents of pension reform to justify major changes in state and local pension benefits.

(%) California Likely Voters

 

Much more likely Somewhat more likely Somewhat less

likely

Much less

likely

Many government employees are abusing the system to spike their pensions. In 2013, one former assistant fire chief in Los Angeles collected a government pension of $983,000. In San Diego, a former city librarian now collects $234,000 annually, and a politician in that same city started cashing full-pay pension checks at age 32. Last year alone, over 41,000 retired state and local government employees cashed pension checks of $100,000 or more! This proposal would end abuses like these. 52 27 12 9
This proposal does not take away any pension benefits lawfully earned by government employees. The proposal simply prevents any spiking of pensions going forward and also reforms benefits for any newly hired government employees going forward. It will not affect current retirees. In this way, we are fixing our pension problem while protecting the seniors and families who depend on current benefits. 47 40 8 5
Backroom deals by politicians created the California pension crisis. Politicians take campaign contributions and support from powerful government unions and in return, politicians give the unions sweetheart deals that mean bigger pension benefits. Politicians have even voted to spike their own pensions. This proposal provides a “check” on state and local politicians by requiring voter approval of any future pension deals. With this proposal, voters will be able to stop the politicians from doing backroom pension deals that taxpayers can’t afford. 47 31 13 9
If you are concerned about public safety you should support this pension reform proposal. If we don’t reform government pensions now, many cities and counties will be forced to cut police and fire services to divert our tax dollars to bail out government pension funds. For example, the Oakland Police Department no longer responds to 44 different crimes as a result of cutbacks that were necessary to fund pensions. Elsewhere in the state, fire stations have had to scale back hours of operation and in some cases close in order to pay rapidly rising pension costs. 44 40 8 8
Pension debt has grown exponentially in California, rising from $6.3 billion in 2003 to $198 billion in 2013. And when combined with unfunded liabilities for retiree healthcare programs, taxpayers owe almost $350 billion to fund future retirements for government employees. Without immediate action, the cost of government pensions will double in the next five years alone. This proposal will shrink the debt and save taxpayers billions. 44 34 14 7
Politicians and bureaucrats who run the government pension program are cooking the books and misleading the public. Last year the head of the pension program pled guilty to taking bribes and helping friends collect millions in a fraudulent investment scheme. The situation is getting worse as taxpayers lose billions from dubious investment decisions made by a board with significant conflicts of interest. This proposal would reform the government pension program, which is why the powerful elites who profit from the government pension program are opposing it. 44 30 15 11
Many government employees contribute nothing at all towards the costs of their pension benefits, leaving taxpayers to pick up the whole tab. This proposal would require new government employees to contribute at least half the cost of their retirement plans, similar to what most private sector employees have to contribute. 43 32 17 8
If you are concerned about quality education for our children you should support this pension reform proposal. If we don’t reform government pensions now, many cities and counties will be forced to cut after school programs, close libraries, and parks and recreation in order to divert our tax dollars to bail out government pension funds. For example, cities like San Jose had to restrict library hours of operation in order to pay for rapidly rising pension costs. 40 34 17 9
Mounting government pension debts have forced major cuts in important services. For example, pension contributions in Los Angeles have grown from 3% of the city’s overall budget to nearly 20% in just the last decade, crowding out other public needs. Already in cities and counties across California, higher pensions costs have meant cuts to after school programs, closures and brownouts at fire stations and cancellations of road repairs. With this pension reform proposal, we can generate savings to restore these important services. 39 34 20 7
Voters should take a close look at who opposes this pension reform proposal. One Sacramento union boss leading the charge against reform collects a pension of $183,690 annually. He says government employees trade off pay for a secure retirement. However, according to the Sacramento Bee newspaper, the average salary for employees like him is $163,000 annually plus health care and retirement at age 55. Those same union leaders are lying about this pension reform proposal because they want to keep their taxpayer-funded gravy train going. 39 29 18 15
Cities across California are being crushed under the weight of mounting pension debt. Because of pensions, major cities such as Vallejo, Stockton, and San Bernardino have already gone bankrupt, which resulted in massive cuts in important services such as police and fire protection. Unless we approve this pension reform proposal, many more cities throughout California will be forced to declare bankruptcy and make similar extreme cuts in our services. 38 36 16 9
Voters should take a close look who opposes this pension reform proposal. In 2012, the teachers unions blocked legislation that would have given local officials the power to fire teachers convicted of sexually abusing their own students even though this meant that sexually abusive teachers got to keep their jobs. Those same unions are lying about this pension reform proposal because they want to block the common-sense reform it would bring. 38 27 22 13
The pension reforms in this proposal are fair. The new benefits provided to government employees would be no better, and no worse, than the benefits provided to workers in the private and non-profit sectors. For police and fire, the measure provides a guarantee of death and disability benefits mirroring exactly what the US Military receives. 37 41 14 9
 

 *   *   *

Arguments in Opposition to Pension Reform Offer Mixed Bag of Results

(%) California Likely Voters
(among those who saw “anti” messaging first)
Much less

likely

Somewhat less

likely

Somewhat more likely Much more likely
This pension proposal is promoted and funded by Tea Party Republicans including a young billionaire Texan who is spending $50+ million dollars to take away from school bus drivers, teachers, nurses, and firefighters their hard-earned retirement benefits. He hates government so much that he wants to strip millions of middle and working class Californians of their retirement security. 53 19 17 11
This proposal to eliminate public pensions in California is led and funded by a Texas wheeler-dealer billionaire named John Arnold. Arnold is spending $50+ million dollars of his fortune to dismantle retirement plans for firefighters, nurses, and teachers. Moving California state and local government employees to 401(k) accounts would mean billions more for Arnold and his cronies to split in higher Wall Street fees. 48 21 19 13
Many public employees like teachers, police, and fire fighters do not receive Social Security or have very limited benefits. This proposal would eliminate their pensions and would undermine their ability to retire with dignity, as they will have no safety net if their 401(k) investments lose their value before or during their retirement through no fault of their own. 47 25 19 9
This pension reform proposal would likely eliminate the current death and disability benefits for new police, firefighters, and other public employees. It would be disgraceful to take these important protections away from families of police and fire fighters who make the ultimate sacrifice to protect Californians. 47 24 20 9
If enacted, this ballot measure will cost the taxpayers millions, or even billions for extra elections. Every contract at all levels of government could be on the ballot, costing school districts, cities, and counties millions of dollars to hold these elections. And it will unleash expensive lawsuits which will be litigated in the courts, with taxpayers footing the bill. 45 34 14 7
This proposal would eliminate state constitutional protections for current and future employees, breaking promises made to teachers, nurses, and firefighters by rewriting their pension benefits without negotiation. This would devastate middle class families who have contributed to these pension plans and have made long-term financial planning decisions based on the promises made to them when they were hired. 45 25 19 11
This proposal to eliminate public pensions in California is led and funded by greedy investors including America’s youngest Wall Street billionaire who made his stash out of the collapse of Enron. If a statewide pension-gutting proposal is passed in California, public sector employees will be moved to 401(k) plans, which would mean a windfall in investment fees for Wall Street. It’s as bad as when George W. Bush tried to privatize Social Security. 44 27 19 10
Pensions are important compensation for public employees, including those who work in K-12 schools, higher education, hospitals, and police protection.  Public employees earn an average of 7% less than their private sector counterparts. Adequate pensions also serve as valuable recruitment and retention tool. If we approve this proposal’s massive cuts in pension benefits, we will need to either pay government employees more or risk hiring less-qualified government employees, which will lead to lower-quality services. 38 26 20 16
This measure is part of an extreme agenda to eliminate collective bargaining for government employees in California. The proposal allows voters to increase or decrease compensation and retirement benefits of government employees without any negotiation or collective bargaining. This undermines the ability of the government and employees to negotiate and agree on contracts. These complex issues should be settled at a bargaining table, not the ballot box. 38 24 24 14
This proposal would take away vested benefits that were promised to current public employees. For example, a state employee with 8 years of service could lose retiree healthcare benefits she would have earned after 10 years under her current employment contract. This is unfair to workers and their middle-class families, especially single mothers, because many accepted lower as a tradeoff better retirement and healthcare plans. 37 32 20 11
This proposal exaggerates the pension problem. Public employees are not retiring to lavish and luxurious pensions. In 2012, California passed extensive pension changes that raised the retirement age for new workers and require all employees to pay half of their pension costs. Thanks to Governor Brown’s reforms, $100,000 plus pension payments have all but been eliminated. The average public employee pension is just $2,500 a month – hardly the gold-plated plan overhaul that the other side claims. 31 29 28 11

 *   *   *

Significant Support for Pension Reform After Title and Summary Is Explained

Among voters who were exposed to the case for pension reform immediately after the Title and Summary was provided, support shifted dramatically back in favor of the pension reform proposal.  CPC concludes that the Title and Summary as currently written confuses and scares voters, but once the proposal is clearly explained to voters, confident support returns.

(%) CA Likely Voters
Vote yes to support 63
Vote no to oppose 18
Undecided 19

 *   *   *

Pension Reform Likely to Have Major Impact on 2016 Elections

The presence of a pension reform issue in the midst of the 2016 elections in California could have a profound effect on both candidate races and the debate over a variety of tax increase measures being considered for the 2016 ballot.

(1)  In the November 2016 election, which of the following types of candidate would you be most likely to vote for?

(%) California
Likely Voters
A Democrat who opposes the proposal 24
A Democrat who supports the proposal 18
A Republican who opposes the proposal 12
A Republican who supports the proposal 20
None of the above 5
Not sure 22

(2)  If a candidate from a political party different from your own supported this proposal, would that make you…?

(%) California
Likely Voters
Much more likely to support that candidate 9
Somewhat more likely to support that candidate 23
Somewhat less likely to support that candidate 11
Much less likely to support that candidate 17
No difference 41

(3)  Some people say that we should approve tax increases on the wealthy and extend the temporary sales tax enacted in 2012, because the state still need that money to close the budget deficit. Without these funds, we will have to cut funding for schools and for other important public services.

Other people say that the politicians are only raising taxes to pump more money into these failing state and local government pension systems to continue unsustainable government pension payouts (including their own) with our tax dollars. None of this money will go to school funding. We should enact pension reform first before considering any more tax increases.

Which of the following comes closer to your view?

(%) California
Likely Voters
Approve tax increases  on the wealthy and extend 2012 tax increases 37
Enact pension reform first 32
Neither of the above 15
Unsure 17

 *   *   *

Voters Not Swayed Significantly By Groups on Pro and Con Side of Pension Reform

CPC evaluated voter views of a variety of groups that are likely to take positions both for and against pension reform proposals.

As it related to this proposal, how much would you trust the information you might receive from the following organizations or institutions?

(%) California Likely Voters A lot of trust /

very credible

Somewhat trust / somewhat credible Trust just a little / not very credible Do not trust at all / not at all credible
Police and firefighter unions 22 39 25 14
Teachers’ unions 18 35 23 23
CalPERS 13 35 33 19
Government employees’ unions 11 31 27 31
Public sector unions 11 30 34 25
California Chamber of Commerce 10 41 33 16

 *   *   *

About the Author:  Former San Diego city councilman and lifelong entrepreneur Carl DeMaio is now tackling state-wide fiscal reform policy. While on the City Council, DeMaio led the effort to cut red tape on small businesses, reform the city’s contracting processes to expedite infrastructure projects, and enact some of the toughest “Sunshine Law” open government requirements in the nation. In 2012, DeMaio crafted and led a citizens campaign to qualify and pass the “Comprehensive Pension Reform” Initiative – the first-of-its kind measure to switch San Diego from a Defined Benefit Pension Plan to a 401(k) retirement program. In 2003, DeMaio founded the American Strategic Management Institute (ASMI), which provides training and education in corporate financial and performance management. In late 2007, DeMaio sold both of his companies to Thompson Publishing Group. DeMaio holds a BA in International Politics and Business from Georgetown University.

Climate Change Laws Hurt The Poor And Benefit No One: Why Are Political Elites Pushing So Hard?

I was eighteen years old in 1966 when my plane circled the tiny airport in Ontario, California.  I was traveling from the Bay Area to Claremont to begin my freshman year in college.  Looking down from my window seat, the overcast cloud cover prevented me from seeing the freeways and buildings on the ground.  When we landed, however, I looked up and saw a hazy blue sky.  Then I realized that I was looking up through the cloud cover that I had observed from above.  To my horror, what I had seen below me from the sky was not cloud cover at all; it was thick, brown smog, and I was breathing it.

That was the day I became an environmentalist.  Although I have a libertarian’s skepticism of government, many times I have supported government programs to clean up the air, water, forests and beaches. In this way, I am like other Californians.  Because all of us love and defend the natural resources of our state, the brand “environmentalist” is almost as popular as Santa Claus.

George Orwell warned, however, “political language . . . is designed to make lies sound truthful and murder respectable.” [1] California’s climate change laws have nothing to do with removing smog or keeping California’s beaches clean.  They hurt the poor and benefit no one.   Yet a political elite has managed to impose its will on the California economy without having to explain why it has chosen to hurt the poor for no benefit to the public largely because they use the label “environmentalist”.   It is time to hold them accountable.

Orwell’s warning also applies to the substance of the climate change conversation.  The climate change elites do not discuss climate change issues in the manner of scientists; they collapse multiple distinct issues into demonizing rhetoric:  “The science is settled,” they say in response to every argument that is made; this means that the opponent is a “science denier”. Seldom is this rhetoric even arguably responsive.  While science is one of the principal subjects of the discussion about predicting earth’s climate future through scientific computer modeling, it is no more than political rhetoric to argue that one scientist is so completely wrong in his opinion, and the other so clearly correct, that the first is “denying” the very principles of science. And this is not even the main point of this essay…

Opponents who have other reasons for their opposition to climate change laws usually do not challenge the science.  Assuming the climate change outcomes have been predicted accurately by proponents, for example, opponents nevertheless contend that enforcement of climate change laws will not eliminate or delay the predicted harmful effects of climate change because reductions in GHG emissions required by California (or EPA) are more than offset by increased emissions from new power generation plants in China and India.  Opponents who make this point do not deny the science; they embrace it.  The climate change elites do not respond to this point as a distinct argument for which they are accountable; at most, they pretend that the issue does not exist, a slick move worthy of Orwell’s admonition about “political speech”.

California has the most aggressive climate change laws of any state in the nation and is the only state imposing a cap and trade protocol on emitters.  It requires that GHG emissions be reduced to 1990 levels no later than 2020.  This year, new laws have been proposed to tighten that standard, requiring that 2020 emissions be reduced to 80% below 1990 levels.  Other restrictions include specific requirements that specified minimum levels of wind and solar power be included in the mix of power sources.  All of this makes power in California the most expensive in the nation.

According to the Manhattan Institute, “California’s renewable energy mandates and climate change policies . . . are having a disproportionate economic impact on the poor.” [2] The report found that “in 2012, about 1 million California households were living in energy poverty, a term that applies to households that spend 10 percent, or more, of their income on household energy costs.” There is a considerable disparity between wealthy areas, such as Mill Valley in Marin County, whose monthly energy costs were only $200 per home because of mild weather conditions, and middle-income areas, such as the town of Hanford in the San Joaquin Valley, where harsher average weather leads to average monthly energy costs of about $500 per home.

20150821_CPC_Loewen
Why don’t California’s disadvantaged communities recognize that
extremists in Sacramento are devastating their household budgets?

The climate change elite is leaving the poor and middle class behind in other ways too.  The Manhattan Institute study found that because of the high cost of compliance (estimated $115 billion to meet renewable requirements alone), California’s climate change laws are forcing businesses out of the state, resulting in job losses.  There are also collateral effects from the general hostility of climate change elites to any business involved with fossil fuels.  Take fracking, for example. Two years ago, Californians were excited about the potential for thousands of jobs when we learned that California’s shale formations are even richer than those in boom states like North Dakota. [3]  A USC study predicted that fossil fuels from shale would provide “up to 2.8 million jobs, increasing the state’s total economic output by up to 14.3 percent . . . boosting personal income by up to 10 percent.” [4] Due to actions in Sacramento, nothing has happened.  Why not?  A public official who wants to help the poor and middle class close the economic gap has enough information to allow fracking to proceed, but for now, the political elites prefer to keep fossil fuels right where they are, embedded deep in California’s shale.

Most troubling is that the goals of climate change laws are not achieved even when they are strictly enforced.  For example, the EPA is pressuring American utilities to stop using coal because it generates more GHGs than other fuel sources.  India and China, however, both build coal-fired power plants faster than the United States can remove its own. [5]  Eric Roston, writing for Bloomberg Business, observes “’The U.S. is dropping coal plants at an unprecedented rate, but still nowhere as quickly as India is adding them,” and “By 2020 India may have built about 2.5 times as much capacity [in coal] as the U.S. is about to lose.” [6]

China, “the world’s biggest coal addict by far,” has a plan to build hundreds of coal plants, which negates the efficacy of emissions limits imposed by political elites in this country.  Eric Lawson of Princeton University, known for his strong stance in favor of the science of climate change, is quoted by Stephen Moore in Investors Business Daily: “From 2010 through 2013, (China) added half the coal generation of the entire U.S. At the peak, from 2005 through 2011, China added roughly two 600-megawatt coal plants a week for seven straight years. [7] And according to U.S. government projections, China will add yet another U.S. worth of coal plants over the next 10 years, or the equivalent of a new 600-megawatt plant every 10 days for 10 years.”

California’s climate change laws are particularly vulnerable to the criticism that they will not change the predicted outcome of man-made warming because, according to the Manhattan Institute study, all of California’s emissions are only 1% of GHG emissions worldwide and 6% of total U.S. emissions. There are no climate models that support the idea that reduction of some or all of those amounts will affect global climate change given increases of emissions in China and India.

Instead of responding directly to these criticisms, some have argued that China and India will change; if the U.S. sticks with its stringent emission reduction policies, they contend, our example will encourage them to reverse the increases in emissions that represent their recent history and turn those into reductions in emissions.  This is pure Utopian fantasy.

About 900 coal plants are currently planned in China and India.  Where is the evidence that India or China have made any plans to change these to lower-emission energy plants?  What plans have been made to tear down the existing coal plants and replace them?  Absent concrete plans, the follow-my-lead theory is far-fetched.

There is no precedent to suggest that follow-my-lead will succeed.  There is, however, precedent suggesting it will not succeed.  In California, proponents of AB32 sold the most aggressive state law on climate change in America partly on the follow-my-lead theory.  They told Californians that when AB32 was enacted, other states would follow California’s example by adopting statutes similar to AB32.  This effort failed; not one state has adopted a climate change law like California’s.  Since it should have been easier to convince another state, like Oregon, to join California on climate change law than to convince a sovereign nation like China, California’s experience disproves the follow-my-lead theory.

Proponents of climate change laws point to the “Joint Announcement” on climate change dated November 12, 2014 signed during President Obama’s visit to China as supposed proof that China is willing to reconsider its policy of increasing emissions.  The Joint Agreement, however, confirms that China will continue to increase its emissions through at least 2030.  Much false information has been implied about this nonbinding statement.  But it is available on line, and its meaning is pretty clear. [8] China does not commit anywhere in the document to reduce its emissions; it only states, without agreeing, that it might reach a peak in its increases by 2030.  By signing the Joint Agreement, President Obama effectively acknowledges that current conditions will not change before 2030 at the earliest.  This means that the heavy burdens created by California’s emissions limits cannot achieve the intended benefits until sometime after that date.

These critical problems with climate change laws have been known for a long time. Yet climate change elites do not respond to them, making it clear that they have no response that makes sense.  This does not mean that nothing should be done about climate change.  But it does mean we need to change the laws that are hurting the poor and middle class, examine what is possible in the area of adaptation, and hold the political elites accountable.  The future of California depends on it.

Bob Loewen is the chairman of the California Policy Center.

FOOTNOTES

(1)  “Politics and the English Language,” George Orwell, 1946

(2)  “Renewable Energy Mandates Same As A Tax On The Poor,” by Robert Bryce, Manhattan Institute, 7/26/2015

(3)  “Fixing California: Will Fracking Bonanza Be Allowed?,” Chris Reed, CPC Prosperity Forum, 9/30/2013

(4)  “The Monterey Shale & California’s Economic Future,” USC Price School of Public Policy, March 2013

(5)  “World Falls In Love With Coal That Obama Is Waging War On,” Stephen Moore Investor’s Business Daily, 8/7/2015

(6)  “The Grim Promise of India’s Coal-Powered Future,” Eric Roston, Bloomberg Business, 5/21/2015

(7)  “World Falls In Love With Coal That Obama Is Waging War On,” Stephen Moore Investor’s Business Daily, 8/7/2015

(8)  U.S.-China Joint Announcement on Climate Change, 11/12/2014

Transparent California Releases 2014 Salary Data for California K-12 School Employees

For Immediate Release
August 12, 2015
California Policy Center
Contact: Robert Fellner
Robert@CalPolicyCenter.org
(201) 206-6469

Data: No correlation between teacher compensation and academic performance

TUSTIN — K-12 employee compensation data released today by Transparent California shows there is no meaningful correlation between teacher compensation and student performance; when the compensation of all district employees is compared to performance, there is a negative correlation.

A geographically-diverse survey of 75 of the largest school districts statewide – accounting for nearly half of total statewide enrollment – found average teacher compensation that ranged from $81,000 to $120,000, with no correlation to district performance:

PR-20150812-1

The Academic Performance Index (API) ranges from a low of 200 to a high of 1000, with 800 being the targeted goal for all schools. The comparison relies on 2013 scores, the most recent data available.

The average full-time teacher compensation was $94,796 and the average API score was 795. Compensation is defined as wages plus the employer-cost of health and retirement benefits.

The average total employee cost per enrolled student was $6,946 and was negativelycorrelated against the district’s API scores.

Over 740,000 employee compensation records from 555 K-12 school districts – representing nearly 80 percent of total enrollment statewide – was obtained by and published on TransparentCalifornia.com, a public service website that provides accurate, comprehensive and easily searchable information on the compensation of public employees in California.

Statewide, the Chaffey Joint Union High School’s average compensation package for full-time teachers topped the list at $119,942, while receiving only a 777 API score in 2013. San Ramon Valley Unified earned a 923 API score in 2013, the highest of all schools surveyed, with average teacher compensation and total employee cost per student both below average at $88,638 and $6,763, respectively.

The top 3 highest earners statewide were:

  1. John Deasy, Emeritus Superintendent of Schools at Los Angeles Unified received $485,634 in compensation.
  2. John Collins, Superintendent at Poway Unified received $478,008 in compensation.
  3. Michael Hanson, Superintendent at Fresno Unified received $460,890 in compensation.

Greater LA Area

The greater Los Angeles area includes schools in the counties of: Los Angeles, Orange, San Bernardino and Riverside.

The average greater Los Angeles area K-12 employee received a compensation package worth $88,581 with over 56,000 employees making more than $100,000.

Chaffey Joint and Anaheim Union High both received below-target API scores of 777 in 2013, despite leading the state in average teacher compensation of $119,942 and $115,437, respectively.

The average compensation for full-time teachers at 10 of the largest school districts in the greater Los Angeles area is displayed below:

PR-20150812-2

Greater San Diego Area

For the greater San Diego area, the average K-12 employee received a compensation package worth $85,584 with over 10,000 employees making more than $100,000.

The top 3 highest earners in the greater San Diego area after John Collins were:

  1. Kevin Holt, Superintendent at San Marcos Unified received $356,672 in compensation.
  2. Randolph Eugene Ward, Superintendent at San Diego County Office of Education received $347,430 in compensation.
  3. Cynthia Marten, Superintendent at San Diego Unified received $316,255 in compensation.

The average compensation for full-time teachers at 10 of the largest school districts in San Diego County is displayed below:

PR-20150812-3

Central Coast Area

The Central Coast area includes schools in the counties of: Monterey, San Benito, San Luis Obispo, Santa Barbara, Santa Cruz and Ventura.

The average Central Coast K-12 employee received a compensation package worth $85,522 with nearly 5,000 employees making over $100,000.

Lucia Mar Unified’s average teacher compensation was just over $81,000, but their 816 API score was considerably higher than Hueneme Elementary’s 734 score, despite Hueneme spending over 30% more on teacher compensation.

The top 3 Central Coast earners were:

  1. David Cash, Superintendent of Santa Barbara Unified received $306,111.
  2. Marvin Biasotti, Superintendent of Carmel Unified received $301,935.
  3. Tammy Murphy, Superintendent of Montecito Union Elementary received $301,239.

The average compensation for full-time teachers at 10 of the largest Central Coast school districts is displayed below:

PR-20150812-4

Bay Area

For the Bay Area, the average K-12 employee received a compensation package worth $87,295 with over 16,000 employees making more than $100,000.

The top 3 highest Bay Area earners were:

  1. Polly Bove, Superintendent at Fremont Union High received $363,736 in compensation.
  2. Elizabeth Mcmanus, Deputy Superintendent at San Mateo Union High received $349,292 in compensation.
  3. Bruce Harter, Superintendent of Schools at West Contra Costa Unified received $337,973 in compensation.

The average compensation for full-time teachers at 10 of the largest school districts in the Bay Area is displayed below:

PR-20150812-5

Greater Sacramento and Central Valley area

For the greater Sacramento and Central Valley area, the average K-12 employee received a compensation package worth $84,012 with over 15,000 employees making more than $100,000.

Michael Hanson’s $460,000 compensation package was over $125,000 more than the next 3 top highest earners for the Greater Sacramento and Central Valley area:

  1. Steven Ladd, Superintendent at Elk Grove Unified received $331,855 in compensation.
  2. David Gordon, Superintendent at Sacramento County Office of Education received $315,423 in compensation.
  3. Steven Martinez, Superintendent at Twin Rivers Unified received $314,742.

The average compensation for full-time teachers at 10 of the largest school districts in the Greater Sacramento and Central Valley area is displayed below:

PR-20150812-6

To view the entire dataset in a searchable and downloadable format, visit TransparentCalifornia.com.

“The lack of meaningful correlation between average teacher compensation and school performance, as measured by the district’s 2013 API score, is stunning” said Mark Bucher, president of the California Policy Center. “It does show, however, that simply increasing funding is not an effective way to improve performance.”

Bucher added that, “The doubling of employer contributions towards CalSTRS in the coming years will pose a significant challenge to schools already paying nearly $95,000 a year on average teacher compensation. The data also suggests that this increase in employee compensation is unlikely to improve educational outcomes.”

To schedule an interview with California Policy Center president Mark Bucher, please contact Robert Fellner at 201 206-6469 or Robert@CalPolicyCenter.org.

Transparent California is California’s largest and most comprehensive database of public sector compensation and is a project of two nonpartisan, free-market think tanks, the California Policy Center and Nevada Policy Research Institute. Learn more at TransparentCalifornia.com.

Reviewing “The Conservative Heart” by Arthur Brooks

If you have not read The Conservative Heart, How to Build a Fairer, Happier, and More Prosperous America, by Arthur C. Brooks, buy a copy and read it now. Brooks’ work will be of interest to most as a “how to” primer for election messaging. Conservative candidates, who too often get their clocks cleaned on messaging, need to listen to what Brooks has to say. The author is more ambitious than that, however, striving for no less than the elusive secret sauce to enable conservatives to fashion a new governing majority for America.

A New Conservative Movement

Arthur Brooks is the head of the American Enterprise Institute, a Washington think tank where some of best public policy minds in the country work. His book takes a fresh look at a question that has stumped conservatives for years: how can we change the perception of voters that conservatives do not care about the poor and disadvantaged?

Mitt Romney taught conservatives why they need to be concerned about this perception when he wrote off “the 47%” who receive payments from the government. The Presidential candidate was generalizing about millions of potential voters, and in a single moment caught on hidden video perpetuated the perception that members of his party care little about regular people. How many of those 47% might have been interested in Mr. Romney’s message if he had not sounded like he was writing them off? How many of the other 53% of Americans had their votes affected by their perception of Mr. Romney’s attitude? I am one who still hopes that policy still matters for some persuadable voters in elections, but only a fool would think that undecided voters will listen to the message of a candidate they do not like. It is for conservatives who are tired of losing elections that Brooks has written this book.

Brooks rejects the ideas of the past, in which it was suggested that conservatives adopt liberal policies in order to appear more compassionate. No changes in conservative principles are needed to demonstrate compassion, Brooks argues, because conservative policies are already based on compassion for all people, including the poor. Instead, Brooks wants conservatives to take the time to understand their principles better, and that will help them to explain to the public why they should trust conservatives to govern.

Brooks leads the reader on a philosophical journey to find the conservative heart. This is not a gimmick or artifice; Brooks finds the conservative heart in the speeches and writings of conservative politicians, the writings of philosophers, interviews with thoughtful people, and things he has learned from his own life experience. What emerges is a better understanding of the values on which conservative policies are based. Brooks hopes that these values are shared by a solid majority of Americans and for that reason will form the basis of a new governing majority in America if conservatives explain their connection to conservative policies.

The New Social Movement

Brooks encourages conservatives to begin a social movement to transform America. He sees the Tea Party as the vehicle for this conservative change, but his message could be delivered to anyone who shares the broad conservative principles outlined in his book.

Brooks admires the Tea Party because it “tapped into the frustrations of millions of ordinary Americans, inspiring many to get involved politically, brush up on the U.S. Constitution, and organize demonstrations.” But Brooks views the Tea Party as a movement only in its infancy; he is convinced that the Tea Party movement can achieve a governing majority based on conservative policies if it follows his plan. According to Brooks, a movement works in stages, and the Tea Party movement is currently in stage one, which he calls the “rebellion” stage. To reach a governing majority, the movement must go through three more stages: announce an agenda based on majoritarian values; declare the moral high ground; and unite the country behind their agenda. These additional steps will turn the Tea Party into a majoritarian social movement capable of winning elections and changing America in a major way.

A “rebellion,” Brooks says, is a “protest movement” that is “inherently oppositional”. By its nature, this first stage is limited in what it can achieve because it is fighting “against” an agenda set by someone else—the majority. Being against things feels so good that some may prefer it, and Brooks wishes them well. For those who would like to see a governing majority implement conservative policies, however, it will be necessary to identify a conservative agenda explained in terms of helping people. Why? Because this is how to convert people to the conservative cause.

Brooks’ ideas boil down to the premise that a governing majority can be built around majoritarian values. It is beyond dispute that every culture is predicated on shared values, and some values are more deeply held than others. Brooks makes no attempt to list the values on which conservative policies are based, but he touches on some of them in his search for the conservative heart. When the conservative agenda is articulated in terms of conservative values, Brooks believes that Americans will recognize a kinship between what they believe and what conservatives believe. This is because the essential values underlying the conservative cause are majoritarian values. This becomes obfuscated through the culture wars and political misdirection, but if the Tea Party will lead with an agenda that emphasizes the conservative heart, Brooks contends that it will start a movement that will carry a majority behind its candidates:

The Tea Party must dedicate itself to the positive fruits of its principles. The power of free enterprise will help Americans escape poverty and dependency by creating good paying jobs, restoring upward mobility, and creating a new culture of values. These are the values that animate the conservative heart. The Tea Party can show the conservative heart to America.

Americans need to see the Tea Party as the vanguard of a new right that fights for the whole country. The grass roots should consider themselves heroes on behalf of those left behind in the Obama economy—whether they support Tea Party leaders or not. The conservative social movement can’t dismiss as moochers people who can’t find jobs and have to take government help. On the contrary, these are precisely the people who need our help. It isn’t ordinary citizens who are to blame, but the architects of disastrous economic policies that have destroyed opportunities for independence. The Tea Party can fight for all the people in this country.

Brooks frequently refers to the conviction in the Declaration of Independence that men are “endowed by their Creator with . . . inalienable rights . . . to life, liberty and the pursuit of happiness.” Perhaps the most useful discussion found in The Conservative Heart is its analysis of the relationship between work and “the pursuit of happiness”. This provides an example of how Brooks contrasts the values of conservatives and progressives.

Conservatives want policies that encourage work so that every person has an opportunity to participate and contribute in our society. These policies are based on the values of personal responsibility, economic opportunity that comes with having an entry level job on the resume instead of a dead end history of being on assistance year after year, and the means to pursue happiness for the people who value working and earning over personal decline. Progressives do not share these values. They treat work as punishment; it makes no difference to them whether the unemployed get their paycheck from the government or from a private employer from whom they earned it. Brooks quotes Vice President Biden’s reference to “dead end” jobs to show the condescension of progressives for jobs that they deem not worthy, compared to conservatives, which treat all jobs as a blessing, especially compared to a government handout. The progressive is not compassionate because he treats the unemployed as objects to be managed with money, not human beings who would be better off if they were able to earn a living, become responsible for their own support and that of their family, and have the opportunity to climb the economic ladder.

Something The Public Can Believe In

Arthur Brooks would like to see conservatives fashion an agenda that leads with a statement of conviction: we have proposals designed to help all the people, and our first priority is to help the most vulnerable among us. Conservatives can identify many proposals at the local, state and federal level where their policies will help the poor and middle classes directly. While conservative policies usually help all the people, the emphasis on their effect on the poor is important, according to Brooks, because the perception that conservatives care will help persuade voters to trust conservatives to govern because of shared values. This will help win elections. Conservatives should be interested in that message.

*   *   *

Bob Loewen is the chairman of the California Policy Center.

"For the Kids" – Comprehensive Review of California School Bonds, Executive Summary (Section 1 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:
You are Here: 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)
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


Executive Summary 

Few Californians realize how much debt they’ve imposed on future generations with their votes for bond measures meant to fund the construction of new and modernized school facilities.

From 2001 to 2014, California voters considered 1147 ballot measures proposed by K-12 school districts and community college districts to borrow money for construction via bond sales. Voters approved 911 of these bond measures, giving 642 school and college districts authority to borrow a total of $110.4 billion.

California voters also approved three statewide ballot measures during that time to authorize the state to borrow $35.8 billion. That money has supplemented local borrowing for construction projects at school and college districts, and the state has spent all but $195 million of it.

That’s a total of $146.1 billion authorized during the last 14 years for state and local educational districts to obtain and spend on construction projects. All of it has been borrowed or will be borrowed from wealthy investors, who buy state and local government bonds as a relatively safe investment that generates tax-exempt income through interest payments.

Current and future generations of Californians are already committed to paying these investors about $200 billion in principal and interest — a number that will grow as school and college districts continue to borrow by selling bonds already authorized by voters but not yet sold.

And more borrowing is coming.

In 2016 California voters may be asked to authorize the state to borrow as much as $9 billion for school construction. More than 100 school and college districts may ask voters to approve borrowing a total of several billion more dollars. Officials at the country’s second largest school district, the Los Angeles Unified School District, claim they need more than $40 billion for additional construction and plan to ask voters to approve borrowing several billion in 2016.

It is time to be wary. The California Policy Center believes that most Californians are unaware and uninformed about this relentless borrowing and the amount of debt already accumulated to pay for school construction. Most voters cannot explain how a bond measure works and do not get enough information to make an educated decision about the wisdom of a bond measure.

California voters who want to learn more before voting will have difficulty finding relevant information. Where does an ordinary Californian find out how much money a school or college district has already been authorized to borrow from past bond measures, or the principal and interest owed from past bond sales that still needs to be repaid, or the projected changes in assessed property valuation and how they affect tax and debt limits, or the past and projected student enrollment? The state does not offer a clearinghouse of information for the public to research and compare data about bond measures and bond debt for educational districts. Much of the information available about debt finance for educational districts is oriented toward interests of bond investors rather than people who pay the debt.

Californians who recognize a need for their own local educational districts to refrain from accumulating additional debt have significant obstacles to overcome. State law gives supporters of bond measures a systematic strategic advantage when local districts develop bond measures and put them before voters for approval. Campaigns to support bond measures are funded and even managed by financial and construction industry interests that will profit after passage. And after voters approve a bond measure, educational districts are tempted to take advantage of ambiguities in state law and use bond proceeds for items and activities not typically regarded by the public as construction.

To help to fix these deficiencies, this report encourages the California legislature and the executive branch to adopt five sets of recommendations:

Five Categories of Recommendations
1Provide Adequate and Effective Oversight and Accountability for Bond Measures
2Enable Voters to Make a Reasonably Informed Decision on Bond Measures
3Eliminate or Mitigate Conflicts of Interest in Contracting Related to Bond Measures
4Reduce Inappropriate, Excessive, or Unnecessary Spending of Bond Proceeds
5Improve Understanding of Bond Measures Through Public Education Campaigns

At a time of low interest rates, California school and community college districts may benefit in some circumstances from borrowing money to fund school construction, just like households benefit from home mortgages and car loans. But California voters — and their elected representatives — need to become much more informed about the debt legacy they are leaving to their children and grandchildren.

Emotional sentiment, lobbying pressure from interest groups, and eagerness to circumvent frustrating tax and debt limits in state law can overwhelm a prudent sense of caution. Irrational decisions that burden future generations cannot necessarily be fixed after the public finds out about them.


Section Summaries

Section 2. Why This Report Matters: More Borrowing in 2016

Californians will be asked in 2016 to continue taking on debt for construction of educational facilities, but one elected official is leery. Governor Jerry Brown wants to change the funding system for school construction. He is concerned about debt that Californians have accumulated from years of allowing the state and local educational districts to relentlessly borrow.

That money borrowed through bond sales will have to be paid back — with interest — to the investors who bought them. Voters have limited understanding of bonds and how bonds provide funds for construction, and elections focus on what voters will get rather than how they will pay for it. To the detriment of future generations, few Californians realize the huge amount educational districts have been authorized to borrow and the huge amount of debt accumulated.

Section 3. Quantifying and Explaining California’s Educational Construction Debt

Whatever voters are asked to approve in 2016 will not launch a new program to fix long-neglected schools to serve a rapidly expanding state population while providing smaller class sizes. That thinking is a legacy of the 1990s that seems to endure today despite 14 years of most bond measures passing at a 55 percent threshold for voter approval. Arguments for another state bond measure in 2016 ignore or downplay how local school and college districts and the state obtained authority in the past 14 years to borrow $146.1 billion for educational construction.

If voters are not told or reminded of recent borrowing patterns, how can they make an informed decision on future borrowing? To rectify the lack of availability of statistics on total bond debt in California for educational facility construction, the California Policy Center collected, synthesized, and analyzed data regarding California educational construction finance. The California Policy Center believes it is the first and only entity to painstakingly research and present an accurate and comprehensive record of all state and local educational construction bond measures considered by voters from 2001 through 2014.

Section 4. How Educational Districts Acquire and Manage Debt

It’s likely that most California voters have limited familiarity with the organization and governance of their local school and community college districts. When voters authorize their local educational districts to borrow money for construction by selling bonds, presumably they trust that the local school or college district will exercise prudence in managing the process. Sometimes their trust is betrayed.

To discourage abuse of the school construction finance system, voters need to be aware of how their local government is organized and managed. They also need to realize that state law does not explicitly give Independent Citizens’ Bond Oversight Committees broad authority to review construction programs funded by bond measures.

How can voters become informed about bonds and the process of borrowing money for educational construction through bond sales? Is there a way to explain in clear plain language what actually happens after voters approve a bond measure and authorize a school or college district to borrow money via bond sales?

Section 5. Capital Appreciation Bonds: Disturbing Repayment Terms

In 1993, California law was changed so that school and college districts could use an innovative form of debt finance called zero-coupon bonds, also known as Capital Appreciation Bonds. These bonds allow school and college districts to borrow now for construction and pay it back — with compounded interest — many years later. The borrowing strategy has been a tempting and dangerous lure for elected school and college boards.

Some people think Capital Appreciation Bonds are a “ticking time bomb” or the “creation of a toxic waste dump.” Others regard critics as uninformed and contend that these debt finance instruments are beneficial for school and college districts. Since the people who will be paying off many of these Capital Appreciation Bonds are now children or not even born yet, there isn’t much incentive to stop the flow of borrowed money that doesn’t need to be paid back for a generation or two.

Section 6. 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%. 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.

Section 7. The System Is Skewed to Pass Bond Measures

Considering the advantages that supporters have in preparing and campaigning for a bond measure, perhaps it’s noteworthy that voters reject about 20% of local bond measures for educational construction. At every stage of the process, interests that will benefit from bond sales can take advantage of a system that favors passage of a bond measure. Some issues of concern include use of public funds to develop campaigns to pass bond measures, significant political contributions to campaigns from interests likely to benefit from construction, involvement of college foundations as intermediaries for campaign contributions, and conflicts of interest and alleged pay-to-play contracts.

Section 8. More Trouble with Bond Finance for Educational Construction

While compiling the comprehensive information provided in this study, California Policy Center researchers identified numerous other troubling aspects of bond finance. School and college districts are evading compliance with the law and making irresponsible decisions. Ordinary voters lack enough data to make an informed vote. Community activists who seek deeper understanding find themselves stymied.

Section 9. Improving Oversight, Accountability, and Fiscal Responsibility

This report encourages the California legislature and the executive branch to adopt five sets of recommendations that will help to fix these deficiencies.

Five Categories of Recommendations
1Provide Adequate and Effective Oversight and Accountability for Bond Measures
2Enable Voters to Make a Reasonably Informed Decision on Bond Measures
3Eliminate or Mitigate Conflicts of Interest in Contracting Related to Bond Measures
4Reduce Inappropriate, Excessive, or Unnecessary Spending of Bond Proceeds
5Improve Understanding of Bond Measures Through Public Education Campaigns

The California Policy Center rejects the idea that additional oversight and accountability isn’t needed or desirable. Some legislative reforms and education programs (both public and private) can overcome voter cynicism, frustration, apathy, and ignorance.

Tables and Appendices of “For the Kids: California Voters Must Become Wary…”

Tables A1 to A6

Table A-1 California K-12 School Districts 2013-2014 – Ranked by Enrollment

Table A-2 California Community College District Enrollment Fall 2014 Ranked by Number of Students

Table A-3 Details of Bond Indebtedness Waiver Requests from California School Districts to State Board of Education 2002 through March 2015

Table A-4 California School Construction & Finance History

Table A-5 Arguments for Capital Appreciation Bonds

Table A-6 Arguments Against Capital Appreciation Bonds

Appendices A to L

Appendix A – All California Educational Bond Measures Pass and Fail – 2001-2014 Ranked by Percentage of Voter Approval

Appendix B – All California Educational Bond Measures Approved by Voters – 2001-2014 Ranked by Amount Authorized to Borrow

Appendix C – All California Educational Bond Measures Rejected 2001-2014 – Ranked by Amount NOT Authorized to Borrow

Appendix D – All California Educational Bond Measures Approved With a Two-Thirds Threshold Since November 2000 Enactment of Proposition 39 – Listed By Election Year

Appendix E – All California Educational Bond Measures 55 Percent – 2001-2014

Appendix F – All California Educational Bond Measures Repurposed or Reauthorized Since November 2000 Enactment of Proposition 39 – Listed by Election Year

Appendix G – All California Educational Bond Measures Approved by Voters with 55 Percent Threshold Since November 2000 – Results if Prop 39 Had Not Been Law

Appendix H – All California Educational Bond Measures Approved by Voters Under 55 Percent Threshold Since November 2000 Enactment of Proposition 39 – Failures Under 2:3 Threshold

Appendix I – All California Educational Bond Measures Approved by Voters – 2001-2014 Ranked by Amount of Debt Service

Appendix J – All Educational Districts in Which Voters Authorized Borrowing Via Bond Sales Since Proposition 39 – Ratio of Current Debt Service to Amount Authorized

Appendix K – All Educational Districts in Which Voters Authorized Borrowing Via Bond Sales Since November 2000 Enactment of Prop 39 – Ratio of Current Debt Service to Total Yes Votes

Appendix L – All Educational Districts in Which Voters Authorized Borrowing Via Bond Sales Since November 2000 Enactment of Prop 39 – Ranked by Amount Authorized Per Yes Vote

###

More Borrowing for California Educational Construction in 2016 (Section 2 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)
You are here: 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)
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


Why This Report Matters: More Borrowing in 2016

Californians will be asked in 2016 to continue taking on debt for construction of educational facilities, but one elected official is leery. Governor Jerry Brown wants to change the funding system for school construction. He is concerned about debt that Californians have accumulated from years of allowing the state and local educational districts to relentlessly borrow.

That money borrowed through bond sales will have to be paid back — with interest — to the investors who bought them. Voters have limited understanding of bonds and how bonds provide funds for construction, and elections focus on what voters will get rather than how they will pay for it. To the detriment of future generations, few Californians realize the huge amount educational districts have been authorized to borrow and the huge amount of debt accumulated.

Interest Groups Want Voters to Consider Another State Bond Measure

When the California Policy Center published this report, the California Attorney General had approved circulation of petitions through September 21, 2015 for a proposed statewide ballot initiative entitled the “Kindergarten Through Community College Public Education Facilities Bond Act of 2016.” Professional signature gatherers set up tables at grocery stores and other public locations trying to cajole citizens into signing petitions to “help the kids” by putting the measure on the ballot.

If this proposal qualifies for the ballot and voters approve it, the State of California will have the authority to borrow $9 billion through selling bonds to investors. According to the petition, this $9 billion will ensure that “K-14 facilities are constructed and maintained in safe, secure and peaceful conditions.” As reported in the Sacramento Bee, school construction interests and residential housing developers want this bond measure, or one like it, on the ballot in 2016.

Proponents point out, accurately, that most of the money that voters authorized the state to borrow in 1998, 2002, 2004, and 2006 has been distributed as matching grants to local educational districts. As of April 15, 2015, $195.4 million remains3 from $35.4 billion approved to borrow as a result of three statewide ballot propositions in the 2000s.

The petition for the Kindergarten Through Community College Public Education Facilities Bond Act of 2016 lists four “findings” explaining what the state could do if it borrowed $9 billion:

1. Career technical education facilities to provide job training for many Californians and veterans who face challenges in completing their education and re-entering the workforce.

The history of recent bond measures on the state and local level shows that voters are inclined to support more government spending when veterans are cited as beneficiaries. Poll results confirm this. A “State of California School Bond Measure Feasibility Survey” of likely voters conducted January 30 to February 9, 2014 for California’s Coalition for Adequate School Housing (C.A.S.H.) indicated that “more than six-in-ten are highly concerned about unemployment among veterans.”

2. Upgrade aging facilities to meet current health and safety standards, including retrofitting for earthquake safety and the removal of lead paint, asbestos and other hazardous materials.

Again, the “State of California School Bond Measure Feasibility Survey” concluded that “more than two-thirds agree that many California public schools need significant health and safety improvements,” specifically the statement that “many schools and community colleges throughout California are old, outdated and need upgrades to meet current health and safety standards, including retrofitting for earthquake safety and the removal of lead paint, asbestos and other hazardous materials.”

3. Studies show that 13,000 jobs are created for each $1 billion of state infrastructure investment. These jobs include building and construction trades jobs throughout the state.

Influential construction interests are part of the coalition supporting this statewide bond measure. This statement acknowledges their pivotal role in the campaign to pass it.

4. Academic goals cannot be achieved without 21st Century school facilities designed to provide improved school technology and teaching facilities.

Once again, the “State of California School Bond Measure Feasibility Survey” concludes that “in particular, voters believe that funds must be directed towards upgrading vocational/career education programs, repairing classrooms and science labs and upgrading technology.”

These are deliberately chosen arguments to justify borrowing another $9 billion for community college and K-12 school district construction projects. In fact, these were the same arguments used in newspaper opinion pieces and position papers in 2014 to support Assembly Bill 2235, which if signed into law would have asked state voters in the November 2014 election to authorize borrowing $4.3 billion for school construction through bond sales.

Regardless of whether the four arguments listed above for a statewide bond measure are factually valid, they have been tested through polling and other voter research and shown to be effective in winning voter support. Surely a 2016 campaign for a state bond measure will use them.

How do these arguments stand in the larger context of bond indebtedness for the State of California and its community college districts and K-12 school districts? This report provides some of that context and introduces information never before available to the public.

Governor Brown Worries About Debt and Seeks Change in School Construction Finance

Governor Jerry Brown has used his executive power to thwart legislative efforts to place a statewide bond measure for educational construction on the 2016 ballot. Assembly Bill 2235 never received an opposition vote as it passed the Assembly and moved through Senate committees with support from numerous interest groups. Voters didn’t get to consider it in the November 2014 election only because Governor Brown didn’t want it on the ballot. As reported by a Capitol Public Radio reporter, the bill author issued a statement explaining its abandonment: “The governor has made it clear that he does not want a school bond on the same ballot as the water bond and rainy day fund. We do not expect the legislature to send the bill on him.”

Meanwhile, the Governor is taking a leading role in calling for change in how state and local governments fund California school construction. He submitted a state budget proposal to the California legislature in January 2015 with an introduction stating that funding commitments “must be honestly confronted so that they are properly accounted for and funded.” It warned that “budget challenges over the past decade have also resulted in a greater reliance on debt financing, rather than pay-as-you-go spending…From 1974 to 1999, California voters authorized $38.4 billion of general obligation bonds. Since 2000, voters authorized more than $103.2 billion of general obligation bonds”

Table 1: All General Obligation Bonds to Be Paid Off Through
California’s General Fund
Amount Authorized to Borrow$135.2 billion
Amount Borrowed$105.7 billion
Amount Authorized But Not Borrowed$29.5 billion
Amount Owed in Principal (June 1, 2015)$72.4 billion
Amount of Debt Service Owed (June 1, 2015)$131.8 billion
Amount of Debt Service to Be Paid 2015-2016$6 billion
Sources: “Schedule of Debt Service Requirements for General Fund Non-Self Liquidating Bonds (Fixed Rate),” California State Treasurer, June 1, 2015, accessed June 28, 2015, www.treasurer.ca.gov/bonds/debt/201506/general-fixed.pdf and “Authorized and Outstanding General Obligation Bonds,” California State Treasurer, June 1, 2015, accessed June 28, 2015, www.treasurer.ca.gov/bonds/debt/201506/authorized.pdf

Concern About Debt Growing from State Matching Grants for Local Educational Districts

One funding commitment Governor Brown “confronted” in his proposed fiscal year 2015-16 budget was the State of California’s debt accumulated from funding construction of facilities for local school districts. California voters approved bond measures in 2002, 2004, and 2006 authorizing the state to borrow $35.4 billion via bond sales for school and college construction, and only $195 million remains to be borrowed. According to internal California State Treasurer documents, debt service on those three state bond measures is $56.7 billion.

According to the Governor’s 2015-16 Budget Summary, “the Administration has noted the following significant shortcomings” related to school bond finance over the past two years:

The current program does not compel districts to consider facilities funding within the context of other educational costs and priorities. For example, districts can generate and retain state facility program eligibility based on outdated or inconsistent enrollment projections. This often results in financial incentives for districts to build new schools to accommodate what is actually modest and absorbable enrollment growth. These incentives are exacerbated by the fact that general obligation bond debt is funded outside of Proposition 98. These bonds cost the General Fund approximately $2.4 billion in debt service annually.

This statement is surprising and controversial recognition that some school districts spend money on new school construction that perhaps isn’t needed. The proposed budget summary also notes that large school districts have in-house professional facilities departments that can take advantage of the first-come, first-serve application system to get funding from the State Allocation Board for local school construction.

Another surprising admission in the Governor’s budget proposal is acknowledgement that voters approve four out of five proposed local bond measures, thus providing a relatively easy flow of money for school construction: “The current program was developed before the passage of Proposition 39 (which reduced the local bond vote threshold from a two-thirds supermajority to 55 percent) in 2000, which has since allowed local school bonds to pass upwards of 80 percent of the time.”

The budget summary also reported that the California Department of Finance had met with parties interested in educational construction and developed a set of recommendations, including three related to bond finance:

1. Increase Tools for Local Control: Expand Local Funding Capacity

While school districts can pass local bonds with 55% percent approval, assessed valuation caps for specific bond measures and total caps on local bonded indebtedness have not been adjusted since 2000. In order to provide greater access to local financing, these caps should be increased at minimum by the rate of inflation since 2000.

Based on the Consumer Price Index of the U.S. Bureau of Labor Statistics, the inflation rate from November 2000 (when voters approved Proposition 39) to May 2015 was 36.6%. Therefore, under this proposal the California legislature would increase tax and debt limits at least 36.6% above existing amounts. However, the flaw in this proposal is that it does not account for increases in property value or total assessed property valuation in California since 2000. (See Section 5 of this report for background on tax and debt limits.)

2. Expand Allowable Uses of Routine Restricted Maintenance Funding

Current law requires schools to deposit a percentage of their general fund expenditures into a restricted account for use in maintaining their facilities. Rather than requiring that these funds be used solely for routine maintenance, districts should have the ability to pool these funds over multiple years for modernization and new construction projects. Expanding the use of these funds will provide school districts with yet another funding stream to maintain, modernize, and construct new facilities.

This proposal injects a bit of “pay-as-you-go” from district general funds into educational facilities construction — a departure from the bond debt financing that has driven school construction since the enactment of Senate Bill 50, the Leroy F. Greene School Facilities Act of 1998.

3. Target State Funding for Districts Most in Need

State funding for a new program should be targeted in a way that: (1) limits eligibility to districts with such low per-student assessed value they cannot issue bonds at the local level in amounts that allow them to meet student needs, (2) prioritizes funding for health and safety and severe overcrowding projects, and (3) establishes a sliding scale to determine the state share of project costs based on local capacity to finance projects.

This recommendation is based on the perception that the current first-come, first-served funding system allows certain school and college districts to win a disproportionate amount of state matching grants at the expense of other districts that may have a more legitimate need but lack the resources and wherewithal to take advantage of opportunities.

Finally, the list of recommendations concludes with a message:

…it is the intent of the Administration to advance the dialogue on the future of school facilities funding. School districts and developers should have a clear understanding of which limited circumstances will qualify for state assistance. Over the course of the coming months, the Administration is prepared to engage with the Legislature and education stakeholders to shape a future state program that is focused on districts with the greatest need, while providing substantial new flexibility for local districts to raise the necessary resources for school facilities needs.

These proposals are not new ideas. A 2003 report from the Public Policy Institute of California analyzed school bond measures and identified disparities among districts based on wealth and region. In response to these findings, the report suggested raising state debt limits for bond measures to reduce the impact of changes in assessed property valuation. It also recommended adoption of a plan that would give deserving school and college districts access to state construction funds without having to match these grants with local funding.

State Legislative Initiatives

The stage is set for change in California school construction financing. Subsequent to the release of the proposed budget from the Governor, state legislators introduced bills such as Senate Bill 114 and Assembly Bill 148. These bills would make some mild changes to the state’s school construction program, while at the same time placing a statewide bond measure on the November 2016 ballot to borrow money (for a yet unidentified amount) via bond sales for school construction.

The author of Senate Bill 114 explained the purpose of the bill:

Funding for the School Facilities Program is virtually gone and there is a backlog in applications for state assistance…while the state’s growing debt service is of concern, it is unclear whether local districts have the capacity to generate sufficient revenue at the local level to meet their specific facility needs. The “winding down” of the current program, and the Governor’s call for change, present an opportunity to rethink the administrative and programmatic structure of the State Facilities Program…

Supporting one or both of these bills are the California School Boards Association, the California Faculty Association, the California Association of School Business Officials, the American Federation of State, County, and Municipal Employees union (AFSCME); the Los Angeles Unified School District, and the Riverside County Superintendent of Schools. Further debate will reveal if these groups are willing to withhold potential objections to some of the Department of Finance proposed changes to educational construction finance in exchange for having another statewide bond measure on the 2016 Presidential general election ballot.

No formal opposition to these bills has yet emerged, but at this time the bills are just a frame, to be expanded with more detailed proposals.

Sources

“Request for Title and Summary for Proposed Initiative: Kindergarten Through Community College Public Education Facilities Bond Act of 2016,” Office of the California Attorney General, January 12, 2015, accessed June 28, 2015, https://oag.ca.gov/system/files/initiatives/pdfs/15-0005%20(Education%20Bond%20Act).pdf

“California School Builders, Others to Gather Signatures for November 2016 Bond Measure,” Sacramento Bee, January 12, 2015, accessed June 28, 2015, www.sacbee.com/news/politics-government/capitol-alert/article6143364.html

“AB 148 School Facilities: K–14 School Investment Bond Act of 2016 – California State Assembly Education Committee Analysis,” California Legislative Information, April 28, 2015, accessed June 28, 2015, https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201520160AB148#

“State of California School Bond Measure Feasibility Survey,” California’s Coalition for Adequate School Housing, Date, accessed June 28, 2015, https://www.cashnet.org/meetings/2014_Annual_Conference/documents/38_LegislativeUpdate_Bond_Feasibility.pdf

“Text – AB 2235 Education Facilities: Kindergarten-University Public Education Facilities Bond Act of 2014,” California Legislative Information, accessed June 28, 2015, https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB2235

“No School Bond, Lawmaker Suspension Measures On November Ballot,” Capitol Public Radio, August 19, 2014, accessed June 28, 2015, www.capradio.org/articles/2014/08/19/no-school-bond,-lawmaker-suspension-measures-on-november-ballot/

“2015-16 Governor’s Budget Summary,” Department of Finance – California Budget, January 9, 2015, accessed June 28, 2015, www.ebudget.ca.gov/2015-16/pdf/BudgetSummary/FullBudgetSummary.pdf

“2015 California’s Five-Year Infrastructure Plan,” Department of Finance – California Budget, January 9, 2015, accessed June 28, 2015, www.ebudget.ca.gov/2015-Infrastructure-Plan.pdf

“Governor’s Budget Summary 2015-16: K Thru 12 Education,” Department of Finance – California Budget, January 9, 2015, accessed June 28, 2015, www.ebudget.ca.gov/2015-16/pdf/BudgetSummary/Kthru12Education.pdf

“SB 50 – Chaptered. Leroy F. Greene School Facilities Act of 1998: Class Size Reduction – Kindergarten University Public Education Facilities Bond Act of 1998,” Official California Legislative Information, August 27, 1998, accessed June 28, 2015, www.leginfo.ca.gov/pub/97-98/bill/sen/sb_0001-0050/sb_50_bill_19980827_chaptered.html

“Fiscal Effects of Voter Approval Requirements on Local Governments,” Public Policy Institute of California, January 27, 2003, accessed June 28, 2015, www.ppic.org/content/pubs/report/R_103KRR.pdf

“Text – SB 114 Education Facilities: Kindergarten Through Grade 12 Public Education Facilities Bond Act of 2016,” California Legislative Information, June 3, 2015, accessed June 28, 2015, leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB114&search_keywords=

“Text – AB 148 School Facilities: K–14 School Investment Bond Act of 2016,” California Legislative Information, May 6, 2015, accessed June 28, 2015, leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB114&search_keywords=

“Senate Education Committee Legislative Analysis – AB 148 School Facilities: K–14 School Investment Bond Act of 2016,” California Legislative Information, March 25, 2015, accessed June 28, 2015, http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201520160SB114#

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Quantifying and Explaining California’s Educational Construction Debt (Section 3 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)
You are here: 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)
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


Quantifying and Explaining California’s Educational Construction Debt

Whatever voters are asked to approve in 2016 will not launch a new program to fix long-neglected schools to serve a rapidly expanding state population while providing smaller class sizes. That thinking is a legacy of the 1990s that still seems to endure today despite 14 years of most bond measures passing at a 55 percent threshold for voter approval. Arguments for another state bond measure in 2016 ignore or downplay how local school and college districts and the state obtained authority in the past 14 years to borrow $146.1 billion for educational construction.

If voters are not told or reminded of recent borrowing patterns, how can voters make an informed decision on future borrowing? To rectify the lack of availability of statistics on total bond debt in California for educational facility construction, the California Policy Center collected, synthesized, and analyzed data regarding California educational construction finance. The California Policy Center believes it is the first and only entity to painstakingly research and present an accurate and comprehensive record of all state and local educational construction bond measures considered by voters from 2001 through 2014.

The amount of authority approved by voters is a higher percentage than the percentage of the number of bond measures approved by voters because larger bond measures proposed by larger districts passed at a higher rate than smaller bond measures proposed by smaller districts.

Table 2: Local Educational Bond Measures Considered by California Voters After Passage of Proposition 39 in November 2000
Number on Ballot1147
Number Approved911
Number Rejected236
Percentage Approved79.42%
Percentage Rejected20.58%
Amount Proposed to Authorize$124,350,056,744
Amount Proposed to Authorize (including 16 reauthorizations)$125,080,421,744
Amount Authorized$109,620,418,737
Amount Authorized (including 16 reauthorizations)$110,350,783,737
Amount Rejected$14,729,638,007
Percentage of Authority Approved (including 16 reauthorizations)88.22%
Percentage of Authority Rejected (including 16 reauthorizations)11.78%
Amount Authorized Through Three Statewide Bond Measures$35,766,000,000
Total Amount Proposed to Authorize (State and Local Bond Measures)$160,116,056,744
Total Amount Proposed to Authorize (State and Local Bond Measures) (including 16 reauthorizations)$160,846,421,744
Total Amount Authorized (State and Local Bond Measures)
(including 16 reauthorizations)
$146,116,783,737

How Did It Become So Easy to Pass Bond Measures?

A new era of generous borrowing for educational construction in California was inaugurated by the enactment of Proposition 39. Approved by 53.4% of voters in the November 7, 2000 election, it reduced the voter approval threshold for most educational construction bond measures from two-thirds to 55 percent. (Because the measure imposes restrictions on districts using the new 55 percent threshold, a minority of districts have continued to propose measures requiring a two-thirds vote.)

This lowered obstacle apparently encouraged local educational districts to take the risk of proposing many more bond measures at much higher amounts for voters to approve. As shown in Tables 3 and 4, dropping the voter threshold from 66.67% to 55% transformed the approval of educational bond measures from a 50-50 chance to a commonplace outcome.

As shown in Table 5, between now and 2055, California’s taxpayers will pay about $200 billion in principal and interest payments to investors who have bought bonds issued by the state and by local educational districts in order to get funding for facility construction.

Table 3: Local Educational Bond Measures Considered by California Voters After Passage of Proposition 39 in November 2000
55% ApprovalTwo-Thirds
Approval
Total
Number on Ballot10371101147
Number Approved85754911
Number Rejected18056236
Percentage Approved82.64%49.09%79.42%
Percentage Rejected17.36%50.91%20.58%
Table 4: Local Educational Bond Measures: Results If Proposition 39 Wasn't Law
Under Prop 39
(55% and 2/3)
If Prop 39 Wasn’t Enacted (2/3)
Total Number of Bond Measures on Ballot11471147
Number of Bond Measures Approved911423
Percentage of Bond Measures Approved79.42%36.88%
Total Amount Authorized to Borrow
(includes reauthorizations)
$125,080,421,744$52,712,273,012
Percentage of Authorization Amount Approved88.22%42.15%
Table 5: Total Amount of Debt Service for Educational Facility Construction
Amount for 642 School and College Districts for Which Voters Approved Bond Measures Since Proposition 39 Passed in 2000$136,867,456,924
Amount for Three Bond Measures That Voters Approved for State of California Since Proposition 39 Passed in 2000$56,668,673,695
Estimate for Several Dozen School Districts Where Voters Approved Bond Measures Only Before Enactment of Proposition 39 or Lack Data$2,000,000,000
Estimated Amount for Several Bond Measures That Voters Approved for State of California Before Proposition 39 Passed in 2000$4,500,000,000
Approximate Total$200,000,000,000

How Was Debt Service Determined?

California Policy Center researchers identified, calculated, and tallied aggregate debt service for almost all of the 642 California local educational districts in which voters approved borrowing money for construction through bond sales after the election of November 7, 2000. On that date, California voters approved Proposition 39 and reduced the threshold for voter approval of most bond measures for construction from two-thirds to 55 percent.

This debt service data was obtained using tables included in about 650 “Official Statements” posted on a publicly-accessible and free-to-use Electronic Municipal Market Access (EMMA) website administered by the Municipal Securities Rulemaking Board (MSRB).

Example of Official StatementWhat are these statements? Federal law generally requires underwriters in a primary offering of municipal bonds of $1 million or more to obtain and review an Official Statement from the issuer of those bonds. (Many smaller bond offerings also have Official Statements.) In a dense report of more than 200 pages, these statements disclose financial information meant to inform a potential buyer and reduce the chance of “fraudulent, deceptive, or manipulative acts or practices.”

Official Statements include a chart that indicates how much aggregate principal and interest the issuer of the bonds would owe each year if the bonds weren’t refunded (“called in” or redeemed so that new bonds can be issued at a lower interest rate) or paid off early. California Policy Center researchers entered each district name into the EMMA system, identified the most recent bond offering or bond refunding from the list of bond issues, downloaded the associated Official Statement, located the aggregate debt service chart, and calculated the total debt service for 2015 and/or later years.

Using these Official Statements to extract data required diligence. Firms that produce the statements do not use a specific standard format, so the aggregate debt service table appears in different places. Tables differ in title, format, or details of content. Older Official Statements are not optimized for word searches. A few tables do not total up the annual debt service, thus forcing the user to convert the table into a spreadsheet and calculate the total using a formula. A handful of Official Statements outright lacked aggregate debt service tables.

Tables may even contain erroneous data. After some confusion, researchers realized that an Official Statement for the Napa Valley Unified School District contained major errors. It indicated total debt service as $77 million instead of the actual $665 million and also indicated a November 5, 2002 bond measure as authorizing $219 million instead of the actual $95 million. This was an unfortunate district to have an erroneous Official Statement: a California Watch article published in the San Francisco Chronicle just three months before the Official Statement was posted identified the Napa Valley Unified School District as a district where taxpayers will eventually “pay dearly for bonds.” In 2009 it borrowed $22 million through Capital Appreciation Bond sales that will cost $154 million by the time the last bonds in the series mature forty years later, in 2049.

Researchers also had to be cautious about accurately identifying school districts with similar names. For example, Central, Oak Grove, and Columbia are words shared by more than one school district. And “College School District” in Santa Barbara County is not a community college district. Some of the inconsistencies found in cross-referencing various sources for bond measure data seem to be a result of misidentifying districts with similar-sounding names.

Even after these challenges were overcome, researchers recognized that the list of debt service for school and college districts needs to be considered with some caveats. (Table 6 is “Cautionary Considerations When Evaluating Current Debt Service Data for School and College Districts.”) Researchers are also aware of arguments that debt service — even when considered with other financial data — is not always a useful way to assess whether or not school or college districts have been irresponsible in their choices for debt finance of facilities construction. A few of those arguments are listed in Table 7: Why Some Analysts Downplay Debt Service Data.

Despite these potential limitations, aggregate debt service amounts available through Official Statements posted on EMMA provide new insight into the long term debt obligations owed by California local educational districts for facilities construction. This data set represents a major advance in informing Californians about the tremendous debt accumulated by educational districts that borrow money for school construction by selling bonds.

Table 6: Cautionary Considerations When Evaluating Current Debt Service Data for School and College Districts
1For some school or college districts, debt service may be relatively low compared to the total amount authorized to borrow because those districts haven't issued all of the bonds (or any of the bonds) yet. When those districts sell all of the bonds in the amount authorized by voters, debt service will be higher.
2An educational district in a wealthy area can have high debt service but also have high and stable total assessed property value. That high debt service may be inappropriate, but it is not as risky as the same debt service in a less affluent district with unstable property values and an uncertain economic future.
3Some California educational districts do not have debt service listed in the appendices because they recently sold bonds through “private placement.” These transactions do not require Official Statements to be posted on EMMA. Without an Official Statement, long term debt obligation from bonds is more difficult to obtain. And when obtained through annual financial reports, that number may be outdated compared to information available in an Official Statement.
4The appendices indicate all aggregate debt service for 642 districts in which voters approved bond sales since Proposition 39 was enacted in 2000. This means there may be some distortions when comparing data, for the following reasons:

Aggregate debt service listed for districts may originate from bond measures approved by two-thirds of voters as far back as 1987 and up through November 7, 2000. This means that debt service for some districts may appear disproportionately high relative to the amount authorized by voters to borrow from 2001 through 2014.

There are a handful of districts that have current debt service resulting from bond measures approved in 2000 or earlier but have not asked voters to authorize additional borrowing since the November 7, 2000 election. That debt service is not included in the grand total reported here.

Likewise, California voters approved several ballot propositions before Proposition 39 was enacted in 2000, including a $9.2 billion bond measure passed in 1998 that included $6.7 billion for K-12 school districts and $2.5 billion collectively for community college districts and the California State University and the University of California campuses.
5Several K-12 school districts have merged in the past 15 years. Some Official Statements segregate debt service for the districts before they merged, and some combine the debt service.
6Several community college district and K-12 school districts have created “School Facilities Improvement Districts” carved out from the complete jurisdiction of the districts. Some Official Statements segregate debt service for these sub-districts, and some combine the debt service for the sub-districts with the debt service for the complete district.
7Debt service tables in Official Statements do not account for Bond Anticipation Notes, Certificates of Participation, lease revenue bonds, and other ways that educational districts borrow money.
8Community Facilities Districts funded by Mello-Roos bonds are not included in Official Statements.

Sources

Electronic Municipal Market Access (EMMA) website administered by the Municipal Securities Rulemaking Board (MSRB) http://emma.msrb.org

“Napa Valley Unified School District,” Electronic Municipal Market Access (EMMA), May 9, 2013, accessed June 28, 2015, http://emma.msrb.org/EA524107-EA408291-EA805228.pdf

“School Districts Pay Dearly for Bonds,” San Francisco Chronicle, January 31, 2013, accessed June 28, 2015, www.sfgate.com/education/article/School-districts-pay-dearly-for-bonds-4237868.php

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How California School and College Districts Acquire and Manage Debt (Section 4 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)
You are here: How California School and College Districts Acquire and Manage Debt (4 of 9)
Capital Appreciation Bonds: Disturbing Repayment Terms (5 of 9)
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


How Educational Districts Acquire and Manage Debt 

It’s likely that most California voters have limited familiarity with the organization and governance of their local school and community college districts. When voters authorize their local educational districts to borrow money for construction by selling bonds, presumably they trust that the local school or college district will exercise prudence in managing the process.

Sometimes their trust is betrayed.

To discourage abuse of the school construction finance system, voters need to be aware of how their local government is organized and managed. They also need to realize that state law does not explicitly give Independent Citizens’ Bond Oversight Committees broad authority to review construction programs funded by bond measures.

How can voters become informed about bonds and the process of borrowing money for educational construction through bond sales? Is there a way to explain in clear plain language what actually happens after voters approve a bond measure and authorize a school or college district to borrow money via bond sales?

Bonds Help Local Governments Borrow Money to Better Serve the People

When people talk about municipal securities or municipal bonds, they’re talking about state governments or local governments borrowing money from investors with the promise to pay it back to them later, with interest. Municipal (derived from the Latin word municipium, meaning a free city) simply means a local government, such as a county, city, water district, sanitation district, irrigation district, utility district, transportation district, cemetery district, mosquito vector district, and many other kinds of special districts formed by the people to serve the people. And it includes school districts and community college districts.

Despite a lack of public attention to bonds, this method of debt finance is important, especially for governments such as California’s school districts and community college districts that want to initiate or continue major construction programs. U.S. Securities and Exchange Commissioner Luis A. Aguilar recently described the importance of municipal bonds:

It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives. Municipal securities provide financing to build and maintain schools, hospitals, and utilities, as well as the roads and other basic infrastructure that enable our economy to flourish. Municipal bonds’ tax-free status also makes them an important investment vehicle for individual investors, particularly retirees. Ensuring the existence of a vibrant and efficient municipal bond market is essential, particularly at a time when state and local government budgets remain stretched.

Such comments are appreciated by state and local governments as murmuring continues in Washington, D.C. that income from municipal bonds should lose tax-exempt status.

Basic Information About California K-12 School Districts

In the case of a local elementary school district (kindergarten though eighth grade), high school district (ninth through twelfth grade), or unified school district (kindergarten through twelfth grades), voters elect a board of trustees (often called a “school board” or a “board of education”) to oversee operations of the school district and make major decisions as representatives of the people. The board appoints a District Superintendent and other professional administrators to handle day-to-day management of the district.

In addition, each county has an elected County Board of Education and an elected County Superintendent of Schools with specific responsibilities. There is also a State Board of Education appointed by state elected officials to oversee education policies that are common for all school districts in the state. There is also a State Superintendent of Schools elected by the people of California.

Table A-1 (“California K-12 School Districts 2013-2014 – Ranked by Enrollment”) lists 945 elementary school districts, high school districts, and unified school districts with enrollment tracked by the California Department of Education as of June 15, 2015.

Basic Information About California Community College Districts

In the case of a local community college district, voters elect a Board of Trustees (often called a “college board” or a “governing board”) to make decisions for the college district as representatives of the people. There is also a Board of Governors of the California Community Colleges appointed by state elected officials to oversee education policies that are common for all college districts in the state. The Board of Governors appoints a Chancellor of the California Community Colleges and other professional administrators to handle day-to-day management of the state college system.

Boards for the University of California and California State University systems are appointed by state elected officials and not directly chosen by the people.

As of June 15, 2015 there are 72 community college districts in California with 112 colleges. (Some districts contain multiple colleges.) Table A-2 (“California Community College District Enrollment Fall 2014 – Ranked by Number of Students”) lists these districts.

What Are the Independent Citizens’ Bond Oversight Committees? 

To strengthen the arguments for Proposition 39 in 2000, the California legislature passed Assembly Bill 1908, the “Strict Accountability in Local School Construction Bonds Act of 2000,” with these stated intentions:

  1. Vigorous efforts will be undertaken to ensure that school and college districts spend the proceeds of bond measures, including those passed under criteria of Proposition 39, in strict conformity to law.
  2. Taxpayers will directly participate in the oversight of bond expenditures.
  3. Members of the oversight committees appointed for these purposes will promptly alert the public to any waste or improper spending of money borrowed through bond sales.
  4. Unauthorized expenditures of school construction bond revenues will be vigorously investigated, prosecuted, and restrained by the courts.

A school or college district board must appoint an independent citizens’ bond oversight committee with 60 days after the board enters the election results in its minutes. The committee must include at least seven members to serve for a term of two years and for no more than two consecutive terms. District employees, officials, vendors, contractors, or consultants are prohibited from serving on the committee, and it must include at least one “active” representative of the following groups:

  1. a business organization, located within the district, representing the business community
  2. a senior citizens’ organization
  3. a bona fide taxpayers’ organization
  4. for a school district: parents or guardians of children enrolled in the district
  5. for a school district: parents or guardians of children enrolled in the district who are also active in a parent-teacher organization, such as the Parent Teacher Association or school site council
  6. for a community college district: students who are currently enrolled in the district and also active in a community college group, such as student government
  7. for a community college district: organizational support groups of the district, such as advisory councils or foundations

These committees have several responsibilities listed in state law meant to ensure the district spends bond proceeds only on projects listed in the ballot statement and avoids spending bond proceeds on ineligible projects, programs, or “teacher or administrative salaries or other school operating expenses.” State law also assigns these committees to review “efforts by the school district or community college district to maximize bond revenues by implementing cost-saving measures.”

The committee does NOT have a explicit oversight role for how the district pays for these construction projects, and a narrow interpretation of the law could claim that oversight committees do not have legal authority to review bond sales. However, the California League of Bond Oversight Committees (CalBOC) believes these committees have the authority to review and comment on the structure of bond issues under the provisions for reviewing “cost-savings” measures. Districts often defer to legal counsel for interpretations of the responsibilities and limitations of oversight committees.

A Private Organization Has Taken Responsibility for Independent Citizens’ Bond Oversight Committees

Currently a private organization is providing services and advice to oversight committees. The California League of Bond Oversight Committees (CalBOC), founded in 2006, is a non-profit public service organization that filled a need for training, education, and legislative advocacy for the state’s bond oversight committees.

This arrangement has shortcomings. A private organization is dependent on voluntary financial contributions and a committed volunteer leadership, and it lacks power to take action against educational districts that fail to comply with state laws. Membership and involvement is dependent on the motivations and self-initiative of individual bond oversight committee members. CalBOC does not have any professional staff to monitor districts, collect data, and provide it to the public.

In addition, school districts can discourage oversight committee members from participating in the California League of Bond Oversight Committees, and some school district administrators openly disparage it. Some district administrators and legal counsel don’t want oversight committees interpreting their purpose broadly and consuming district staff time and district funds on investigations outside of a narrowly-defined purview.

The author of this report has been and continues to be a member of the Advisory Committee for the California League of Bond Oversight Committees (CalBOC).

Translating School Finance Decisions For Ordinary People to Understand

For many Americans, the phrase “stocks and bonds” evokes the image of an established and wealthy investor. Someone who buys a stock becomes an owner of a corporation, and someone who buys a bond becomes a creditor who is owed money by a corporation or a government. It’s likely that more Americans could explain stocks than could explain bonds.

The lack of public awareness or knowledge about bonds may be attributable to the complex provisions of certain bonds and the fact that bonds typically do not offer the very large potential returns offered by equity in growing firms.

Bonds rarely get news media attention outside of a few financial wire services such as Bloomberg, Reuters (which had a “MuniLand” blogger), and specialty publications such as The Bond Buyer. And in popular culture, depictions of bond brokers have been mainly limited to two books by Tom Wolfe: The Bonfire of the Vanities (subsequently made into a movie) and I am Charlotte Simmons.

What Is a Bond?

Some technical definitions of a bond are listed in Table 10. But rather than focusing on the definition of a bond, Californians need to focus on what a bond does in practice.

For a school or community college district, issuing (“selling”) bonds means the district borrows money for a specific length of time from investors with the obligation to return all of that money to them when that time period ends. The amount borrowed is called the principal.

During that length of time the district pays a fee to the investors, either on a regular basis (for Current Interest Bonds) or accumulated with compounded interest at the end of the time period (for Capital Appreciation Bonds). The amount paid is called interest.

The term of maturity between borrowing the money and paying back the money with interest can be one to three years (short-term bonds) or decades (long-term bonds). Under California law, a school district or community college district cannot issue a current interest bond with a maturity over 40 years. As a result of Assembly Bill 182 enacted in 2013, California local governments are now prohibited from issuing Capital Appreciation Bonds with a maturity over 30 years.

AB 182 allows a school district or community college district to issue Current Interest Bonds bonds with a term of maturity between 30 and 40 years. The district must use that borrowed money for projects with a “useful life” that equals or exceeds the term of maturity.

What Are “General Obligation Bonds” Referenced in Ballot Language for Bond Measures?

Corporations and state and local governments issue bonds to raise money. Bonds sold by local governments are called municipal bonds. An appealing aspect of many municipal bonds for investors is their tax-exempt status.

Municipal bonds such as those sold by California school districts and community college districts for construction are called general obligation bonds, meaning they are backed by the “full faith and credit” of the districts. These districts theoretically have legislative power to collect enough money through property taxes, other borrowing, selling assets, or other sources of revenue to fulfill their obligation to make payments on the bonds when due. Those taxes are collected from property owners in the district. (Revenue bonds are another kind of municipal bond, paid off through tolls, lease payments, user fees, or other service payments.)

Comparing Current Interest Bonds to Capital Appreciation Bonds

When voters are asked at an election to approve a bond measure to pay for construction at a school district or community college district, they generally have been told that a “Yes” vote will authorize the sale of general obligation bonds to fund that construction.

California educational districts are issuing two kinds of general obligation bonds: Current Interest Bonds and Capital Appreciation Bonds. Usually the district does not tell voters what kind of general obligation bonds it will sell, unless it specifically passes a resolution before the election stating it will not sell Capital Appreciation Bonds and includes that condition in the ballot statement.

1. Current Interest Bonds (also called Fixed Rate Bonds)

These are the “traditional” kind of municipal bonds. A buyer of Current Interest Bonds gets a periodic interest payment (usually semi-annually). When the bond matures, the buyer gets the principal back.

2. Capital Appreciation Bonds (also called Zero Coupon Bonds)

A buyer of Capital Appreciation Bonds does not receive semiannual or other periodic interest payments. Instead, the buyer receives all of the interest – compounded over the length of maturity for the bond – together with the principal when the bond matures. There is no regular payment of interest, but the accumulated (“accreted”) interest is compounded over many years, making the wait a worthwhile investment. Capital Appreciation Bonds are purchased at a deeply discounted amount from their face value.

Capital Appreciation Bonds are discussed in more detail in Section 5.

Two Costs to Educational Districts of Borrowing Money Via Bonds

From the perspective of the school district, the additional financial cost of borrowing money by selling bonds as opposed to spending money from the district general fund results from (1) interest and (2) transaction fees.

Interest

If someone borrows $1000 for five years from a lender at an annual interest rate of 5 percent, the borrower and the lender agree that the borrower will pay back the $1000 over five years and also pay 5% of that $1000 ($50) multiplied by five years for a total of $1250. The borrower gets the $1000 immediately to use, and the lender earns annual interest income of $50 over five years for a total of $250. Both parties consider themselves to get a benefit from the transaction.

Likewise, if a school district issues a traditional $1000 Current Interest Bond at an annual interest rate of 5 percent with a five-year term of maturity and an investor buys the bond at its face value of $1000, the school district gets the $1000 immediately to use for construction, and the investor earns annual interest income of $50 over five years for a total of $250. When the five years are over, the investor gets the $1000 back. Both parties get a benefit from the transaction. In addition, the investor does not have to pay taxes on the interest.

School districts usually sell series of bonds as a package with different maturities and interest rates.

Transaction Fees (Issuance Fees)

Bond buyers are not the only party to make money from bonds issued by California school districts and community college districts. Similar to taking out a mortgage, a variety of parties in the financial services industry are involved in the preparation and sale of bonds, and each party gets a fee for participating in the transaction. These fees are classified as “costs of issuance.”

To prevent these fees from cutting into the amount of money authorized by voters for construction, educational districts routinely inflate the interest rates on bonds they sell so that the price is higher than the face value of the bond. After the bonds are sold, that extra money, or “premium,” is used to pay the costs of issuance.

Table 8: Types of Issuance Fees
underwriter’s discount
bond counsel fees
disclosure counsel fees
paying agent fees
escrow agent fees
rating agency fees
bond insurance fees
verification agent fees
financial advisor fees
printing fees
other miscellaneous expenses

How are Municipal Bonds Bought and Sold? Who Buys Them?

Municipal bonds are not traded on an exchange like stocks. Instead, investors buy and sell bonds “over the counter” through dealers and brokers registered with the Municipal Securities Rulemaking Board (MSRB), a self-regulatory organization overseen by the U.S. Securities and Exchange Commission. These dealers and brokers act as underwriters or intermediaries between issuers and investors. They charge fees, or “mark-ups” for the transactions.

Once a school district sells a bond, the bond can be traded in the municipal bond market. The price will fluctuate and investors will be concerned about yield — the amount of income earned as prices rise and fall.

According to Federal Reserve statistics, individual investors hold a little more than two-thirds of municipal bonds, about 42 percent directly and about 28 percent through mutual funds and other investment vehicles. Major institutional investors include asset management firms, insurance companies, and commercial banks.

One of the arguments to cap or eliminate the federal tax exemption for income from municipal bonds is that the exemption mainly benefits wealthy individuals who buy bonds as a tax-exempt investment. Buyers of municipal bonds do not generally “keep the money in the community” because they aren’t in the community. And they generally do not buy bonds issued by educational districts to “help the children” or “provide vocational training to veterans.” They buy them to make money.

Ironically, the same Progressive activists who call for higher taxes on the rich also tend to support educational bond measures that help the rich to earn investment income that is tax-free. Forcing the rich to pay taxes on income earned through municipal bonds could collapse the demand for these bonds and make borrowing money for construction a much more expensive proposition for school and college districts.

Table 9: Some Advantages for Investors in Municipal Bonds
Interest earned on municipal bonds is usually exempt from federal and state income tax.
In the case of general obligation bonds, principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer’s taxing power. Despite negative nationwide publicity about a relatively small number of bankrupt local governments (such as the California cities of Vallejo, Stockton, and San Bernardino), a government defaulting on municipal bonds is “extremely infrequent,” according to Moody’s. They are thus a relatively safe investment.
In the case of Current Interest Bonds, investors get a regular interest payment, usually semi-annually. There is a regular, dependable income stream.
In the case of Capital Appreciation Bonds, investors can earn a substantial amount of interest over a long period of time through compounding while still enjoying the relatively safe investment of general obligation bonds.

How Does an Educational District Pay Back the Borrowed Principal Plus Interest on Bond Sales?

People pay back the principal and interest on car loans, school loans, and mortgages using their income. Educational districts pay back the principal and interest on bonds using their “income,” that is, taxes collected from property owners in the district.

After a school district or community college district borrows money by selling bonds for construction, it informs the county auditor and county treasurer/tax collector. Based on the assessments of property value determined by the county assessor, the county treasurer calculates the appropriate tax rate and generates individual tax bills for owners of property such as houses, farms, apartment buildings, commercial buildings, manufacturing facilities, business infrastructure, and undeveloped land. A specific rate and tax for each bond measure is listed on the tax bill.

These taxes are called ad valorem taxes. Ad valorem is Latin for “according to worth” and indicates that taxes are levied (imposed) on property owners in proportion to the assessed value of their property.

Does Renting or Leasing Mean That You Don’t Pay for Educational Construction or the Cost of Borrowing Money for It?

Households that rent property or businesses that lease property do not pay property taxes directly. However, it is not true to claim or think that renters or lessees don’t have to pay for educational construction and the costs of borrowing money to pay for that educational construction. Property owners can and do incorporate the cost of their property taxes into their rents or leases. Bond sales by a school or college district may result in higher rent.

Technical Definitions of Bonds

Notice that the common term in all of these definitions is debt. When a school or college district sells bonds, it borrows money from investors and must pay them the money back over time, with interest.

Table 10: Technical Definitions of Bonds
SourceDefinition
California Education Code Section 15140.5 (added to law by Assembly Bill 182 in 2013)Evidence of indebtedness payable, both principal and interest, from the proceeds of ad valorem property taxes that may be levied without limitation as to rate or amount upon property subject to taxation by the governing board of the school district or community college district.
Glossary on the Municipal Securities Rulemaking Board (MSRB) websiteThe written evidence of debt, which upon presentation entitles the bondholder or owner to a fixed sum of money plus interest. The debt bears a stated rate(s) of interest or states a formula for determining that rate and matures on a date certain.
U.S. Securities and Exchange Commission website definition of municipal bondsDebt securities issued by states, cities, counties and other governmental entities to finance capital projects, such as building schools, highways or sewer systems, and to fund day-to-day obligations. Investors who buy municipal bonds are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” The date when the issuer repays the principal, the bond’s maturity date, may be years in the future. Short-term bonds mature in one to three years, while long-term bonds generally will not mature for more than a decade. 
Internal Revenue Service Tax-Exempt Governmental Bonds Compliance Guide description of municipal bondsTax-exempt bonds are valid debt obligations of state and local governments, commonly referred to as “issuers” - the interest on which is tax-exempt. This means that the interest paid to bondholders is not includable in their gross income for federal income tax purposes. This tax-exempt status remains throughout the life of the bonds provided that all applicable federal tax laws are satisfied…Governmental bonds are tax-exempt bonds issued by a state or local government, the proceeds of which are generally used to finance activities or facilities owned, operated, or used by that or another government for its own purposes. This can include financing the building, maintenance, or repair of various types of public infrastructure such as highways, schools, fire stations, libraries, or other types of municipal facilities.

Sources

“Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair,,” U.S. Securities and Exchange Commission, February 13, 2015, accessed June 28, 2015, www.sec.gov/news/statement/making-municipal-securities-market-more-transparent-liquid-fair.html

“Letters to Congress/Administration,” National Association of Bond Lawyers, accessed June 28, 2015, http://registration.nabl.org/about/Governmental-Affairs/Tax-Reform-Resources/Letters-to-Congress-Administration.html

California League of Bond Oversight Committees (CalBOC) www.calboc.org

Reuters “MuniLand” blogger Cate Long blogs.reuters.com/muniland/

The Bond Buyer www.bondbuyer.com

Municipal Securities Rulemaking Board (MSRB) www.msrb.org

Board of Governors of the Federal Reserve System – Data Releases, June 11, 2015, accessed June 28, 2015, www.federalreserve.gov/releases/z1/current/z1r-4.pdf

Capital Appreciation Bonds: Disturbing Repayment Terms (Section 5 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)
You are here: Capital Appreciation Bonds: Disturbing Repayment Terms (5 of 9)
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


Capital Appreciation Bonds: Disturbing Repayment Terms

In 1993, California law was changed so that school and college districts could use an innovative form of debt finance called zero-coupon bonds, also known as Capital Appreciation Bonds. These bonds allow school and college districts to borrow now for construction and pay it back — with compounded interest — many years later. The borrowing strategy has been a tempting and dangerous lure for elected school and college boards.

Some people think Capital Appreciation Bonds are a “ticking time bomb” or the “creation of a toxic waste dump.” Others regard critics as uninformed and contend that these debt finance instruments are beneficial for school and college districts. Since the people who will be paying off many of these Capital Appreciation Bonds are now children or not even born yet, there isn’t much incentive to stop the flow of borrowed money that doesn’t need to be paid back for a generation or two.

Capital Appreciation Bonds Get Attention: Some Welcomed It, Some Didn’t

There was a brief time in the last half of 2012 when California news media and even national news media alerted the public to a neglected but long-festering problem involving municipal bonds sold by many California school districts and community college districts. These educational districts chose to borrow money for construction using an unconventional debt finance instrument called a Capital Appreciation Bond.

Capital Appreciation Bonds allow school and college districts to circumvent state laws that limit taxes and debt relative to the total value of property in the districts. But they also subject future generations of Californians to potentially burdensome taxes and debt.

Explaining and Contrasting Current Interest Bonds and Capital Appreciation Bonds

The traditional Current Interest Bonds (also called Fixed Rate Bonds) are relatively easy to understand. If someone buys a Current Interest Bond and holds it until it matures (reaches the end of its time period for borrowing), that buyer receives interest on a regular basis (usually semi-annually). The buyer gets the original principal paid back when the bond reaches the end of its term of maturity.

Here’s an example of how a Current Interest Bond works:

  • An entity buys a $1000 Current Interest Bond issued by a school district at face value (also known as par value) with a 25-year term to maturity at a 2.5 percent interest rate.
  • Each year, for 25 years, the buyer gets $25 in interest from the school district, because 2.5% of $1000 is $25.
  • When the bond matures, the buyer gets the principal of $1000 back from the school district.
  • The total interest earned over 25 years is $625, because $25 times 25 is $625.
  • Although the $625 is income, the buyer will never have to pay tax on that interest if the bond is tax-exempt, as is typical with municipal bonds.

Obviously the school district must levy taxes on property owners each year throughout the 25-year term to maturity so that it has enough money to pay interest each year (and ultimately pay back the principal at the maturity date).

Capital Appreciation Bonds (also called Zero Coupon Bonds) are more difficult to understand. Someone who buys a Capital Appreciation Bond pays for it at a price deeply discounted from the face value (par value) of the bond. The buyer does not receive interest payments until the bond reaches maturity, at which point the buyer is paid the face value of the bond, which is the deeply-discounted price (the principal) plus all of the interest earned during the term to maturity.

During the term to maturity period of the Capital Appreciation Bond, interest accumulates over time. The interest is compounded, meaning interest for a time period is earned on the original amount of money and also earned on any of the interest that has already been accumulated up to that time period.

Compound interest that accumulates as a Capital Appreciation Bond grows in value is called “accreted interest.” “Accreted” (a word derived from the Latin accrescere, to increase) means accumulated over time.

Here’s an example of how a Capital Appreciation Bond works:

  • An entity buys a $5000 Capital Appreciation Bond with a 25-year term to maturity at an interest rate of 5 percent.
  • The discounted price of the bond is $1477.
  • When the bond matures, the buyer gets $5000 back from the school district.
  • The total earned over 25 years is $3,523.
  • Although the $3,523 is income, the buyer will never have to pay tax on that interest if the bond is tax-exempt, as is typical with municipal bonds.

The school district benefits because for many years it does not need to levy taxes on property owners in order to make interest payments. It can borrow much more money through bond sales without being restricted by tax and debt limits established in state law. The community can enjoy the benefits of the bond sales without having to pay for them — at least for a while.

And although the buyer does not get a regular interest payment, the accumulated (“accreted”) interest is compounded over many years, making the wait a worthwhile investment. The cliché about “the power of compound interest” for an investor is accurate.

Why Did Capital Appreciation Bonds Become Popular?

The public first became aware of Capital Appreciation Bonds in 2012 when news media reported on a 2011 debt financing arrangement at the Poway Unified School District. Most reports insinuated that limits on taxes and debt established by the legislature in 2000 in conjunction with Proposition 39 had forced schools and community colleges to borrow money by selling Capital Appreciation Bonds. Allegedly these limits were constraining school and college districts from implementing necessary construction programs at a time of plummeting property values. Educational districts saw Capital Appreciation Bonds as the only debt financing option available to alleviate school overcrowding and ensure children’s safety.

But in reality, Capital Appreciation Bonds have been a component of bond issues by California educational districts for over twenty years. Signed into law in 1993, Senate Bill 872 authorized school and college districts to sell them. Voters in the Windsor Unified School District approved a bond measure on April 12, 1994, and the district proceeded to sell $5,054,761 in Capital Appreciation Bonds in its first series of bond sales. The Old Adobe Unified School District and the Oakland Unified School District soon followed.

Capital Appreciation Bond Origins

The first sentence in a 1982 article in the New York Times declared, “Give Wall Street a headache like double-digit interest rates, and someone will invent an aspirin like the zero-coupon bond.” According to this article, in 1981 J.C. Penney became the first corporation to issue Capital Appreciation Bonds. In 1982, E.F. Hutton became the first bond broker to underwrite Capital Appreciation Bonds for municipal governments.

A survey of news coverage on Capital Appreciation Bonds during the 1980s reveals that the focus of journalistic concern for this new form of municipal debt finance was the risk to investors. Needless to say, Capital Appreciation Bonds endured past the era of high interest rates, and the aspirin for investors became a headache for taxpayers.

Who Buys Capital Appreciation Bonds?

Capital Appreciation Bonds are not necessarily a wise decision for an investor, so who sees an investment advantage in buying them? James Estes, Professor of Finance at California State University, San Bernardino tried to answer this question and reported the results of his investigation in a 2013 paper. After observing that Charles Schwab & Co, Inc. does not offer or sell Capital Appreciation Bonds, he contacted twelve companies that offer municipal bond funds. All twelve claimed they don’t market funds featuring Capital Appreciation Bonds. Company representatives told Estes that Capital Appreciation Bonds were undesirable to their investors because of their lack of current interest payments, their poor yield, and their high risk.

Estes also investigated rumors on the web that CalPERS might be holding many municipal Capital Appreciation Bonds. CalPERS spokesperson Danny Brown denied that CalPERS holds them and cited their risk. Finally, Estes mentions the claim of a finance reporter that international banks hold Capital Appreciation Bonds in a trust administered by Bank of America.

In response to a Twitter inquiry from the author of this report, a former reporter for Voice of San Diego tweeted that he never learned who held the district’s Capital Appreciation Bonds during his 2½ years reporting on Poway Unified School District’s Capital Appreciation Bond fiasco: “The word was that the debt had likely been sold and resold and resold. Also no repository for that info…I always wanted to know.”

In 2014, a municipal bond advisor named Dale Scott of Dale Scott & Company presented a plan to Poway Unified School District for the district to buy back some of its Capital Appreciation Bonds using funds from a property tax increase. One challenge for this district is identifying who owns the bonds so offers can be made to buy them back. Scott pointed out that he had managed to find owners of Capital Appreciation Bonds issued by the Stockton Unified School District and buy back about 30 percent of them. According to an August 20, 2014 article in the San Diego Union-Tribune, “Scott said there is a myth that capital appreciation bonds are impossible to acquire once they are sold, but the reality is the bond holder may have many reasons for selling bonds that may take decades to mature.”

Tax and Debt Limits for Bond Measures Qualified Under Proposition 39 (Enacted Through Assembly Bill 1908 in 2000)
Type of Educational DistrictTax LimitDebt Limit
Unified School District0.06% of taxable property value ($60 per $100,000)2.5% of taxable property value
Elementary School District0.03% of taxable property value ($30 per $100,000)1.25% of taxable property value
High School District0.03% of taxable property value ($30 per $100,000)1.25% of taxable property value
Community College District0.025% of taxable property value ($25 per $100,000)2.5% of taxable property value

Tax and Debt Limits Meant to Assure Property Owners that a 55% Approval Threshold for School Bond Measures Wouldn’t Crush Them

From a school district’s perspective, Capital Appreciation Bonds are attractive because they enable the district to borrow more within its tax and debt limits. California Education Code Sections 15268-15270 sets the current limits. The state has not changed the limits since the enactment of Assembly Bill 1908 in conjunction with Proposition 39 in 2000, although Governor Brown proposed increasing them in his 2015-16 budget. (See Section 2 for background.)

Opponents of Proposition 39 in 2000 pointed out in their ballot arguments that these tax and debt limits were not part of the constitutional amendment enacted through Proposition 39 and therefore could be amended or repealed by the state legislature at any time. This is true.

Districts can set a lower tax or debt limit in the ballot statement for a bond measure. And K-12 school districts can get waivers from State Board of Education to impose higher tax or debt limits. (See Section 6 for background on waivers.)

Tax and Debt Limits Make Funding of Construction Programs Highly Dependent on Assessed Property Valuation

Because tax and debt limits are based on annual assessed property valuation in a district, the limits change yearly as a reflection of the real estate market. If property values increase compared to the previous year, the amount of money that can be borrowed increases relative to the previous year. If property values decline compared to the previous year, the amount of money that can be borrowed that year decreases. Educational districts hope (and usually project) property value to increase at a respectable rate for many years to come.

If the substantial increase in home prices during the mid-2000s gave school and college districts several years to borrow a lot more than perhaps originally anticipated, the dramatic drop in the following years hindered school and college districts, especially those with ongoing construction programs. From 2007 to 2011, assessed property valuation in some regions of California declined by as much as 50%, especially in exurban areas of California that grew rapidly in population during the 2000s as young families sought home ownership at prices they could afford.

Not surprisingly, these same regions needed new school construction to accommodate the children in these young families. Because of tax and debt limits, educational districts could not raise tax rates or borrow more money using traditional Current Interest Bonds to compensate for the loss in revenue resulting from the decline in property values.

Capital Appreciation Bonds are a clever way to circumvent the debt limits. A school or college district can take on a long-term debt obligation of $5000 by selling a bond but declare the debt to be $1300 because the bond was sold at the deeply discounted “principal” of $1300. And by deferring payment to bond investors until the bonds mature, the district can borrow money without exceeding the tax limit.

Hoping for the Best with Capital Appreciation Bonds

Of course, school districts will eventually have to collect a lot of money through levying taxes on property owners to pay principal and accreted interest to the buyers of Capital Appreciation Bonds. Essentially, Capital Appreciation Bonds represent a district’s gamble that assessed values will climb rapidly enough to produce sufficient tax revenue to allow issuers to pay off the bonds when they become due. If the anticipated increase in assessed property valuation fails to occur during the term of maturity, the district cannot pay principal and interest owed in future years.

There is little political disincentive for elected board members to borrow money today for school construction and impose a commitment on future generations to pay it off in 25, 30, or even 40 years. Only the elected board members of the Poway Unified School District have suffered political consequences from approving this kind of debt finance. But future school and college board members (who are children today) may be unjustly subjected to voter ire when the bill on Capital Appreciation Bonds is finally due.

2013: An Incomplete Fix for the Excesses of Capital Appreciation Bonds

Assembly Bill 182 was an attempt to restrain the worst excesses of Capital Appreciation Bonds while still allowing school and college districts to use them as a debt finance tool. It developed out of a proposal from San Diego County Treasurer-Tax Collector Dan McAllister as a response to high-profile Capital Appreciation Bond sales by school districts in his county.

Supporters of this bill were prominent critics of unrestrained Capital Appreciation Bond sales: California State Treasurer Bill Lockyer, the aforementioned San Diego County Treasurer-Tax Collector Dan McAllister, the California Association of County Treasurers and Tax Collectors, the California League of Bond Oversight Committees, the Howard Jarvis Taxpayers Association, and the California Taxpayers Association. Several rural county boards of supervisors supported the bill, as well as the board of supervisors for Contra Costa County, where the West Contra Costa Unified School District, the Mt. Diablo Unified School District, and the Acalanes Union High School District received local attention for risky bond finance schemes, including Capital Appreciation Bonds.

California State Treasurer Bill Lockyer wrote the following in support of Assembly Bill 182:

…many districts face a critical need to build or modernize facilities for their children, and I recognize that falling property tax assessments, revenue losses, and statutory debt service limits have all combined to reduce districts’ debt financing options, at least at the present time. However, we cannot continue to use debt financing tools, such as CABs, that force tax payers to pay, at times, more than 10 times the principal to retire these bonds. In too many cases, these transactions have been structured with 40-year terms that delay interest and principal payments for decades, resulting in huge balloon payments. Moreover, school board members and the public have not always been fully informed about the total costs and risks associated with issuing capital appreciation bonds. As a result of such CAB deals and lack of transparency, our future generations in many California school districts will be burdened with heavy taxes for years and years to come.

But there was also significant opposition to the bill from groups heavily involved in promoting bond measures for school construction, including California’s Coalition for Adequate School Housing (C.A.S.H.), the Association of California School Administrators, the California Association of School Business Officials, and the Small School Districts’ Association. The first legislative analysis written for a committee about AB 182 described the basis for the opposition:

All of the opposition letters submitted to the Committee have an “oppose unless amended” position. Generally, the opposition supports more transparency, but is concerned that the bill will inhibit school districts’ ability to secure funding to house students and provide for renovations as promised to voters through their bond initiatives. While some of the opponents do recognize the need to establish some parameters to prevent extreme CABs, they argue that CABs, if done appropriately and in a limited way, are effective. The requested amendments vary from organization to organization. They include expanding the term of CABs to 30 years, restoring the term of 40 years for CIBs, increasing the total debt service to principal ratio to 6 to 1 and applying the ratio to bond authorization, grandfathering in bonds that are already approved but not issued, and allowing districts to seek a waiver from the SBE to increase the tax rates.

In the end, the bill passed the State Senate 36-0 and passed the State Assembly 78-0. Soon after the bill was signed into law, governing boards of school and college districts were already initiating the sale of more Capital Appreciation Bonds under the new guidelines. This method of debt finance for school and college construction is not going away.

Table 12: Provisions of Assembly Bill 182 (AB 182)
The ratio of total debt service to principal for any series of bonds sold shall not exceed four to one (debt service four times greater than principal).
If the sale of bonds includes bonds that allow for the compounding of interest, including, but not limited to, Capital Appreciation Bonds, the agenda of the governing board meeting at which the sale will be approved shall include a proposed resolution to approve the sale of Capital Appreciation Bonds. Public notice for the resolution must be on at least two consecutive meeting agendas, first as an information item and second as an action item.
The governing board must be presented with the following information:
Disclosure of the financing term and time of maturity, repayment ratio, and the estimated change in the assessed value of taxable property within the school district or community college district over the term of the bonds.
An analysis containing the total overall cost of the Capital Appreciation Bonds.
A comparison to the overall cost of Current Interest Bonds.
The reason bonds that allow for the compounding of interest are being recommended.
A copy of the disclosure made by the underwriter as required by Rule G-17 of the federal Municipal Securities Rulemaking Board.
A Capital Appreciation Bond maturing more than 10 years after being sold must be able to be redeemed before its fixed maturity date, with or without a premium, at any time, or from time to time, at the option of the issuer, beginning no later than the 10th anniversary of the date it was sold.

Case Study: Poway Unified School District’s Egregious Debt Finance

Poway Unified School District created a special School Facilities Improvement District in 2007 and asked voters in February 2008 to authorize $179 million in bonds to finance capital improvements. The bond measure passed with 63.9% support, as it qualified under Proposition 39 for a 55% voter approval threshold.

As a campaign strategy, the district promised voters that the bond measure would not require a tax increase, supposedly because assessed property values would rise enough over time to bring in more tax revenue and pay off the debt service. To keep this promise, the school board subsequently adopted some excessive debt financing schemes.

From 2008 through 2011, the district borrowed the $179 million by issuing four series of bonds, including Current Interest Bonds and non-callable Capital Appreciation Bonds, with some bonds issued to refund earlier bond issues. It even sold some 40-year bonds at the maximum legally allowed interest rate of 8 percent. It used numerous controversial debt finance practices, such as selling bonds at a 20 percent premium over face value, and ended up incurring issuance fees totaling more than $6.7 million.

Perhaps people in the Poway Unified School District did not comprehend the dangers at the time, but the school board realized the district was doing something questionable. In 2010 it filed a validation lawsuit to subvert future lawsuits against their next bond finance deal. This provoked a warning letter from the California Attorney General, but in the end no party chose to be a defendant, thus giving the district legal cover to proceed.

Property owners in the School Facilities Improvement District now have the burden of paying $1.27 billion in debt service through 2051 for the privilege of borrowing $179 million. Poway Unified School District was described in the news media as having “shot to fame” as a “poster child for an era of reckless and risky school bond borrowing” through bond sales that have “reached legendary status.” And it became a rare example of voters making school board members accountable for its decisions on bond finance.

Three of the five board members who voted for the Capital Appreciation Bond deal in 2011 have lost their reelection campaigns, and a fourth chose not to run for re-election. The only remaining board member from 2011 may still be in office because only three candidates (two incumbents and a challenger) ran to fill two seats in the 2012 election. Seeing the popular demand for change, eight candidates ran for three seats in 2014.

Michigan Banned Capital Appreciation Bonds When California Legalized Them

On April 27, 2012, a former reporter for the Detroit Free Press newspaper named Joel Thurtell published a post on his blog entitled “Muni Bomb Ticks in California.” Thurtell wrote about the popularity of Capital Appreciation Bond sales by California educational districts.

Thurtell revealed that the practice was not new; in fact it was common at Michigan school districts in the late 1980s and early 1990s:

Joel on the Road LogoThere’s a school bond scandal brewing as California schools load taxpayers with horrendous debt for the next generation of taxpayers. The blight is called CABs — short for Capital Appreciation Bonds. It hit Michigan in 1988. Within four years of the first CAB issue, Michigan public school debt had doubled to reach more than $4 billion. That was just principal. The interest on the CABs amounted to 200 percent — 300 percent — even 575 percent of principal, depending on the terms of the individual bond issue. Nineteen years ago, I delved into this fascinating but arcane world with its private argot strewn with obscure words like “zeroes” and “basis points” describing fairly simple things in language you need a special dictionary to comprehend. It’s an industry with specialized documents that seem encrypted so that people like you and I will have trouble understanding them.

Thurtell had spent many days of difficult, tedious research at the Michigan State Treasurer’s office scrutinizing paper copies of “Official Statements” produced for Michigan school districts. He produced a “Big Chart” that quantified the prevalence of Capital Appreciation Bond sales and accumulated debt service. On April 5, 1993 the Free Press published the first of a series of Thurtell’s articles about how Michigan school districts were borrowing their money for school construction. The articles changed public policy in Michigan:

Because of my Free Press stories…the state Legislature banned future issues of Capital Appreciation Bonds and ordered that future bond issues be competitively bid rather than rigged through a process the underwriters euphemistically termed “negotiation.” It was huge that CABs were banned, because as you will read in these stories, schools were piling up enormous debt to be paid by future taxpayers. Imagine the predicament schools would have found themselves in had such debt been allowed to continue accumulating into today’s depressed economy. Debt payback was predicated on rosy assumptions called “present value” that predicted large increases in real estate valuation ad infinitum.

At the May 2012 annual conference of the California League of Bond Oversight Committees, the Los Angeles County Treasurer-Tax Collector Mark Saladino and Alicia Minyen, a school bond expert and certified fraud examiner, made presentations that included discussion of Capital Appreciation Bonds. Saladino had written a May 16, 2011 white paper about risky municipal debt finance that referenced school districts issuing Capital Appreciation Bonds. Minyen was a prominent critic of a few school districts in Contra Costa County that had issued Capital Appreciation Bonds in irresponsible ways.

Minyen referenced Joel Thurtell’s articles and blog posts. The author of this report then wrote articles for his personal blog about the Capital Appreciation Bond presentations, and local taxpayer activists throughout the state began contacting him with questions and concerns about Capital Appreciation Bond sales going on in their local school and college districts. Californians who paid close attention to tax and government finance issues from a critical perspective were confused — and suspicious.

Graphic Depictions of Poway Unified School District Bond Debt Inspire Limited Reforms

Voice of San Diego Pie Chart on Poway USD Capital Appreciation BondsFinally a breakthrough in bringing public awareness to the issue occurred in August 2012, when a journalistic web publication called Voice of San Diego published a series of investigative pieces written by reporter Will Carless about the 2011 Poway Unified School District bond sales. The first article hit on August 6, 2012: “Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools.”

It’s possible that Voice of San Diego was successful in bringing sudden and dramatic attention to the practice because of the simple and colorful graphics produced by Keegan Kyle and included with the articles. These graphics portrayed the deals in a way much easier to understand than the analytical writing of policy experts.

Voice of San Diego on Poway Unified School District Capital Appreciation BondsThese articles and the associated graphics were the catalyst for intense statewide public criticism. Voice of San Diego created a spreadsheet, the Los Angeles Times created a database, and other news media outlets compiled information revealing that a couple hundred community college and K-12 school districts in California had issued Capital Appreciation Bonds, with many starting long before property values began to decline in 2007.

California and national news media, state and local taxpayer organizations, and many state and local politicians spent the next year criticizing California educational districts for poor decisions about borrowing money via bond sales for school construction. About a dozen educational districts received a disproportionate amount of negative attention for their Capital Appreciation Bond sales. Criticism ebbed but did not disappear after Governor Brown signed Assembly Bill 182 in October 2013 to put limits and new oversight on Capital Appreciation Bonds.

Backers of Capital Appreciation Bonds Stubbornly Defend Them

Throughout the state and even at the Poway Unified School District, elected district officials and administrators defended their decisions to sell Capital Appreciation Bonds. Their response to criticism was common and consistent:

  1. Voters wanted school construction done as soon as possible.
  2. Capital Appreciation Bonds were the only way available to get the money.
  3. We didn’t do anything wrong.
  4. Look at the complete program instead of focusing on individual bond issues.

These claims generally echoed the arguments of parties involved in the preparation and sale of those bonds. These bond experts knew the obscure and complicated business of municipal bonds, but they also had a financial interest in seeing these bond sales continue.

Tables A-5 and A-6 are comprehensive lists of arguments for and against Capital Appreciation Bonds, with rebuttals.

Table A-5
Arguments for Capital Appreciation Bonds
ArgumentRebuttal
URGENCY
School facilities are desperately needed now: schools are overcrowded, deteriorating, outdated, and unsafe. These claims are rarely quantified. There needs to be an objective way to determine that need overwhelms the risk of massive tax and debt burdens for future generations.
Despite 14 years of Proposition 39, educational districts continue to increase the number of bond measures on the ballot and the total amount authorized to borrow. It seems that spending between $100-$200 billion on construction since 2000 has only increased the need for more.
It’s possible that educational districts are preparing for a population boom that may never occur. Average Daily Attendance for California K-12 school districts has dropped from 5,927,951 in 2003-04 to 5,631,709 in 2008-09 to 5,501,603 in 2013-14. Actual California population growth is lagging behind projections made in the 1990s.
When the bond measure was before voters for consideration, the educational district made promises to residents about what was going to be built and what the tax rate would be. Those promises must be fulfilled. Voters want the projects now.Anecdotally, it appears that voters aren’t necessarily keen on immediately proceeding with construction projects listed in bond measure ballot statements if it requires borrowing money under outlandish terms via sales of Capital Appreciation Bonds or other unconventional methods of debt finance. Taxpayers would rather give their money to their local educational district than to bond investors.
Who actually applies the most pressure on the educational district to proceed with borrowing money? Are educational districts selling Capital Appreciation Bonds or other unconventional methods of debt finance because parents and teachers are demanding it? Or is the political pressure coming from the various interests that contributed to the bond measure campaign and now want to reap the rewards of contracts for this construction program?
Interest rates are low. This is a good time to borrow money, perhaps with a mix of Current Interest Bonds and Capital Appreciation Bonds. Rates may not be so favorable when assessed valuation of property in the district goes up.Interest rates are low and provide an advantage for educational districts issuing Current Interest Bonds, but the outrageous nature of Capital Appreciation Bond negates the benefit of lower rates. The ratio of debt service to principal should not exceed 3 or 4 (at the most) for an individual bond issue.
Educational districts will jeopardize the quality of education for students if they don’t get funding for construction now.Is it true that new and modernized facilities significantly improve academic performance and life preparation for students? Is the impact of bond measures on test scores proportionate to the amount of tax revenue spent on debt service for those bond measures? Or are bond measures simply an easy method to get more money flowing into the district?
Ongoing construction programs would have to stop if funding isn’t obtained now, causing inconvenience, stopping momentum, and risking a higher cost of construction in the future.A realistic projection for assessed valuation of property would allow for better planning of construction-related contracts. Future generations should not have to pay for the risky borrowing practices of this generation’s leaders.
STINGY STATE LAWS COMPEL USE
Educational districts have to sell Capital Appreciation Bonds or other unconventional methods of debt finance because of unreasonably low tax and debt limits established in state law.The California legislature established these limits in state law in 2000 as part of a strategy to boost voter support for Proposition 39, a statewide measure on the November 2000 ballot to modify Proposition 46 enacted in 1986 - an initiative that modified the high-profile Proposition 13 enacted in 1978. Without limits and other additional taxpayer protections, Proposition 39 might have failed, as Proposition 26 failed in March 2000.
Educational districts have to sell Capital Appreciation Bonds or other unconventional methods of debt finance because assessed valuation of property in the districts unexpectedly declined, thus forcing districts to confront tax and debt limits.It’s important to obtain an independent projection of assessed property valuation that does not extend a current exceptional rate of growth for 40 years.
THESE BOND FINANCE DEALS ARE MISUNDERSTOOD
It’s wrong to consider Capital Appreciation Bonds in isolation. They are usually just a piece of a package of bond issues. When considered in conjunction with other bond issues, the debt to principal ratio is usually reasonable.This doesn’t eliminate the reality that bonds are issued that will need to be paid back decades later with compounded interest. Why include them at all?
Focusing on long-term debt service is misleading. Just because there is a high number for aggregate accreted interest in 40 years doesn’t necessary mean that amount will ever be paid. Many Capital Appreciation Bonds are “callable” and can be redeemed (and are being redeemed) with a new issue of refunding bonds that have lower rates and can be issued as traditional Current Interest Bonds. Because of the consistent increasing value of property in California over several generations, an amount that seems high to taxpayers now will not be so daunting decades from now. Routine inflation will reduce the “real” cost of paying back Capital Appreciation Bonds decades from now. This is public money. The decision to borrow money via Capital Appreciation Bonds assumes that assessed valuation of property and the rate of inflation will increase substantially over decades. And some districts (such as Poway Unified School District) have sold Capital Appreciation Bonds that are not callable.
Contrary to claims made after the fact, plenty of information is provided to educational district administrators and elected board members about bond sales. There isn’t an excuse for not understanding the proposal.Information is not presented in a standardized way that is easy to understand. Most school board members do not have a background in accounting, finance, or bonds. In addition, school board members may be hesitant to publicly acknowledge their lack of understanding, especially if everyone else in the room is nodding heads during the bond consultant presentation.
Critics have self-interested motivations to criticize. Traditional and consistent ideological detractors of government schools want to take advantage of yet another opportunity to undermine the system. Cynical politicians want to exploit bad news in order to build a reputation. News media wants to improve reader and viewer ratings through sensational and misleading coverage.Most people would acknowledge that criticism of at least a few bond issues by California educational districts has merit. In addition, there are self-interested motivations for people denying that Capital Appreciation Bonds and other unconventional bond financing are unusual or unwise. Community college and K-12 school district elected officials wanted to stay in office. District administrators wanted to keep their jobs. And of course professionals in the financial industry wanted to continue making a living from the transaction fees generated by bond sales.
Assembly Bill 182 (2013) wasn’t really needed, but it is now law and there are no valid arguments to impose more restrictions on this valuable tool for educational districts.Educational districts are still selling Capital Appreciation Bonds (and also Bond Anticipation Notes) under the assumption that assessed valuation will continue to rise for decades. The bond financing industry will continue to use these schemes to bloat borrowing and collect more transaction fees.
Table A-5
Arguments for Capital Appreciation Bonds
ArgumentRebuttal
URGENCY
School facilities are desperately needed now: schools are overcrowded, deteriorating, outdated, and unsafe. These claims are rarely quantified. There needs to be an objective way to determine that need overwhelms the risk of massive tax and debt burdens for future generations.
Despite 14 years of Proposition 39, educational districts continue to increase the number of bond measures on the ballot and the total amount authorized to borrow. It seems that spending between $100-$200 billion on construction since 2000 has only increased the need for more.
It’s possible that educational districts are preparing for a population boom that may never occur. Average Daily Attendance for California K-12 school districts has dropped from 5,927,951 in 2003-04 to 5,631,709 in 2008-09 to 5,501,603 in 2013-14. Actual California population growth is lagging behind projections made in the 1990s.
When the bond measure was before voters for consideration, the educational district made promises to residents about what was going to be built and what the tax rate would be. Those promises must be fulfilled. Voters want the projects now.Anecdotally, it appears that voters aren’t necessarily keen on immediately proceeding with construction projects listed in bond measure ballot statements if it requires borrowing money under outlandish terms via sales of Capital Appreciation Bonds or other unconventional methods of debt finance. Taxpayers would rather give their money to their local educational district than to bond investors.
Who actually applies the most pressure on the educational district to proceed with borrowing money? Are educational districts selling Capital Appreciation Bonds or other unconventional methods of debt finance because parents and teachers are demanding it? Or is the political pressure coming from the various interests that contributed to the bond measure campaign and now want to reap the rewards of contracts for this construction program?
Interest rates are low. This is a good time to borrow money, perhaps with a mix of Current Interest Bonds and Capital Appreciation Bonds. Rates may not be so favorable when assessed valuation of property in the district goes up.Interest rates are low and provide an advantage for educational districts issuing Current Interest Bonds, but the outrageous nature of Capital Appreciation Bond negates the benefit of lower rates. The ratio of debt service to principal should not exceed 3 or 4 (at the most) for an individual bond issue.
Educational districts will jeopardize the quality of education for students if they don’t get funding for construction now.Is it true that new and modernized facilities significantly improve academic performance and life preparation for students? Is the impact of bond measures on test scores proportionate to the amount of tax revenue spent on debt service for those bond measures? Or are bond measures simply an easy method to get more money flowing into the district?
Ongoing construction programs would have to stop if funding isn’t obtained now, causing inconvenience, stopping momentum, and risking a higher cost of construction in the future.A realistic projection for assessed valuation of property would allow for better planning of construction-related contracts. Future generations should not have to pay for the risky borrowing practices of this generation’s leaders.
STINGY STATE LAWS COMPEL USE
Educational districts have to sell Capital Appreciation Bonds or other unconventional methods of debt finance because of unreasonably low tax and debt limits established in state law.The California legislature established these limits in state law in 2000 as part of a strategy to boost voter support for Proposition 39, a statewide measure on the November 2000 ballot to modify Proposition 46 enacted in 1986 - an initiative that modified the high-profile Proposition 13 enacted in 1978. Without limits and other additional taxpayer protections, Proposition 39 might have failed, as Proposition 26 failed in March 2000.
Educational districts have to sell Capital Appreciation Bonds or other unconventional methods of debt finance because assessed valuation of property in the districts unexpectedly declined, thus forcing districts to confront tax and debt limits.It’s important to obtain an independent projection of assessed property valuation that does not extend a current exceptional rate of growth for 40 years.
THESE BOND FINANCE DEALS ARE MISUNDERSTOOD
It’s wrong to consider Capital Appreciation Bonds in isolation. They are usually just a piece of a package of bond issues. When considered in conjunction with other bond issues, the debt to principal ratio is usually reasonable.This doesn’t eliminate the reality that bonds are issued that will need to be paid back decades later with compounded interest. Why include them at all?
Focusing on long-term debt service is misleading. Just because there is a high number for aggregate accreted interest in 40 years doesn’t necessary mean that amount will ever be paid. Many Capital Appreciation Bonds are “callable” and can be redeemed (and are being redeemed) with a new issue of refunding bonds that have lower rates and can be issued as traditional Current Interest Bonds. Because of the consistent increasing value of property in California over several generations, an amount that seems high to taxpayers now will not be so daunting decades from now. Routine inflation will reduce the “real” cost of paying back Capital Appreciation Bonds decades from now. This is public money. The decision to borrow money via Capital Appreciation Bonds assumes that assessed valuation of property and the rate of inflation will increase substantially over decades. And some districts (such as Poway Unified School District) have sold Capital Appreciation Bonds that are not callable.
Contrary to claims made after the fact, plenty of information is provided to educational district administrators and elected board members about bond sales. There isn’t an excuse for not understanding the proposal.Information is not presented in a standardized way that is easy to understand. Most school board members do not have a background in accounting, finance, or bonds. In addition, school board members may be hesitant to publicly acknowledge their lack of understanding, especially if everyone else in the room is nodding heads during the bond consultant presentation.
Critics have self-interested motivations to criticize. Traditional and consistent ideological detractors of government schools want to take advantage of yet another opportunity to undermine the system. Cynical politicians want to exploit bad news in order to build a reputation. News media wants to improve reader and viewer ratings through sensational and misleading coverage.Most people would acknowledge that criticism of at least a few bond issues by California educational districts has merit. In addition, there are self-interested motivations for people denying that Capital Appreciation Bonds and other unconventional bond financing are unusual or unwise. Community college and K-12 school district elected officials wanted to stay in office. District administrators wanted to keep their jobs. And of course professionals in the financial industry wanted to continue making a living from the transaction fees generated by bond sales.
Assembly Bill 182 (2013) wasn’t really needed, but it is now law and there are no valid arguments to impose more restrictions on this valuable tool for educational districts.Educational districts are still selling Capital Appreciation Bonds (and also Bond Anticipation Notes) under the assumption that assessed valuation will continue to rise for decades. The bond financing industry will continue to use these schemes to bloat borrowing and collect more transaction fees.
Table A-6
Arguments Against Capital Appreciation Bonds
ArgumentRebuttal
THE BOND FINANCE INDUSTRY IS NOT TRUSTWORTHY
Promoters of bond deals are motivated by transaction fees and tend to advance funding proposals in their own interest but harmful to the public interest.Borrowing money for long-term investment is a well-accepted practice in the United States and a fundamental part of our economic system.
Most people involved with bond finance are ethical and enjoy being in a professional financial vocation that helps students and society.
The few bond finance professionals who are alleged to advise decisions not in the interest of their clients earn a bad reputation and can’t stay in the business.
Companies and individuals who work in the business of assisting with capital transfer and earn fees on those transactions are an easy target to malign, but they are essential to a prosperous economy.
Proving their lack of responsibility to the public, the California Public Securities Association in 2009 sponsored Assembly Bill 1388, a self-interested bill that repealed a law requiring that the maximum annual payment of principal and interest on a bond issue cannot exceed the minimum annual payment of principal and interest by more than 10 percent.Actually, this bill helped educational districts by allowing them greater opportunity to borrow money despite reaching state tax and debt limits or despite reaching tax and debt limits indicated in the bond measure.
Excessive competition in the market to win contracts from educational districts for bond finance services has compelled some companies to overstate benefits and understate risks of unconventional bond finance.Increased competition in municipal bond finance gives educational districts the opportunity to compare numerous potential contractors and chose the one that best suits its needs. Districts concerned about debt accumulated through Capital Appreciation Bonds can award contracts to professional service firms that adopt a conservative approach to bond finance.
Increased competition in municipal bond finance has encouraged the development and promotion of more creative and effective options to help educational districts in bond finance, such as Reauthorization Bonds and Ed-Tech Bonds.
Corruption is rampant in the municipal bond finance business, as proven by apparent “pay to play” practices between educational districts and bond underwriters.Many parties in the bond financial industry resent how their reputation is tainted by a few companies that make substantial contributions to bond measure campaigns and/or consult for those campaigns and then obtain no-bid contracts and/or higher transaction fees. They have asked the Municipal Securities Rulemaking Board (MSRB) to restrict parties in the financial services industry from contributing to bond campaigns. They have also collectively adopted a voluntary internal moratorium on the practice.
Some county treasurers, for example in Los Angeles County, have ended business with securities brokers that contribute to campaigns for bond measures. The problem is being addressed.
The Municipal Securities Rulemaking Board already has a regulation requiring brokers, dealers, and municipal securities deals to disclose their campaign contributions to allow public scrutiny of such political activity.
Political campaigns are expensive. Parents and students are unlikely to be major sources of contributions to a campaign to pass a bond measure. There is nothing wrong with companies contributing to a campaign and expressing their First Amendment constitutional right to free speech.
No one has ever proven this practice actually happens.
Claims about this practice come from firms that want to stifle competition from other firms that work harder for educational districts.
Educational districts are no different than victims of loan sharks, payday lenders, mortgage scammers, and other unsavory usurers.Comparisons of professional, certified financial service providers to criminals is unjust. Boards elected by the people consider and vote on proposals for bond issues at public meetings regulated by open meetings laws. The process is highly regulated by the US Securities and Exchange Commission and the Municipal Securities Rulemaking Board. The news media has the opportunity to follow and report on the issue to the public.
LACK OF PUBLIC KNOWLEDGE COMPROMISES ACCOUNTABILITY AND ALLOWS TAXPAYERS TO BE EXPLOITED
Few Californians have ever heard of Capital Appreciation Bonds. An even tinier percentage of Californians could adequately explain them. As a result, the public is currently incapable of evaluating this method of bond finance and petitioning their school or college board members about it.Government does many things that the general public does not know about or understand. Accountability is inherent in the regular elections for governing boards. Candidates run for and get elected to public office based on their individual expertise and experience. Voters can subsequently choose to end the public service of those individuals based on their performance.
Educational districts have professional in-house superintendents and often have other administrators overseeing bond deals, including business officers assigned to work on bond finance.
Educational districts hire outside experts to maximize the effectiveness of their bond measures and best serve the public. Contracts for these experts include terms and conditions that provide protection for the district and accountability to the consultant.
State and county elected and appointed officials and their agencies serve as checks and balances for educational district decisions. In particular, county treasurers can and do play a role in evaluating questionable bond financing.
In the few cases in which excessive or inappropriate bond deals may have occurred, (for example, the 2011 bond issue at the Poway USD), elected county treasurers and the news media did identify the failure and publicized it. Assembly Bill 182 (now in law) is the product of research and reporting by elected government officials and the news media. The system of checks and balances worked.
Voters are not informed in election ballot material that some of the money they authorize to borrow via “general obligation bonds” ends up borrowed via Capital Appreciation Bonds and other unconventional borrowing practices.Actually, some ballot statements are now indicating that “no capital appreciation bonds shall be issued.” Inclusion of language specifying the type of General Obligation bonds to be sold should be a decision of the district board and not mandated by the state.
It’s unfair for educational districts to be forced to speculate to voters on how it might borrow money. Financing decisions are made by elected board members based on economic conditions that cannot be known at the time the bond measure is considered.
State law already imposes numerous burdensome and costly requirements on educational districts to ensure voters have a reasonable degree of information for consideration of a bond measure.
Ballot statements already are so long that few people would see any authorizations for the district to Capital Appreciation Bonds and other unconventional borrowing practices if they were included.
COST, TAXES, AND DEBT ARE FOOLHARDY
It’s foolish to borrow money and then wait for decades to start paying off the principal and accreted interest.What’s foolish are the tax and debt limitations established by state voters as Proposition 13 in 1978 and state laws (Assembly Bill 1908) enacted in conjunction with putting Proposition 39 on the statewide ballot in 2000. If those limits were set at a higher threshold or eliminated altogether, Capital Appreciation Bonds and other unconventional financing schemes would become rare.
Property taxes may increase substantially many years in the future when the district begins paying off the debt.It’s unlikely the taxes will end up being particularly noteworthy or burdensome after decades of increased property value and inflation.
The amount to be paid back under Capital Appreciation Bonds is too high.Just because there is a high number for aggregate accreted interest in 40 years doesn’t necessary mean that amount will ever be paid. Many Capital Appreciation Bonds are “callable” and can be redeemed (and are being redeemed) with a new issue of refunding bonds that have lower rates and can be issued as traditional Current Interest Bonds.
Because of the consistent increasing value of property in California over several generations, an amount that seems high to taxpayers now will not be so daunting decades from now.
Routine inflation will reduce the “real” cost of paying back Capital Appreciation Bonds decades from now.
Focusing on the amount of debt service generated by Capital Appreciation Bonds ignores the intangible benefits of high-quality schools with environments conducive to teaching and learning
Capital Appreciation Bonds are used too often.For most educational districts, Capital Appreciation Bonds comprise a small percentage of the total amount of bonds issued. Capital Appreciation Bonds are a legitimate and beneficial option for educational districts that want to obtain a bit more of the money that voters authorized to borrow for needed school construction.
Capital Appreciation Bonds allow educational districts to fund contracts with local contractors and vendors, thus encouraging economic growth and job creation in the community. Capital Appreciation Bonds pay for themselves by generating increased economic activity.
There are no legal or commonly accepted definitions of “too often.” The authority to issue Capital Appreciation Bonds is granted to the educational district’s board of trustees, who are elected by the people. Each educational district has its own comfort for Capital Appreciation Bonds, and this comfort usually reflected in the decision of the board. Trust our representative democracy.
Capital Appreciation Bonds assume an ability to pay based on projections of increased value of taxable property that may extend as many as 40 years into the future.Granted, no one can perfectly predict the future. But California remains a desirable place to live because of its climate, natural beauty, economic prosperity, and culture. It’s reasonable to assume that people with ability and ambition will always come to California, a beacon for the world, and thus increase demand for housing.
The best way to ensure increased property values in the future is to build a foundation of high-quality schools with environments conducive to teaching and learning. Funding for new construction - sometimes obtained through Capital Appreciation Bonds - allow these schools to be provided and fulfills the expectation for increased property values.
Without any sort of representation, future generations of taxpayers (children and grandchildren) are bound to repaying debts accumulated by unconventional borrowing practices of current generations.Schools built using Capital Appreciation Bonds are for the benefit of our children and grandchildren. Shouldn’t they contribute to paying for the system that helped to make them successful?
This is an unfortunate distortion of the concept of “taxation without representation” that applies to people who are deprived of their right for full participation in their current governance. Many of the important and transformational social programs in the United States and in California were adopted before the people now benefiting and paying for them were even born. Generations work together cooperatively to advance progress.

Sources

“Text – SB 872 Local Agencies: General Obligation Bonds,” California Legislative Information, October 6, 1993, accessed June 28, 2015, www.leginfo.ca.gov/pub/93-94/bill/sen/sb_0851-0900/sb_872_bill_931006_chaptered

“Market Place; Zero-Coupon Municipals,” New York Times, March 21, 1982, accessed June 28, 2015, www.nytimes.com/1982/03/31/business/market-place-zero-coupon-municipals.html

“Capital Appreciation Bonds: The Creation of a Toxic Waste Dump in Our Schools,” Alpha Wealth Management, April 11, 2013, accessed June 28, 2015, www.alpha-wealth.com/resources/publications/CAB-Paper.pdf

Kevin Dayton @DaytonPubPolicy, May 9, 2015, accessed June 28, 2015 https://twitter.com/daytonpubpolicy/status/596934260381978624

Dale Scott & Company www.dalescott.com

“Questions & Answers from Capital Appreciation Bond (CAB) Public Forums,” Poway Unified School District, August 20, 2014, accessed June 28, 2015, https://www.powayusd.com/doc_library/2014-15/CommunityForumFAQs.pdf

“Plan Pitched to Lower Poway Bond Debt,” San Diego Union-Tribune, August 20, 2014, accessed June 28, 2015, www.utsandiego.com/news/2014/aug/20/poway-plan-bond-debt/

“Text – AB 182 Bonds: School Districts and Community College Districts,” California Legislative Information, October 2, 2013, accessed June 28, 2015, leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB182&search_keywords=

“Treasury: Capital Appreciation Bonds,” San Diego County Treasurer-Tax Collector, accessed June 28, 2015, www.sdtreastax.com/capital-appreciation-bonds.html

“AB 182 Bill Analysis – Concurrence in Senate Amendments,” Official California Legislative Information, September 5, 2013, accessed June 28, 2015, www.leginfo.ca.gov/pub/13-14/bill/asm/ab_0151-0200/ab_182_cfa_20130905_163723_asm_floor.html

“AB 182 Bill Analysis – Assembly Committee on Education,” Official California Legislative Information, March 20, 2013, accessed June 28, 2015, www.leginfo.ca.gov/pub/13-14/bill/asm/ab_0151-0200/ab_182_cfa_20130318_154906_asm_comm.html

“Citrus College OKs Capital Appreciation Bond Issuance,” San Gabriel Valley Tribune, May 6, 2014, accessed June 28, 2015, www.sgvtribune.com/social-affairs/20140506/citrus-college-oks-capital-appreciation-bond-issuance

“Re: Poway Unified School District v. All Persons Interested – Superior Court of California, County of San Diego, Case No. 37-2010-00106255-CU- MC-CTLAG,” California Attorney General letter to Poway Unified School District, Orange County Government, March 1, 2011, accessed June 28, 2015, http://cams.ocgov.com/Web_Publisher/Agenda11_05_2013_files/images/ATTORNEY%20GENERAL%20OPINION%20-%20POWAY%20BOND%20PREMIUM_9843497.PDF

“Muni Bomb Ticks in California,” Joel On the Road, April 27, 2012, accessed June 28, 2015, www.joelontheroad.com/muni-bomb-ticks-in-california/

“Find High-Interest School Bonds in Your District: A Five-Step Guide,” Voice of San Diego, August 8, 2012, accessed June 28, 2015, http://www.voiceofsandiego.org/investigations/find-high-interest-school-bonds-in-your-district-a-five-step-guide/

“Spreadsheet: Capital Appreciation Bonds,” Los Angeles Times, November 28, 2012, accessed June 28, 2015, spreadsheets.latimes.com/capital-appreciation-bonds/

###

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:

  1. 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.)
  2. 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:

  1. The educational needs of the pupils are not adequately addressed.
  2. The waiver affects a program that requires the existence of a schoolsite council and the schoolsite council did not approve the request.
  3. 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.
  4. Pupil or school personnel protections are jeopardized.
  5. Guarantees of parental involvement are jeopardized.
  6. The request would substantially increase state costs.
  7. 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

West Contra Costa Unified School District Bond Measure History

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.

West Conta Costa Unified School District Enrollment Projection

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:

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. “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.
  3. 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.

Moving Services Paid by Bond Measure - West Contra Costa Unified School District

Office Equipment Paid by Bond WCCUSD

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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The System Is Skewed to Pass Bond Measures (Section 7 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)
Tricks of the Trade: Questionable Behavior with Bonds (6 of 9)
You are here: 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


The System Is Skewed to Pass Bond Measures

Considering the advantages that supporters have in preparing and campaigning for a bond measure, perhaps it’s noteworthy that voters reject about 20% of local bond measures for educational construction. At every stage of the process, interests that will benefit from bond sales can take advantage of a system that favors passage of a bond measure. Some issues of concern include use of public funds to develop campaigns to pass bond measures, significant political contributions to campaigns from interests likely to benefit from construction, involvement of college foundations as intermediaries for campaign contributions, and conflicts of interest and alleged pay-to-play contracts.

It’s Not “Tough” Anymore to Pass Local Bond Measures for School and College Districts

Voters in 2000 who read the ballot argument in favor of Proposition 39 would have seen supporters claim that it would “require bonds to be passed by a tough 55% super-majority vote.” Perhaps a 55% threshold could be described as “tough” compared to approval by a simple majority of 50% plus one, but it certainly hasn’t meant passage is difficult to achieve in practice. Four out of five bond measures proposed under the criteria of Proposition 39 win voter approval. (See Section 3 for more information.)

Supporters might argue that the 80% voter approval rate for construction bond measures qualified under Proposition 39 simply reflects the view of a substantial percentage of Californians that school and community college districts need new and modernized facilities. But these views don’t develop in a vacuum.

An industry of campaign consultants helps educational districts to convince voters to approve bond measures. They have developed a formula that generally results in victory. Here are some of the most obvious tactics used to achieve that success rate of 80 percent.

Using Public Funds to Hire a Consultant for Voter Research That Is Subsequently Useful in the Election Campaign to Pass the Bond Measure

Many Californians would be astonished to learn that school and community college districts can use funds from their operating budget to develop a strategy to pass a bond measure. Yet this practice is common — and legal.

California law prohibits community college districts and K-12 school districts from using public funds or resources to campaign in support or opposition to bond measures. Education Code Section 7054 states “No school district or community college district funds, services, supplies, or equipment shall be used for the purpose of urging the support or defeat of any ballot measure…”

However, these same public resources CAN be used to provide information to the public about the possible effects of any bond issue or other ballot measure, as long as that information constitutes a fair and impartial presentation of relevant facts to aid the electorate in reaching an informed judgment regarding the bond issue or ballot measure.

A 2005 opinion from California Attorney General Bill Lockyer confirmed that it is legal for a college district (and a school district) to use district funds to hire a consultant to conduct surveys and establish focus groups to assess the following important conditions for a campaign:

  1. The potential support and opposition to a bond measure, by gathering information and evaluating the potential for the adoption of a bond measure by the electorate.
  2. The public’s awareness of the district’s financial needs.
  3. The overall feasibility of developing a bond measure that could win voter approval.

According to the Attorney General, this is not “partisan campaigning.”

Of course, this professional research and analysis — paid for by taxpayers — puts a school or college district at a significant advantage for a bond measure campaign. Consultants determine which words and arguments are most effective in motivating various demographic groups in the district to vote for a bond measure. Consultants also determine which arguments would be most effective for opponents of a bond measure and how the school district can neutralize those arguments.

Further research is needed to reveal how often a “feasibility study” concludes that a bond measure is not “feasible.” Considering that the firm evaluating the feasibility of a bond measure may often be seeking future contracts with the district or the campaign committee, there may be a conscious or subconscious inclination to manipulate the survey questions or the results to obtain a deceptively positive recommendation. In his book Win Win: An Insider’s Guide to School Bonds, Dale Scott of Dale Scott & Company cites a case in which he suspects a consulting firm had self-interested motivations when it recommended that a school board place a bond measure on a June primary ballot rather than a November presidential ballot with an apparent better chance of passage. Voters rejected the bond measure.

Considering that voters approve about 80% of educational bond measures at the 55% voter approval threshold, cynics would argue the real purpose of surveys isn’t to determine “feasibility” but to use public funds to develop election campaign strategy. Based on promotional material of firms that specialize in feasibility studies for bond measures, the argument is valid.

Here’s an excerpt from a consulting firm’s website about how information from taxpayer-funded surveys can be used to improve the chance of election victory:

…an initial baseline survey can determine the overall feasibility and voter acceptance of a bond or parcel tax measure at different funding levels. It can test how voters respond to different versions of the ballot title and summary, and – through analysis of respondent demographics and past voting patterns – it can help determine which election calendar promises the greatest likelihood of success. The same survey can also determine the effectiveness of the rationales and arguments that might be offered for and against a bond or parcel tax measure, thus helping shape the communications themes that will explain how the measure addresses voters’ concerns… [Name of firm] works with its clients to perfect ballot language and voter pamphlet arguments, using our empirical data to guide our advice.

A second example:

Public opinion research is critical to packaging a revenue measure for success. School districts can maximize the dollars that they raise through general obligation bonds, Proposition 39 bonds, and parcel taxes by collecting pertinent voter opinion data and using this information to solicit support. [Name of firm] can help maximize your measure’s potential by providing accurate and reliable results…We provide both qualitative and quantitative research services in the following areas:

•  Assessing baseline support for revenue measures

•  Identifying the highest achievable tax threshold and total bond amounts

• Determining the arguments and features of the measure that will increase support

•  Evaluating the need and content for a public information campaign

•  Determining the best election in which to place the measure on the ballot

•  Packaging a measure for success

A third example:

[Name of firm] understands that the research can be the first step not only in determining the feasibility of a potential revenue measure, but also in bringing together the various stakeholders and constituencies that will need to be involved and supportive in order for any ballot measure to be successful. We know that the issues facing the District do not exist in a vacuum and must be put into the context of the current political and cultural environment in the District. The voter opinion survey presents the District with an opportunity to hear from the administration, teachers, staff, Board, and other community stakeholders about their priorities. Involving key stakeholders in the research design leads to confidence in the research findings and helps ensure that the parties who are integral to a ballot measure’s success are on board and on the same page.

Even items scheduled on board meeting agendas to hire the consultant and then to review the survey results create a positive news opportunity for bond measure proponents. At this early stage in the process, potential opponents usually have not emerged to present a different perspective. And a finding of measurable strong support portrays a bond measure as something already broadly supported by community, thus convincing undecided individuals and organizations that the bond measure is worthy of support and discouraging individuals and organizations that might be inclined to oppose it.

Public Resources Used to Win a Bond Measure

A consulting firm for school bond measures has developed a “Finance Measure Checklist for Success” (see Tables 14 and 15) that outlines five steps for victory. A school district can fund and coordinate four of the five steps with public resources. Only the fifth and final step requires the district to “step away” from explicit political campaigning and pass primary responsibility to a separate political entity, such as a Political Action Committee.

By the time the “partisan campaign” begins, the community college district or K-12 school district has spent a year or longer obtaining polling data, alerting voters directly and through the news media to the need for school construction, and refining campaign themes and messages. A taxpayer-funded effort to pass it has been well underway, without a cent of money raised or spent by a campaign committee. Already the proponents have an advantage over any opposition to the bond measure.

Comparing the Election Campaigns of Supporters and Opponents

There is an existing network of professional political consultants who are experienced in establishing a campaign committee, collecting corporate campaign contributions, and communicating with voters using an effective message developed from the results of the district’s feasibility study. Political campaigning is a business, and fierce competition forces consulting firms to build and maintain a reputation for winning. Meanwhile, professional campaign vendors are ready to design, print, and mail campaign material. Endorsements can be quickly obtained from political, business, and community leaders. Participants in phone banks and precinct walkers can be recruited and even paid if a financial incentive is necessary.

In addition, potential district contractors are able to promote school bond measures through California’s Coalition for Adequate School Housing (C.A.S.H.), whose membership “contains over 1,500 school districts, county offices and private sector businesses, including architects, attorneys, consultants, construction managers, financial institutions, modular building manufacturers, contractors, developers, and others that are in the school facilities industry…C.A.S.H. has sponsored or supported over $52 billion in statewide school bonds to build and/or modernize thousands of schools.”

Contrast this to the typical opposition to a bond measure. Often there aren’t any formal opponents. Sometimes the opposition consists of a few individuals known in the community as gadflies or anti-tax or libertarian activists. Opposition can gain more credibility if there is an existing local community or taxpayer organization that provides a formal forum for fiscal critics to meet and strategize. That organization is almost always more effective if it employs full-time professional staff responsible to a board of directors.

Proposition Z for Zombie Tax San Diego United School District 2012In rare cases there is a well-funded opposition campaign backed by local business leaders and interest groups and run by professional political consultants. One example of this was opposition to Measure Z for the San Diego Unified School District in the November 2012 election.

Potential opponents must regularly monitor local news sources and the meeting agendas of local educational districts to know when an elected governing board is considering a bond measure and passes a resolution putting a bond measure on the ballot. Sometimes the board does this immediately before the legal deadline, thus providing very little time for opponents to respond before the election.

Concerned parties must meet to consider the bond measure and determine an appropriate position. Someone needs to know or obtain the various laws concerning the submission of an opposing argument in the ballot pamphlet, and someone needs to write the opposing argument and go through the process of getting group approval of the text. It needs to be submitted on time and in compliance with often-technical legal requirements. A few people in the organization must volunteer to write commentaries or letters to the editor of the local newspaper, and then follow through with the promise. Some people may chip in some money from their small businesses or personal savings to order some lawn signs, which have to be designed, approved, printed, and distributed.

Nonetheless, bond measures do fail almost 20% of the time despite the organizational and financial advantages of supporters. A 2003 report from the Public Policy Institute of California noted that big urban school districts in the San Francisco Bay Area and the Los Angeles area with high numbers of registered Democrat voters tended to propose more bond measures and win voter approval of those bond measures more often that smaller districts in rural areas, such as the Central Valley. This pattern appears to continue through 2014.

In some large urban school districts in California, especially in the San Francisco Bay Area, bond measures always win easily and opposition seems futile. As long as these districts don’t propose bonds too frequently, they rarely have to worry about opposition.

Top Donors Are Current or Potential Contractors for Finance and Construction

Generally, the public has poor access to records concerning the contributions to and expenditures of campaigns to pass bond measures. In some counties the campaign forms must be obtained in person and are provided as photocopies. Other counties have electronic databases that simply link to scanned documents. Trying to compile or analyze campaign finance patterns would be a tedious undertaking.

Nevertheless, compilations of contributors to four campaigns to pass five bond measures in November 2012 suggest that what is commonly assumed is accurate: these campaigns are mostly funded by companies likely to earn money from the proceeds of those bond sales.

Table 16: Categories of Major Donors to Campaigns to Pass Bond Measures
Construction management firms
Law firms involved with bond sales
Architectural firms
Engineering firms
Construction contractors
Construction trade unions
Union-affiliated labor-management committees
Bond underwriters
Community college foundations (for community college bond measures)
Charter school advocacy groups

Community College Foundations Entangled in Controversy

A 2005 opinion of the California Attorney General (also referenced above in relation to bond underwriters and campaigns) determined that a community college district’s auxiliary organizations (such as foundations and student body associations) are legally able to contribute their own privately raised funds to a political action committee established specifically to advocate voter approval of a bond measure. It is routine to see community college foundations contributing to bond campaigns. Like any 501(c)3 non-profit, college foundations are permitted to spend up to 20% of expenditures for influencing legislation, and that includes bond measures.

Controversy arose about this practice in 2004 after the Sierra College Foundation contributed about $100,000 to three bond measure campaigns for the Sierra Community College District. Neither the Political Action Committees nor the Sierra College Foundation reported the contributions to the California Fair Political Practices Commission.

At least two board members alleged that the college president, who estimated making 40 presentations to groups of prospective donors, had tried to hide the identities of contributors to the bond measure campaigns (including architects and engineering firms) using the Foundation as an intermediary. These board members also believed that people interested in contributing to the bond campaign were advised to make their contributions to the Foundation instead of the bond measure campaign committee in order to benefit from a tax deduction. The Placer County Civil Grand Jury ended up concluding there wasn’t any reliable evidence to support these accusations against the college president, but the incident exposed some of the potential problems with college foundations acting as a intermediary to fund campaigns to pass bond measures.

Alleged “Pay-to-Play” by Some Bond Underwriters Gets Attention

In the spring of 2012, there was a flurry of news media attention about some bond underwriters making contributions to campaigns for bond measures and subsequently making money through issuance fees as the underwriter for the bond sales. The news article that broke the story reported the following:

Leading financial firms over the past five years donated $1.8 million to successful school bond measures in California, and in almost every instance, school district officials hired those same underwriters to sell the bonds for a profit, a California Watch review has found. The practice is especially pronounced in California, where underwriters gave 155 political contributions since 2007 to successful bond campaigns for school construction and repairs.

Under an amendment to Rule G-37, adopted in 2010, the Municipal Securities Rulemaking Board (MSRB) requires each broker, dealer or municipal securities dealer to send a form quarterly to the MSRB reporting their contributions to bond ballot campaigns if those contributions exceeded $250. These contributions do not prohibit brokers from doing business with the entity proposing the bond measure, but the reporting requirements allow the public to identify these contributions as part of any effort to cross-reference them with contracts. Other rules prohibit brokers from doing business with entities if they have made campaign contributions to entity officials who make decisions related to selecting brokers for bond issues.

In 2009, the MSRB considered toughening Rule G-37 to prohibit brokers from doing business with government entities if those brokers contributed to campaigns to pass bond measures proposed by those government entities. California was cited as a particularly notorious location for the appearance of “pay-to-play” relationships. In the end, the MSRB declined to change the rule, citing constitutional First Amendment concerns.

The Bond Buyer reviewed broker contributions to 2010 campaigns to pass bond measures in California and identified “a nearly perfect correlation between broker-dealer contributions to California school bond efforts in 2010 and their underwriting subsequent bond sales.” A spokesperson for California State Treasurer Bill Lockyer responded to the review: “…it is probably time to end the days when underwriters, bond counsels or financial advisors fund, manage or provide other key support for local bond campaigns, then get paid to do work on the bond sales.” In 2013, the Los Angeles County Treasurer and Tax Collector Mark Saladino adopted “a complete ban on cash and in-kind contributions from all firms in our underwriter pool starting no later than when we renew our pool for another year in January 2014.”

Sources

“Opinion No. 04-211,” Legal Opinions of the Attorney General, April 5, 2011, accessed June 28, 2015, oag.ca.gov/system/files/opinions/pdfs/04-211.pdf

Win Win: An Insider’s Guide to School Bonds, Dale Scott & Company, accessed June 28, 2015, www.dalescott.com/dscpublishing

“School District Services,” Fairbank, Maslin, Maullin, Metz & Associates (FM3), accessed June 28, 2015, www.fm3research.com/services/School_District_Services

“Public Opinion Research for Today’s School Districts,” Godbe Research, accessed June 28, 2015, www.godberesearch.com/level2/pdf/School_BR_2006.pdf

“Approve TBWB Strategies/EMC Research Consulting Proposal to Conduct a Parcel Tax Feasibility Study (Phase 1 Only),” Soquel Union Elementary School District November 7, 2012, accessed June 28, 2015, www.soqueldo.santacruz.k12.ca.us/board_agendas/board_packet110712.pdf

“Finance Measure Checklist for Success,” Lew Edwards Group, accessed June 28, 2015, www.lewedwardsgroup.com/services/finance-checklist.html

California’s Coalition for Adequate School Housing (C.A.S.H.) www.cashnet.org

“Tax Group to Oppose San Diego School Bonds,” San Diego Union-Tribune, September 5, 2012, accessed June 28, 2015, www.utsandiego.com/news/2012/sep/05/tax-group-to-oppose-prop-z/

“Fiscal Effects of Voter Approval Requirements on Local Governments,” Public Policy Institute of California, January 27, 2003, accessed June 28, 2015, www.ppic.org/content/pubs/report/R_103KRR.pdf

Tables of contributors to campaigns to pass bond measures in the November 2012 election for Sacramento City Unified School District (Measures Q and R), Solano Community College District (Measure Q), West Contra Costa Unified School District (Measure E), and San Diego Unified School District (Measure Z) are provided on various posts of www.LaborIssuesSolutions.com

“Opinion No. 04-211,” Legal Opinions of the Attorney General, April 5, 2005, accessed June 28, 2015, oag.ca.gov/system/files/opinions/pdfs/04-211.pdf

“Final Report: Refutation of Trustee’s Charges Against Former Sierra College President,” Placer County Civil Grand Jury, March 21, 2006, accessed June 28, 2015, www.placer.courts.ca.gov/grandjury/2005-2006/2005-2006-gjfinalreport.pdf

With Campaign Donations, Bond Underwriters Also Secure Contracts,” California Watch, May 12, 2015, accessed June 28, 2015, californiawatch.org/money-and-politics/campaign-donations-bond-underwriters-also-secure-contracts-16032

“Rule G-37: Political Contributions and Prohibitions on Municipal Securities Business,” Municipal Securities Rulemaking Board, accessed June 28, 2015, www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-37.aspx

“Brokers’ Gifts That Keep Giving,” The Bond Buyer, January 13, 2012, accessed June 28, 2015, www.bondbuyer.com/issues/121_10/california-broker-dealer-contributions-school-bond-issue-1035266-1.html

“Proposed Underwriter Pool Changes” Los Angeles County Treasurer and Tax Collector, August 8, 2013, accessed June 28, 2015, http://ttc.lacounty.gov/proptax/docs/Underwriter%20Pool%20Memo.pdf

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More Trouble with Bond Finance for Educational Construction (Section 8 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)
Tricks of the Trade: Questionable Behavior with Bonds (6 of 9)
The System Is Skewed to Pass Bond Measures (7 of 9)
You are here: 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


More Troubling Issues with Bond Finance for Educational Construction

While compiling the comprehensive information provided in this study, California Policy Center researchers identified numerous other troubling aspects of bond finance. School and college districts are evading compliance with the law and making irresponsible decisions. Ordinary voters lack enough data to make an informed vote. Community activists who seek deeper understanding find themselves stymied.

Bad Government Behavior

1. Some School and College Districts Don’t Comply with Proposition 39

Two examples of investigative reports on educational district compliance with Proposition 39 are the San Diego County Taxpayers Association 2015 School Bond Transparency Scorecard and a 2010 San Mateo County Civil Grand Jury report entitled “School Bond Citizens’ Oversight Committees, Prop 39.” These reports show some districts are close to full compliance while others don’t seem to be complying at all. It appears that two types of districts are broadly failing to comply: (1) small school districts, which may have limited capability to comply, and (2) large school districts routinely accused of fiscal irresponsibility and mismanagement.

2. Spend It Or Lose It? Districts Can Sell Bonds Decades After Voter Approval

Some school and college districts ask voters to approve new authority to borrow additional money for facilities construction even though much of the authority from previous bond measures to borrow money has not been used. This is a strategy to circumvent tax and debt limits imposed by state law on individual bond measures, and it leaves millions (and sometimes billions) of dollars in borrowing authority dangling for future school boards to exercise long after voters have forgotten the election.

3. Districts Sell Bonds at a Premium and Use the Extra Money to Pay Fees Related to Selling the Bonds

The California Attorney General’s office is preparing a legal opinion (14-202) on whether school and college districts can use a premium to pay bond issuance fees. The question asked is “May the ‘premium’ generated from a school district bond sale be used to pay for expenses of issuance and other transaction costs?” (See Table 8 for a list of such fees.)

In 2011, the California Attorney General warned the Poway Unified School District that “artificially inflating the interest rate to generate premium” to pay for costs of issuance would be illegal.

The California State Treasurer or a state agency needs to compile a list of bond issues for which buyers paid a premium that the district then used to pay bond issuance fees. How rampant is the practice and how much has it cost California taxpayers?

4. Firms Get Contracts to Prepare a Bond Measure Before the Election and Then Get Contracts to Implement the Bond Measure After the Election

The California Attorney General’s office is preparing a legal opinion (13-304) on whether a party that gets a contract with a school or college district for surveying voters and preparing a bond measure can then get a contract as the bond underwriter (bond broker) for issuances approved by that same bond measure. The question asked is “In connection with a school or community college bond measure, does a district violate state law by contracting with a bond underwriter for both pre-election campaign services and post-election underwriting services?”

5. Is There Exaggeration, Deception, or Outright Fraud When Districts Assess Needs for Another Bond Measure?

Some school and college districts seek to borrow more money for school construction even when their enrollment has been substantially declining for years and is projected to continue declining. Overcrowding would not seem to be a problem in such districts. Is the need legitimate?

A state agency should conduct random audits for several school or college districts to determine the credibility of their facilities plan based on their evaluations of safety, class size reduction and information technology needs. Numerous bond measures include the words “safety” and “security” in the ballot question and statement, insinuating to voters that students and teachers may be physically harmed unless the district can borrow money via bond sales for construction projects. Are there truly legitimate threats to safety and security in schools throughout the state?

6. A Handful of Voters in Future Development Areas Have Given School Districts Massive Authority to Sell Bonds and Put the Bills on Future Residents

When researchers for the California Policy Center developed preliminary charts now in the appendix to this report and began circulating them publicly early in 2015, two bond measures received unexpected attention on the list of 1,147 considered since enactment of Proposition 39.

In both of these cases, a school district created the boundaries of a School Facilities Improvement District — carved out of the entire district — in a sparsely-populated where future development will occur and future schools will be built.

Apparently the Folsom-Cordova Unified School District compared this option to the establishment of a Community Facilities District funded by Mello-Roos fees and chose this financing option. Its Improvement District had a population in 2006 of about 330 persons.

Table 17: Bond Measures Approved by a Handful of Voters for Huge Amounts
Educational DistrictFolsom Cordova Unified School District SFID No. 3Roseville Joint Union High School District SFID No. 1
Amount Authorized to Borrow$750,000,000$115,000,000
Date of Election2007-03-272007-04-24
CountiesSacramentoPlacer
MeasureMA
Needed to Pass66.7%66.7%
Yes6011
No141
Total7412
Passage81.1%91.7%
Amount Per Vote$12,500,000$10,454,545

Shortcomings That Hinder Voters

The California legislature recognizes that some ballot statements for bond measures do not contain enough relevant information for voters. In 2014, Governor Brown signed into law Assembly Bill 2551, introduced by Assemblyman Scott Wilk, which requires each bond issue proposed by a local government to include estimates from official sources of tax rates for certain years, the maximum annual tax rate, and total debt service (the principal and interest that would be required to be repaid if all the bonds are issued and sold). The bill never received a vote in opposition. In 2015, Assemblyman Jay Obernolte introduced Assembly Bill 809, which requires the ballot statement for local tax measures to include information on the amount of money to be raised annually and the rate and duration of the tax to be levied. As of July 13, 2015, the bill was moving through Senate committees after passing the Assembly 57-8 (with 15 not voting).

1. Ballot Questions and Statements Aren’t Useful to the Ordinary Voter

A 2009 Little Hoover Commission report on bond measures noticed the lack of “fundamental criteria for ballot measures” and recommended a “simple, easy-to-understand report card in the voter guide for all bond measures placed on the ballot.” The problem continues unabated today.

Bond measures tend to be presented to voters in a vacuum, with minimal context about the past history of the district’s bond measures and construction programs. Voters can misinterpret proposed bond measures as a desperate response to a long-standing unaddressed crisis of unsafe, decrepit, and overcrowded classrooms, laboratories, and athletic facilities.

Voters need a chance to consider whether they should approve millions or even billions in new bond authority, even if millions or even billions of money has already been borrowed and millions or billions in existing authority still remains to be spent. This would reveal any history of foolish bond issues or debt acquisition.

2. Information Provided to Voters Needs More Pictures, Charts, and Tables

As mentioned in Section 5 of this report, a possible reason why the public finally discovered the extreme Capital Appreciation Bond financing arrangements of the Poway Unified School District was the simple and colorful graphics in the Voice of San Diego articles about it. More than ever, American society depends on imagery, charts, and tables for information instead of prose.

3. Voters Need to See the Importance of Assessed Property Valuation and District Enrollment Projections

Projections of the rate of change for assessed property valuation in the district should be among the most important elements in decisions concerning bond issues. Voters need to consider a history of wild swings in assessed property valuation in the district and decide whether projections are realistic or exaggerated.

A report on Capital Appreciation Bonds from the 2013-2014 Orange County Grand Jury recognized “there has been virtually no publicity concerning the implications of debt service repayment for CABs, specifically the magnitude of potentially higher taxes. There is potential for some school districts, through the County, to increase property taxes well beyond what was presented when the bonds were issued in order to repay the CABs.” Results of the Grand Jury’s investigation were depicted in tables. At least three school districts in Orange County predicted assessed property valuation to grow at unrealistically high rates when they asked voters to approve bond measures. As a result, these districts will have to levy tax rates far beyond what was portrayed to voters in order to pay off the Capital Appreciation Bonds.

In addition, voters need to be aware if the school or college district asking to borrow money for construction is experiencing a long-term trend up or down in student enrollment. There are arguments for borrowing a lot of money for facilities construction during a time of dropping enrollment (Wiseburn Unified School District is an example of this deliberate strategy), but the message to voters needs to reflect actual circumstances.

4. Ballot Questions for Bond Measures Deceive and Manipulate Voters

Several ballot questions for proposed community college bond measures have specifically singled out veterans as beneficiaries. As noted in Section 2, polling shows that voters respond positively to the idea that a bond measure will help veterans. As a result, the possibility that veterans will be using facilities funded by bond proceeds gets prominent mention in ballot language.

On June 29, 2015, the Solano County Grand Jury issued a report highly critical of the ballot title and ballot statement for Measure Q, a November 2012 ballot measure that authorized the Solano Community College District to borrow $348 million for construction by selling bonds to investors. The Grand Jury asserted that voters were duped into thinking that proceeds from selling bonds would directly provide classroom instruction and job training for veterans and other students. It suggested that future bond measures conform narrowly to Proposition 39 language and focus on construction of educational facilities:

Finding 1

The language of Measure Q was misleading. While Proposition 39 generally authorizes funding of buildings and land purchases even the name of the measure, “The Solano Community College District Student/Veterans’ Affordable Education Job Training, Classroom Repair Measure,” suggests otherwise.

Recommendation 1

Language used in future school bond proposals be limited to that which is stated in the authorizing statute.

References to veterans is an example of how campaign consultants have developed ballot titles, questions, and summaries that manipulate the emotions of uninformed voters who are looking at a ballot and deciding how to vote. Another example is the claim that “all funds stay local” or “all funds benefit neighborhood schools.” This statement ignores how taxpayers will pay the financial services industry for issuance fees and may end up providing more funds for interest payments to wealthy bond investors than for principal spent on design and construction of neighborhood schools.

These clever campaign tactics would probably withstand legal challenges based on California Elections Code Section 9509, which establishes a standard for a legitimate challenge to a title, question, or statement of a school or college district ballot measure. A complaint must have “clear and convincing proof that the material in question is false, misleading, or inconsistent” with state law.

Grassroots Activism on Bond Measures Is Difficult

1. Municipal Finance Is Confusing, Even for People Motivated to Understand It

As stated in a 2013-14 Orange County Civil Grand Jury report on Capital Appreciation Bonds, “This topic required extensive research. Numerous newspaper articles were reviewed…An extensive Internet search was conducted to learn about the mechanics of bond financing and the related mathematics.” An ordinary person may have difficulty understanding concepts and jargon of municipal finance. It’s also a challenge for anyone without education or experience in accounting to identify and extract relevant information from financial audits and official statements.

In particular, Capital Appreciation Bonds are difficult to comprehend. To complicate matters, accreted interest for this type of debt instrument is portrayed differently depending on whether accounting is done on a “cash basis” or on an “accrual basis.” In the generally accepted accounting principles developed by the Financial Accounting Standards Board, each year’s interest payment is included as an expenditure for the year. This is accounting done on a cash basis. But in the generally accepted accounting standards for state and local governments developed by the Governmental Accounting Standards Board, accreted interest on Capital Appreciation Bonds is not recorded as a current expenditure until the bond matures. This is accounting done on an accrual basis.

Translating these concepts into something easy to understand is critical for the public to evaluate the wisdom of proposed bond issues.

2. Centralized Data Isn’t Available to Compare Debt Finance Conditions of School and College Districts

Where does the public go to find out how a school or college district funds facility construction and how it compares to other educational districts in the county or state?

In most cases, state law has not assigned any state or local agency with the responsibility to collect such information and provide it to the public in an accessible format. Even for information that state law requires to be collected and published — such as waivers from tax and debt limits — agencies are not providing the information in a way that alerts the public to existing or potential problems.

The California State Treasurer’s office has a “California Debt Issuance Database” administered by the California Debt and Investment Advisory Commission that allows the public to search for certain information about individual bond issues. School boards are required to submit certain information and reports regarding the sale or planned sale of bonds to the California Debt and Investment Advisory Commission. This database is better than nothing, but realistically it is not a useful tool for the ordinary citizen.

3. Basic Financial Information Is Inaccessible, Especially at Smaller School Districts

Many school districts are not posting their state-mandated financial reports on their websites for public access. Useful documents that the public should be able to readily access include PDF versions of annual financial audits and bond program audits.

For cases in which financial reports are not available on the web, adequate response to public records requests is often elusive. E-mailed requests to educational districts to get these reports do not always result in a prompt response. In particular, officials in small rural school districts do not seem responsive to an outside individual or organization requesting the district’s financial information. Researchers for this project struggled to obtain financial audits that would reveal details of Capital Appreciation Bond sales with ratios of debt service to principal that are much worse than the Poway Unified School District.

4. “Private Placements” Sometimes Eliminate Official Statements as a Source of Data

The Municipal Securities Rulemaking Board (MSRB) Electronic Municipal Market Access (EMMA) database was created and is maintained for the benefit of potential buyers of municipal bonds. Nevertheless, the Official Statements posted on the database are a valuable source of information for members of the general public who are interested in the debt finance and financial status of a state or local government agency.

Some school districts use “private placement” to sell bonds rather than using a more traditional method of selling bonds in the primary market to many investors. This is supposed to allow for lower interest rates on the bonds and save money for taxpayers. Because the individual private investors are considered qualified to do their own research into the credit and financial status of a district, “private placements” for bond sales by educational districts are exempt from the federal requirement to post Official Statements.

Researchers were unable to determine current debt service for several small school districts for which Official Statements were not posted on EMMA. At least two of them (Exeter Union High School District and Columbia Union School District) used private placements for their most recent bond sales. It is likely that every school district missing an Official Statement on EMMA for its most recent bond issue used private placement.

5. Public Information About General Obligation Bonds Varies in Formats and Completeness

In the annual Financial Audits for educational districts, information about general obligation bonds are presented in different ways. Some reports give details about each series of bonds that are issued, while some do not.

The same problem applies to the Official Statements on the EMMA database. Charts that indicate outstanding debt service are presented in different formats. Some charts provide details about principal and interest for each bond measure and some do not. A few Official Statements for educational districts that have substantial bond debt did not even add up the columns.

Official Statements are only produced when bonds are issued, so the most recent information available on the EMMA database can be more than a decade out of date. EMMA only became operational in the late 2000s, so information from the mid-1990s and earlier is often not available.

6. Refunding Bonds and Reauthorization Bonds Complicate Matters

When a school district refunds some of its bonds with a new bond issue, the record becomes fuzzy about how much principal is still owed for each bond measure and bond issue. Some districts have repeatedly issued refunding bonds, thus creating confusion about what bond measures are responsible for creating current debt. Taxpayers in some educational districts are still paying for bond measures approved in the late 1980s and early 1990s, but that fact is now hidden behind more recent refunded bond issues.

Since 2000, sixteen school districts have asked voters to reauthorize previously-approved bond authority, thus complicating the reporting of bond authority and bond debt. When voters reauthorize bond authority in a new election, they trigger new capacity for the district to levy taxes and accumulate debt. GO Reauthorization Bonds®, developed by the municipal debt financial advisory firm Dale Scott & Company, are marketed to districts that have reached their tax and debt limits, want to borrow more money for construction, but also want to avoid extensive sales of Capital Appreciation Bonds as the scheme to circumvent the tax and debt limits.

7. Critical Information Often Can Only Be Found in Old Board Meeting Packets Not Available for Easy Public Access

Perhaps the most important information to evaluate when considering bond issues are the projections of assessed valuation. If such projections are even recorded, they are often only found in presentations that financial advisors make to the board of trustees. Those presentations might or might not be included in old board meeting packets that might or might not be posted on a district website.

Sources

“2015 School Bond Transparency Scorecard,” San Diego County Taxpayers Association, www.sdcta.org/policy/policy-detail.html?id=1727

“School Bond Citizens’ Oversight Committees, Prop 39,” San Mateo County Grand Jury, https://www.sanmateocourt.org/documents/grand_jury/2009/prop39.pdf

“Re: Poway Unified School District v. All Persons Interested – Superior Court of California, County of San Diego, Case No. 37-2010-00106255-CU- MC-CTLAG,” California Attorney General letter to Poway Unified School District, Orange County Government, March 1, 2011, accessed June 28, 2015, http://cams.ocgov.com/Web_Publisher/Agenda11_05_2013_files/images/ATTORNEY%20GENERAL%20OPINION%20-%20POWAY%20BOND%20PREMIUM_9843497.PDF

“Resource Center,” California’s Coalition for Adequate School Housing, accessed June 28, 2015, https://www.cashnet.org/resource-center/resourcefiles/651.pdf

Text – AB 2551 “Local ballot measures: bond issues,” California Legislative Information, accessed June 28, 2015, http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB2551

Text – AB 809 “Local initiative measures: ballot printing specifications,” California Legislative Information, accessed June 28, 2015, http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201520160AB809

“Bond Spending: Expanding and Enhancing Oversight,” California Little Hoover Commission, June 24, 2009, accessed June 28, 2015, http://www.lhc.ca.gov/studies/197/report197.pdf

“School Bonds: The Untold Story of Assessed Values,” Orange County Grand Jury 2013-14, accessed June 28, 2014, http://www.ocgrandjury.org/pdfs/2013_2014_GJreport/BondsReport.pdf

“Former Wiseburn Schools Chief Don Brann Will Take Reins of Troublec Inglewood Unified,” Daily Breeze, June 28, 2013, accessed June 28, 2015, www.dailybreeze.com/general-news/20130628/former-wiseburn-schools-chief-don-brann-will-take-reins-of-troubled-inglewood-unified

“We Have Your Money, Now What?” Solano County Grand Jury 2014-15, accessed June 30, 2015, http://solano.courts.ca.gov/materials/Measure%20Q.pdf

California Elections Code Sections 9500-9509, accessed June 28, 2015, http://www.leginfo.ca.gov/cgi-bin/displaycode?section=elec&group=09001-10000&file=9500-9509

California State Treasurer’s Office – “California Debt Issuance Database” administered by the California Debt and Investment Advisory Commission www.treasurer.ca.gov/cdiac/debtdata/database_text.asp

“How to Kick-Start a Stalled G.O. Bond Program,” Association of Chief Business Officials, May 21, 2013, accessed June 28, 2015, www.acbo.org/files/Conference/2013 Spring/GOReauthorizationBonds.pdf

###

Improving Oversight, Accountability, and Fiscal Responsibility (Section 9 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)
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)
You are here: Improving Oversight, Accountability, and Fiscal Responsibility (9 of 9)
Guide to all Tables and Appendices – Comprehensive Reference for Researchers


Improving Oversight, Accountability, and Fiscal Responsibility

To help fix the many deficiencies identified in this report concerning school construction finance, the California legislature and the executive branch are urged to adopt 23 specific recommendations organized into these five goals:

Five Categories of Recommendations
1Provide Adequate and Effective Oversight and Accountability for Bond Measures
2Enable Voters to Make a Reasonably Informed Decision on Bond Measures
3Eliminate or Mitigate Conflicts of Interest in Contracting Related to Bond Measures
4Reduce Inappropriate, Excessive, or Unnecessary Spending of Bond Proceeds
5Improve Understanding of Bond Measures Through Public Education Campaigns

Adoption of these 23 recommendations will help California voters to become more wary of borrowing billions more from wealthy investors for educational construction. Future generations will benefit when these five visions are advanced:

Five Visions
1Californians will know basic critical information about bonds and the meaning of bond measures. They will know that money from bond measures is borrowed from investors and must be paid back to investors with interest over time through taxes.
2Official election material provided to voters by the government will provide a more objective and balanced perspective of proposed bond measures, including information about the district showing the cumulative history of bond debt and showing changes in annual enrollment and assessed taxable property value.
3Voters will rely less on emotional language and unproven claims engineered by political consultants and focus more on charts, tables, and graphics that give context.
4School and college districts and their bond finance and campaign consultants will be compelled to adjust to a more informed voter pool with more caution, responsibility, and accountability in their proposals to accumulate more debt.
5California voters will use their much clearer understanding about bond measures to reward school and college districts that practice openness, transparency, and fiscal responsibility, while rejecting additional borrowing authority for school and college districts that unwisely borrow and spend money.

The introduction to a 2009 California Little Hoover Commission report entitled Bond Spending: Expanding and Enhancing Oversight claimed that government “must earn Californians’ confidence by demonstrating that it is providing oversight and accountability for the dollars put in their trust and delivering the promised value once a project is completed. Such confidence will be critical to the success of any future bond proposals.”

This warning was not heeded and the prediction was wrong. Oversight and accountability has not measurably improved, but Californians continue to vote for state and local bond measures.

The California Policy Center rejects the idea that additional oversight and accountability isn’t needed or desirable. Some legislative reforms and education programs (both public and private) can overcome voter cynicism, frustration, apathy, and ignorance. The following charts provide 23 recommendations for adoption by the California legislature, California executive branch agencies, and California local officials such as county treasurers.

Specific Recommendations to Achieve Goal 1: Provide Adequate and Effective Oversight and Accountability for Bond Measures
1Expand the statutory responsibilities of the Citizens Bond Oversight Committee to include an annual review of the district’s arrangements for issuing and repaying bonds.
2Assign the California State Treasurer or a state agency to produce an annual report to the legislature and the public about the status of bond measures. The data shall consist of eight categories for every community college district and K-12 school district, presented in a format that allows the public to download some or all data into a common spreadsheet software for easy sorting by type of data.

The name of the school district or college district.
The enrollment or average daily attendance of the district.
The total assessed valuation of the district.
The amount of bond authority approved by voters since 1986.
The amount of bonds issued since 1986.
The amount of outstanding bond authority for the fiscal year immediately proceeding the current year.
The amount of outstanding principal for the fiscal year immediately proceeding the current year.
The total amount of debt service (principal and interest owed over the terms of all outstanding bonds if they are not redeemed early or refunded).

This information should also be printed on a dedicated page of the district’s annual financial report required under Proposition 39. This would make the report more accessible to oversight committee members and other members of the general public who aren’t familiar with balance sheets or accounting principles.
3Require districts to obtain reasonable and informed projections of assessed property valuation from an independent source (NOT from their bond advisors and consultants) before placing a bond measure on the ballot.
4Assign and provide funding to a state agency or agencies for the following activities:

Ensure that every school or college district that administers a bond measure approved under Proposition 39 complies with legal requirements for a bond oversight committee, bond program performance audits, and bond program financial audits, including posting of required information on the district website.
Establish and maintain a centralized web-based database of California bond program performance audits and bond program financial audits for all districts.
Promote bond oversight committees to the public, educate and train bond oversight committee members and relevant district administrators, and provide resources and assistance to school and college districts to fill vacancies on the committees.
5Give a state agency or county official specific authority to block educational districts from selling bonds when their Independent Citizens’ Bond Oversight Committees are dormant or otherwise not compliant with state law.
6Require a school or college district to issue 85% of the bonds authorized by voters within three years after voter approval of the bond measure, and require 100% of the bond proceeds to be spent or redeemed within seven years after voter approval.
Specific Recommendations to Achieve Goal 2: Enable Voters to Make a Reasonably Informed Decision on Bond Measures
1Bond measure ballot titles should be more accurate and objective, perhaps using standard language similar to this that balances construction projects with debt finance plans:

Shall [NAME OF DISTRICT] be authorized to borrow up to [$xxxxx] in the next [x] years for construction, reconstruction, rehabilitation, replacement, furnishing or equipping of specified school facilities by selling bonds and paying the buyers back, with interest, within [xx] years after the bonds are issued?
2To provide proper historical context for the proposed bond measure, ballot statements should provide a table with a tally of each proposed bond measure approved by voters going back to 1987 with the following information:

Amount that voters authorized the district to borrow through bond sales.
Amount of the borrowing authority that still remains to be spent.
Amount of principal that the district still needs to pay back to investors.
Amount of debt service that the district will need to pay back to investors.
3Ballot statements should provide a chart with the history and projections of assessed property valuation for the district:

History:
Each year annually for previous 10 years.
The last two previous five-year periods.
The last previous ten-year period.

Projections:
Each year annually for next 10 years.
The next two five-year periods.
The next ten-year period.
4Ballot statements should provide a chart with the history of enrollment (or average daily attendance) in the district for the previous five years, the most accurate assessment of current enrollment, and the projected enrollment for the next five years.
Specific Recommendations to Achieve Goal 3: Eliminate or Mitigate Conflicts of Interest in Contracting Related to Bond Measures
1All campaign contribution reports for and against bond measures should be available to the public in easily-accessible electronic form on either the district website or the county elections office website.
2Prohibit corporations and individuals that obtain a contract from a district for feasibility studies or consultation on developing a bond measure from also obtaining a contract for services related to bond issuance, including bond underwriting services.
3California statewide officeholders and the California legislature should encourage the Municipal Securities Rulemaking Board (MSRB) to adopt a rule that provides more comprehensive reporting requirements and either restricts or bans the practice of hybrid bond campaign consultants/bond underwriters getting a contract for bond measure preparation and/or campaign services and then getting a contract (sometimes without competitive bidding) for bond underwriting.
Specific Recommendations to Achieve Goal 4: Reduce Inappropriate, Excessive, or Unnecessary Spending of Bond Proceeds
1Local education agencies should be explicitly prohibited from using proceeds from long-term bonds (bonds with maturities exceeding three years) to buy technological equipment such as portable personal electronics (iPads).
2The California Attorney General should issue a legal opinion on some of the ambiguities of “Furnishing and Equipment,” including portable personal electronics, software that comes in a package with electronics, and hiring companies to move furniture from one building to another.
3Bond premiums should not exceed 1% of the principal of the bond series or be used to offset transaction fees or costs of issuance.
4Criteria relevant to construction bond finance should be developed for the California State Board of Education to evaluate when considering applications from school districts for tax and debt waivers. Two grounds for rejecting waiver applications should be excessive indebtedness and insufficient evidence that new facilities are needed.
5A detailed history of tax and debt waiver requests and approvals from the California State Board of Education should be posted on its website.
6Following the 1994 example of Michigan, California school and college districts should be prohibited from issuing Capital Appreciation Bonds. Assembly Bill 182 has not sufficiently discouraged this kind of debt finance.
Specific Recommendations to Achieve Goal 5: Improve Understanding of Bond Measures Through Public Education Campaigns
1The California State Treasurer or another state agency should commission a study to determine if the state’s voters understand a bond measure, including how the government obtains money via borrowing from investors and pays back the money, with interest, over time to those investors by collecting taxes. County treasurers/tax collectors can conduct a similar survey for their counties.
2The California State Treasurer or another state agency should consider seeking funding for the development and implementation of a non-partisan public education campaign to increase voter knowledge about bond measures and public debt related to bonds. The funding could be appropriated in the state’s general fund or received as a contribution from foundations or other private sources. County treasurers/tax collectors can do the same on a county basis.
3The California State Treasurer should use the position to warn the public to be thoughtful and cautious about how much debt is being imposed on future generations — our children and grandchildren — through excessive borrowing and extreme methods of debt finance such as Capital Appreciation Bonds. County treasurers/tax collectors can do the same on a county basis.
4Information about bonds and bond measures should be added to the suggested “Financial Literacy and Mathematics Education” component of the California Department of Education Curriculum Frameworks.

###

Table A-1 California K-12 School Districts 2013-2014 – Ranked by Enrollment

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)
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)
You are in this section: Guide to all Tables and Appendices – Comprehensive Reference for Researchers


Table A-1California K-12 School Districts Ranked by
Enrollment
2013-2014
RankDistrictTotal
1Los Angeles Unified School District646,683
2San Diego Unified School District129,779
3Garden Grove Unified School District92,354
4Long Beach Unified School District79,709
5Fresno Unified School District73,543
6Elk Grove Unified School District62,888
7San Francisco Unified School District58,414
8Santa Ana Unified School District56,815
9Capistrano Unified School District54,036
10Corona-Norco Unified School District53,739
11San Bernardino City Unified School District53,365
12San Juan Unified School District49,114
13Oakland Unified School District48,077
14Sacramento City Unified School District46,868
15Riverside Unified School District42,339
16Clovis Unified School District41,169
17Sweetwater Union High School District41,018
18Stockton Unified School District40,057
19Fontana Unified School District39,470
20Kern High School District37,318
21Poway Unified School District35,629
22Fremont Unified School District34,208
23Moreno Valley Unified School District34,170
24San Jose Unified School District32,938
25San Ramon Valley Unified School District31,954
26Mt. Diablo Unified School District31,923
27Anaheim Union High School District31,659
28Irvine Unified School District31,392
29Twin Rivers Unified School District31,035
30West Contra Costa Unified School District30,596
31Lodi Unified School District30,349
32Bakersfield City School District30,076
33Temecula Valley Unified School District30,016
34Chino Valley Unified School District29,937
35Chula Vista Elementary School District29,806
36Orange Unified School District29,473
37Montebello Unified School District29,062
38Saddleback Valley Unified School District29,028
39Desert Sands Unified School District28,999
40Visalia Unified School District28,267
41William S. Hart Union High School District26,983
42East Side Union High School District26,760
43Rialto Unified School District26,225
44Glendale Unified School District26,168
45Placentia-Yorba Linda Unified School District25,595
46Vista Unified School District25,377
47Pomona Unified School District25,311
48Antelope Valley Union High School District24,619
49Chaffey Joint Union High School District24,598
50Tustin Unified School District24,059
51Torrance Unified School District23,947
52Hesperia Unified School District23,735
53Palm Springs Unified School District23,332
54Colton Joint Unified School District23,322
55Manteca Unified School District23,188
56Downey Unified School District22,698
57Murrieta Valley Unified School District22,698
58Hayward Unified School District22,555
59Ontario-Montclair School District22,521
60Lake Elsinore Unified School District22,258
61Grossmont Union High School District22,220
62Compton Unified School District22,106
63Palmdale Elementary School District21,956
64Newport-Mesa Unified School District21,905
65Hemet Unified School District21,414
66Fairfield-Suisun Unified School District21,366
67Redlands Unified School District21,326
68ABC Unified School District20,998
69Oceanside Unified School District20,980
70San Marcos Unified School District20,452
71Pajaro Valley Unified School District20,438
72Madera Unified School District20,415
73Val Verde Unified School District19,841
74Conejo Valley Unified School District19,727
75Hacienda la Puente Unified School District19,642
76Folsom-Cordova Unified School District19,527
77Alvord Unified School District19,390
78Jurupa Unified School District19,330
79Escondido Union School District19,204
80Anaheim City School District19,164
81Cupertino Union School District19,079
82Norwalk-La Mirada Unified School District18,960
83Coachella Valley Unified School District18,878
84Napa Valley Unified School District18,610
85Pasadena Unified School District18,586
86Antioch Unified School District18,352
87Baldwin Park Unified School District18,316
88Simi Valley Unified School District17,821
89Alhambra Unified School District17,617
90Panama-Buena Vista Union School District17,469
91Ventura Unified School District17,366
92Oxnard Union High School District17,148
93Tracy Joint Unified School District16,935
94Oxnard School District16,916
95Cajon Valley Union School District16,601
96Huntington Beach Union High School District16,343
97Burbank Unified School District16,332
98Santa Maria-Bonita School District16,026
99Paramount Unified School District15,681
100Santa Barbara Unified School District15,593
101Central Unified School District15,584
102Santa Clara Unified School District15,298
103Modesto City Elementary School District15,259
104Lancaster Elementary School District15,149
105Rowland Unified School District15,055
106Vallejo City Unified School District14,996
107Modesto City High School District14,969
108Lynwood Unified School District14,776
109Pleasanton Unified School District14,768
110Walnut Valley Unified School District14,532
111Salinas Union High School District14,437
112Apple Valley Unified School District14,401
113Fullerton Joint Union High School District14,396
114West Covina Unified School District14,213
115Turlock Unified School District14,127
116Porterville Unified School District14,119
117Victor Valley Union High School District13,889
118Chico Unified School District13,739
119Ceres Unified School District13,694
120Fullerton Elementary School District13,678
121Livermore Valley Joint Unified School District13,653
122Etiwanda Elementary School District13,652
123Natomas Unified School District13,630
124Inglewood Unified School District13,469
125Yuba City Unified School District13,366
126Bellflower Unified School District13,149
127Whittier Union High School District12,983
128Evergreen Elementary School District12,857
129Vacaville Unified School District12,837
130Rocklin Unified School District12,738
131San Dieguito Union High School District12,645
132Palo Alto Unified School District12,527
133New Haven Unified School District12,459
134Alum Rock Union Elementary School District12,386
135Covina-Valley Unified School District12,274
136Victor Elementary School District12,181
137La Mesa-Spring Valley School District12,144
138San Lorenzo Unified School District12,070
139San Mateo-Foster City School District11,858
140Gilroy Unified School District11,840
141Palos Verdes Peninsula Unified School District11,632
142Upland Unified School District11,380
143Santa Monica-Malibu Unified School District11,289
144Las Virgenes Unified School District11,259
145Santa Rosa High School District11,244
146Sanger Unified School District11,204
147Franklin-McKinley Elementary School District11,193
148Carlsbad Unified School District11,049
149Alameda Unified School District11,020
150Menifee Union Elementary School District11,011
151Pittsburg Unified School District10,969
152Oak Grove Elementary School District10,921
153Fremont Union High School District10,792
154Merced City Elementary School District10,788
155Lucia Mar Unified School District10,710
156San Jacinto Unified School District10,698
157Monterey Peninsula Unified School District10,653
158Perris Union High School District10,510
159Berkeley Unified School District10,442
160Adelanto Elementary School District10,378
161Milpitas Unified School District10,281
162Los Banos Unified School District10,260
163Roseville Joint Union High School District10,223
164Bonita Unified School District10,146
165Lompoc Unified School District10,076
166Woodland Joint Unified School District10,055
167Merced Union High School District10,039
168Los Alamitos Unified School District9,914
169Saugus Union School District9,911
170Roseville City Elementary School District9,820
171Yucaipa-Calimesa Joint Unified School District9,779
172Kings Canyon Joint Unified School District9,775
173Sequoia Union High School District9,693
174Marysville Joint Unified School District9,647
175Arcadia Unified School District9,582
176Westminster School District9,503
177Tulare City School District9,497
178Escondido Union High School District9,442
179Morongo Unified School District9,439
180El Monte Union High School District9,388
181Redondo Beach Unified School District9,364
182Castro Valley Unified School District9,361
183Greenfield Union School District9,345
184Azusa Unified School District9,277
185Lincoln Unified School District9,277
186Calexico Unified School District9,263
187Beaumont Unified School District9,256
188Alisal Union School District9,153
189Dublin Unified School District9,151
190El Rancho Unified School District9,129
191Salinas City Elementary School District9,125
192Western Placer Unified School District9,116
193South San Francisco Unified School District9,111
194East Whittier City Elementary School District9,064
195Redwood City Elementary School District9,042
196El Monte City School District9,031
197Ocean View School District9,010
198Morgan Hill Unified School District9,000
199Westside Union Elementary School District8,941
200Hawthorne School District8,809
201Davis Joint Unified School District8,626
202San Leandro Unified School District8,617
203Sylvan Union Elementary School District8,565
204Brentwood Union Elementary School District8,562
205Hueneme Elementary School District8,396
206San Mateo Union High School District8,321
207Liberty Union High School District8,087
208Novato Unified School District8,029
209Washington Unified School District7,978
210Centinela Valley Union High School District7,878
211Snowline Joint Unified School District7,826
212Santa Maria Joint Union High School District7,782
213Berryessa Union Elementary School District7,758
214Glendora Unified School District7,733
215South Bay Union School District7,646
216Campbell Union School District7,642
217San Luis Coastal Unified School District7,636
218Delano Union Elementary School District7,600
219Campbell Union High School District7,453
220Pleasant Valley School District7,401
221Mountain View Elementary School District7,345
222Jefferson Elementary School District7,111
223Claremont Unified School District7,046
224Lennox School District7,022
225Manhattan Beach Unified School District6,890
226Huntington Beach City Elementary School District6,864
227El Dorado Union High School District6,810
228Sunnyvale School District6,787
229Culver City Unified School District6,757
230Newhall School District6,739
231Dry Creek Joint Elementary School District6,715
232Moorpark Unified School District6,703
233Dinuba Unified School District6,580
234Paso Robles Joint Unified School District6,555
235Santee School District6,472
236Selma Unified School District6,447
237San Gabriel Unified School District6,410
238Magnolia Elementary School District6,403
239Ukiah Unified School District6,349
240Fountain Valley Elementary School District6,305
241Lawndale Elementary School District6,300
242Newark Unified School District6,196
243Cotati-Rohnert Park Unified School District6,145
244Lakeside Union Elementary School District6,135
245Whittier City Elementary School District6,124
246El Centro Elementary School District6,101
247Patterson Joint Unified School District6,024
248Brea-Olinda Unified School District5,977
249Temple City Unified School District5,953
250Hanford Elementary School District5,934
251Barstow Unified School District5,920
252Alta Loma Elementary School District5,917
253Monrovia Unified School District5,903
254National Elementary School District5,829
255Perris Elementary School District5,821
256Ramona City Unified School District5,697
257Hollister School District5,669
258Shasta Union High School District5,561
259Union Elementary School District5,533
260Santa Rosa Elementary School District5,466
261Santa Paula Unified School District5,459
262Encinitas Union Elementary School District5,445
263Sulphur Springs Union School District5,437
264Windsor Unified School District5,415
265Acalanes Union High School District5,402
266Travis Unified School District5,398
267Petaluma Joint Union High School District5,397
268Rosedale Union Elementary School District5,397
269Tulare Joint Union High School District5,325
270Oakdale Joint Unified School District5,292
271Orcutt Union Elementary School District5,269
272Charter Oak Unified School District5,158
273Buckeye Union Elementary School District5,157
274Fallbrook Union Elementary School District5,113
275Mountain View Whisman School District5,065
276Garvey Elementary School District5,051
277La Habra City Elementary School District5,022
278Kerman Unified School District4,997
279Buena Park Elementary School District4,985
280Oakley Union Elementary School District4,946
281Rio Elementary School District4,946
282Sierra Sands Unified School District4,944
283Benicia Unified School District4,924
284Soledad Unified School District4,915
285Jefferson Union High School District4,906
286Atwater Elementary School District4,855
287San Ysidro Elementary School District4,842
288Moreland School District4,825
289South Pasadena Unified School District4,767
290Santa Cruz City High School District4,731
291Atascadero Unified School District4,722
292Central Elementary School District4,701
293Oak Park Unified School District4,693
294Los Altos Elementary School District4,675
295San Rafael City Elementary School District4,635
296Sonoma Valley Unified School District4,635
297San Lorenzo Valley Unified School District4,613
298Banning Unified School District4,599
299New Jerusalem Elementary School District4,536
300Center Joint Unified School District4,533
301Little Lake City Elementary School District4,512
302North Monterey County Unified School District4,493
303Centralia Elementary School District4,491
304Del Mar Union Elementary School District4,399
305Coalinga-Huron Unified School District4,367
306Burton Elementary School District4,347
307Tehachapi Unified School District4,272
308Paradise Unified School District4,265
309Delano Joint Union High School District4,235
310Martinez Unified School District4,221
311Ravenswood City Elementary School District4,216
312Beverly Hills Unified School District4,212
313Tamalpais Union High School District4,165
314Lindsay Unified School District4,163
315Valley Center-Pauma Unified School District4,155
316Julian Union Elementary School District4,142
317Placer Union High School District4,137
318Central Union High School District4,106
319Cutler-Orosi Joint Unified School District4,083
320Wiseburn Unified School District4,065
321La Canada Unified School District4,058
322Acton-Agua Dulce Unified School District4,043
323Norris Elementary School District4,041
324Cypress Elementary School District3,990
325Tahoe-Truckee Unified School District3,978
326Bassett Unified School District3,959
327Waterford Unified School District3,954
328Lemon Grove School District3,922
329Belmont-Redwood Shores Elementary School District3,900
330Imperial Unified School District3,898
331Duarte Unified School District3,896
332Albany City Unified School District3,881
333Lake Tahoe Unified School District3,881
334Mountain View-Los Altos Union High School District3,881
335Brawley Elementary School District3,878
336Oro Grande Elementary School District3,857
337Gateway Unified School District3,853
338Hanford Joint Union High School District3,845
339Amador County Unified School District3,825
340Dixon Unified School District3,808
341Mountain Empire Unified School District3,804
342Fillmore Unified School District3,774
343Eureka City Schools3,722
344Goleta Union Elementary School District3,701
345Rescue Union Elementary School District3,700
346Rim of the World Unified School District3,695
347Galt Joint Union Elementary School District3,693
348Ripon Unified School District3,680
349Loomis Union Elementary School District3,636
350Rincon Valley Union Elementary School District3,632
351Enterprise Elementary School District3,622
352Walnut Creek Elementary School District3,608
353Wasco Union Elementary School District3,584
354Richland Union Elementary School District3,530
355Lafayette Elementary School District3,525
356Romoland Elementary School District3,505
357Del Norte County Unified School District3,502
358El Segundo Unified School District3,477
359McFarland Unified School District3,469
360San Carlos Elementary School District3,457
361Greenfield Union Elementary School District3,448
362Redding Elementary School District3,440
363Lammersville Joint Unified School District3,433
364Parlier Unified School District3,418
365Cambrian School District3,378
366Cabrillo Unified School District3,373
367Eastside Union Elementary School District3,353
368Eureka Union School District3,338
369Los Gatos Union Elementary School District3,320
370Burlingame Elementary School District3,304
371Los Gatos-Saratoga Joint Union High School District3,302
372Corcoran Joint Unified School District3,293
373Santa Rita Union Elementary School District3,292
374Stanislaus Union Elementary School District3,292
375Fruitvale Elementary School District3,259
376Mill Valley Elementary School District3,242
377Lemoore Union Elementary School District3,228
378Lowell Joint School District3,209
379Spencer Valley Elementary School District3,205
380Palo Verde Unified School District3,177
381Coronado Unified School District3,169
382South Whittier Elementary School District3,153
383Pacifica School District3,150
384Mendota Unified School District3,146
385Solana Beach Elementary School District3,146
386San Marino Unified School District3,143
387Konocti Unified School District3,130
388Standard Elementary School District3,121
389Arvin Union School District3,101
390Calaveras Unified School District3,079
391Laguna Beach Unified School District3,074
392Southern Kern Unified School District3,043
393Empire Union Elementary School District3,034
394Nevada Joint Union High School District3,003
395San Benito High School District3,003
396Washington Unified School District2,993
397Exeter Unified School District2,979
398Lamont Elementary School District2,958
399Newman-Crows Landing Unified School District2,946
400Lucerne Valley Unified School District2,921
401Menlo Park City Elementary School District2,904
402Nuview Union School District2,894
403Escalon Unified School District2,849
404Riverbank Unified School District2,835
405Dehesa Elementary School District2,809
406San Bruno Park Elementary School District2,796
407Weaver Union School District2,796
408Roseland School District2,755
409Piedmont City Unified School District2,706
410Mojave Unified School District2,696
411Delhi Unified School District2,686
412Ocean View School District2,682
413Ojai Unified School District2,680
414Oroville City Elementary School District2,678
415Rosemead Elementary School District2,668
416Keppel Union Elementary School District2,641
417Farmersville Unified School District2,626
418King City Union School District2,623
419Mountain View Elementary School District2,611
420Reef-Sunset Unified School District2,606
421Livingston Union School District2,602
422Salida Union Elementary School District2,576
423Castaic Union School District2,568
424Orinda Union Elementary School District2,529
425Cucamonga Elementary School District2,517
426Mt. Pleasant Elementary School District2,502
427Carmel Unified School District2,492
428Templeton Unified School District2,487
429Scotts Valley Unified School District2,482
430Fowler Unified School District2,477
431Gonzales Unified School District2,477
432Millbrae Elementary School District2,469
433Bear Valley Unified School District2,453
434Fallbrook Union High School District2,439
435Maricopa Unified School District2,438
436Jefferson Elementary School District2,425
437Fairfax Elementary School District2,412
438River Delta Joint Unified School District2,404
439Savanna Elementary School District2,392
440Petaluma City Elementary School District2,379
441San Rafael City High School District2,365
442Santa Cruz City Elementary School District2,361
443Lemoore Union High School District2,340
444Kingsburg Elementary Charter School District2,334
445Ross Valley Elementary School District2,320
446Firebaugh-Las Deltas Unified School District2,296
447Woodlake Unified School District2,291
448Bonsall Unified School District2,287
449Marcum-Illinois Union Elementary School District2,283
450Linden Unified School District2,278
451Silver Valley Unified School District2,278
452Dos Palos Oro Loma Joint Unified School District2,277
453Oroville Union High School District2,272
454Galt Joint Union High School District2,263
455Orland Joint Unified School District2,254
456Hilmar Unified School District2,253
457Carpinteria Unified School District2,239
458Robla Elementary School District2,231
459Chowchilla Elementary School District2,190
460Red Bluff Union Elementary School District2,163
461Hughson Unified School District2,146
462Plumas Unified School District2,130
463Live Oak Elementary School District2,108
464Taft City School District2,079
465Saratoga Union Elementary School District2,069
466West Sonoma County Union High School District2,069
467Auburn Union Elementary School District2,060
468Soquel Union Elementary School District2,054
469Gridley Unified School District2,051
470Gorman Elementary School District2,050
471Corning Union Elementary School District2,043
472South Monterey County Joint Union High School District2,033
473Pacific Grove Unified School District2,012
474Dixie Elementary School District1,999
475Yosemite Unified School District1,982
476Byron Union Elementary School District1,963
477Helendale Elementary School District1,959
478Earlimart Elementary School District1,952
479Willits Unified School District1,942
480Bishop Unified School District1,939
481Muroc Joint Unified School District1,936
482Golden Valley Unified School District1,923
483Old Adobe Union School District1,886
484Anderson Union High School District1,885
485Winton School District1,885
486Brawley Union High School District1,878
487Fort Bragg Unified School District1,873
488Bellevue Union Elementary School District1,872
489Gustine Unified School District1,863
490Moraga Elementary School District1,852
491Alpine Union Elementary School District1,845
492Newcastle Elementary School District1,844
493Golden Plains Unified School District1,831
494Mariposa County Unified School District1,806
495Armona Union Elementary School District1,804
496Los Nietos School District1,767
497Live Oak Unified School District1,757
498Beardsley Elementary School District1,753
499Central Union Elementary School District1,748
500Wasco Union High School District1,747
501Northern Humboldt Union High School District1,739
502Grass Valley Elementary School District1,733
503John Swett Unified School District1,699
504Kelseyville Unified School District1,681
505Middletown Unified School District1,667
506Healdsburg Unified School District1,650
507Wright Elementary School District1,622
508Riverdale Joint Unified School District1,620
509Red Bluff Joint Union High School District1,601
510Holtville Unified School District1,597
511Pioneer Union Elementary School District1,577
512Lakeport Unified School District1,556
513Hillsborough City Elementary School District1,546
514Reed Union Elementary School District1,546
515Winters Joint Unified School District1,521
516Larkspur-Corte Madera School District1,504
517Hermosa Beach City Elementary School District1,479
518Colusa Unified School District1,456
519Pierce Joint Unified School District1,443
520Willows Unified School District1,443
521Mark West Union Elementary School District1,433
522Caruthers Unified School District1,428
523Piner-Olivet Union Elementary School District1,419
524Thermalito Union Elementary School District1,409
525Cloverdale Unified School District1,394
526Las Lomitas Elementary School District1,386
527Mesa Union Elementary School District1,385
528Fortuna Elementary School District1,381
529Williams Unified School District1,377
530McCabe Union Elementary School District1,368
531Wheatland School District1,341
532Wilsona Elementary School District1,333
533Black Oak Mine Unified School District1,314
534Sierra Unified School District1,309
535Denair Unified School District1,293
536Twin Hills Union Elementary School District1,286
537Guadalupe Union Elementary School District1,282
538Palermo Union Elementary School District1,275
539Lakeside Union School District1,274
540Saint Helena Unified School District1,269
541Placerville Union Elementary School District1,249
542Heber Elementary School District1,233
543Pleasant Ridge Union Elementary School District1,229
544Kentfield Elementary School District1,223
545Kingsburg Joint Union High School District1,222
546Valle Lindo Elementary School District1,222
547Cascade Union Elementary School District1,202
548Calipatria Unified School District1,196
549Mammoth Unified School District1,193
550Plumas Lake Elementary School District1,189
551Fall River Joint Unified School District1,169
552Aromas/San Juan Unified School District1,164
553McKinleyville Union Elementary School District1,141
554Pixley Union Elementary School District1,122
555Hart-Ransom Union Elementary School District1,109
556Sonora Union High School District1,101
557Summerville Union High School District1,097
558Mother Lode Union Elementary School District1,088
559Keyes Union School District1,085
560Cottonwood Union Elementary School District1,083
561Chawanakee Unified School District1,068
562Fortuna Union High School District1,066
563Blochman Union Elementary School District1,063
564Evergreen Union School District1,063
565Arcata Elementary School District1,059
566Taft Union High School District1,059
567Edison Elementary School District1,056
568Bennett Valley Union Elementary School District1,048
569Rio Bravo-Greeley Union Elementary School District1,035
570Hope Elementary School District1,031
571Orange Center School District1,031
572Chowchilla Union High School District1,026
573Klamath-Trinity Joint Unified School District1,025
574Santa Ynez Valley Union High School District1,025
575Susanville Elementary School District1,012
576Yreka Union Elementary School District984
577Meridian Elementary School District978
578Esparto Unified School District976
579Oak Grove Union Elementary School District975
580Spreckels Union Elementary School District974
581Durham Unified School District960
582Corning Union High School District959
583Liberty Elementary School District958
584Terra Bella Union Elementary School District946
585Jamul-Dulzura Union Elementary School District945
586Waugh Elementary School District942
587Washington Union Elementary School District933
588Mupu Elementary School District917
589Sebastopol Union Elementary School District898
590Orchard Elementary School District890
591Raisin City Elementary School District883
592Nevada City Elementary School District879
593Lassen Union High School District873
594South Bay Union Elementary School District869
595McSwain Union Elementary School District865
596Borrego Springs Unified School District864
597Bass Lake Joint Union Elementary School District858
598Strathmore Union Elementary School District858
599Westside Elementary School District854
600San Miguel Joint Union School District849
601Kernville Union Elementary School District840
602Needles Unified School District835
603Calistoga Joint Unified School District832
604Modoc Joint Unified School District823
605Vineland Elementary School District823
606Columbia Elementary School District820
607Sundale Union Elementary School District820
608Mark Twain Union Elementary School District816
609Placer Hills Union Elementary School District801
610Banta Elementary School District795
611Mattole Unified School District780
612Kings River-Hardwick Union Elementary School District778
613Southern Humboldt Joint Unified School District776
614Planada Elementary School District766
615San Pasqual Valley Unified School District759
616El Tejon Unified School District744
617North County Joint Union Elementary School District742
618Wheatland Union High School District735
619Cardiff Elementary School District731
620Sutter Union High School District726
621Bret Harte Union High School District723
622Hamilton Unified School District719
623Penn Valley Union Elementary School District717
624Harmony Union Elementary School District714
625Antelope Elementary School District712
626Pollock Pines Elementary School District706
627Gravenstein Union Elementary School District704
628Laton Joint Unified School District704
629Coast Unified School District703
630Stone Corral Elementary School District702
631Emery Unified School District695
632Rancho Santa Fe Elementary School District691
633Yreka Union High School District670
634Ravendale-Termo Elementary School District665
635Sonora Elementary School District660
636Trinity Alps Unified School District660
637Scott Valley Unified School District658
638West Park Elementary School District657
639Grant Elementary School District655
640Richgrove Elementary School District651
641Gold Trail Union Elementary School District637
642Union Hill Elementary School District634
643Alpaugh Unified School District629
644Portola Valley Elementary School District629
645Buellton Union Elementary School District626
646Tipton Elementary School District612
647Chatom Union School District597
648Solvang Elementary School District591
649Pacific Union Elementary School District588
650Siskiyou Union High School District579
651Cutten Elementary School District577
652Vallecito Union School District577
653Pacheco Union Elementary School District575
654Lost Hills Union Elementary School District574
655Alta Vista Elementary School District573
656Los Molinos Unified School District567
657Briggs Elementary School District561
658Columbia Union School District556
659San Pasqual Union Elementary School District553
660Luther Burbank School District552
661Mendocino Unified School District551
662Biggs Unified School District542
663Anderson Valley Unified School District540
664Happy Valley Union Elementary School District537
665Knightsen Elementary School District532
666Camino Union Elementary School District529
667Palo Verde Union Elementary School District529
668Pleasant View Elementary School District522
669Sausalito Marin City School District521
670Upper Lake Union Elementary School District521
671Shoreline Unified School District519
672Oak Valley Union Elementary School District518
673Mt. Shasta Union Elementary School District517
674Le Grand Union High School District505
675Soulsbyville Elementary School District503
676Loma Prieta Joint Union Elementary School District496
677Ferndale Unified School District494
678Camptonville Elementary School District489
679Woodville Union Elementary School District481
680Franklin Elementary School District477
681Los Olivos Elementary School District471
682Gold Oak Union Elementary School District463
683Jamestown Elementary School District462
684Kings River Union Elementary School District462
685Monson-Sultana Joint Union Elementary School District461
686Tulelake Basin Joint Unified School District460
687Brittan Elementary School District457
688Brisbane Elementary School District456
689Curtis Creek Elementary School District449
690Meadows Union Elementary School District449
691Montecito Union Elementary School District448
692Woodside Elementary School District438
693Jacoby Creek Elementary School District427
694Washington Colony Elementary School District427
695Liberty Elementary School District414
696Kit Carson Union Elementary School District411
697Oak View Union Elementary School District411
698College Elementary School District408
699Rockford Elementary School District407
700Gerber Union Elementary School District404
701Laytonville Unified School District404
702Eastern Sierra Unified School District399
703Vallecitos Elementary School District396
704Round Valley Unified School District394
705Foresthill Union Elementary School District393
706Le Grand Union Elementary School District392
707Pacific Union Elementary School District385
708Summerville Elementary School District385
709Westwood Unified School District382
710Bayshore Elementary School District378
711Arcohe Union Elementary School District374
712Lone Pine Unified School District374
713Island Union Elementary School District373
714Sierra-Plumas Joint Unified School District372
715Ross Elementary School District367
716Westmorland Union Elementary School District363
717Bella Vista Elementary School District355
718Forestville Union Elementary School District354
719Alview-Dairyland Union Elementary School District352
720Sunnyside Union Elementary School District352
721Arena Union Elementary School District347
722Seeley Union Elementary School District345
723Ballico-Cressey Elementary School District344
724Buttonwillow Union Elementary School District343
725La Honda-Pescadero Unified School District340
726Big Oak Flat-Groveland Unified School District339
727Chualar Union School District337
728Freshwater Elementary School District336
729Elverta Joint Elementary School District334
730Rio Dell Elementary School District331
731Janesville Union Elementary School District328
732Colfax Elementary School District320
733Lakeside Union Elementary School District318
734Lassen View Union Elementary School District314
735Fort Sage Unified School District313
736Maxwell Unified School District312
737Sequoia Union Elementary School District305
738Butte Valley Unified School District302
739Upper Lake Union High School District302
740East Nicolaus Joint Union High School District301
741Warner Unified School District297
742Mountain Valley Unified School District296
743Pioneer Union Elementary School District292
744Shandon Joint Unified School District292
745Lagunitas Elementary School District286
746Manzanita Elementary School District284
747Maple Elementary School District282
748Springville Union Elementary School District278
749Sunol Glen Unified School District278
750Twain Harte School District274
751Guerneville Elementary School District270
752Millville Elementary School District266
753Lucerne Elementary School District263
754Cinnabar Elementary School District257
755Waukena Joint Union Elementary School District257
756Geyserville Unified School District253
757Clay Joint Elementary School District250
758Trona Joint Unified School District250
759South Fork Union School District249
760Junction Elementary School District246
761Weed Union Elementary School District244
762Richfield Elementary School District243
763Southside Elementary School District243
764Somis Union School District237
765Hope Elementary School District236
766Wilmar Union Elementary School District234
767Cuyama Joint Unified School District233
768Potter Valley Community Unified School District230
769Semitropic Elementary School District230
770Johnstonville Elementary School District227
771Loleta Union Elementary School District227
772Richmond Elementary School District226
773Traver Joint Elementary School District226
774North Cow Creek Elementary School District225
775Hughes-Elizabeth Lakes Union Elementary School District223
776Scotia Union Elementary School District220
777New Hope Elementary School District216
778Shaffer Union Elementary School District209
779Columbine Elementary School District208
780Pond Union Elementary School District208
781Di Giorgio Elementary School District207
782Butteville Union Elementary School District205
783Black Butte Union Elementary School District204
784Elk Hills Elementary School District203
785Capay Joint Union Elementary School District201
786Dunham Elementary School District201
787Pleasant Grove Joint Union School District201
788Montague Elementary School District200
789Monroe Elementary School District197
790Winship-Robbins School District197
791Paradise Elementary School District196
792Cayucos Elementary School District193
793Ducor Union Elementary School District191
794Grenada Elementary School District190
795Big Pine Unified School District189
796Blue Lake Union Elementary School District188
797Buena Vista Elementary School District187
798Big Valley Joint Unified School District186
799Douglas City Elementary School District186
800Trinidad Union Elementary School District184
801Hydesville Elementary School District183
802Princeton Joint Unified School District177
803Golden Feather Union Elementary School District176
804Chicago Park Elementary School District173
805Lake Elementary School District173
806El Nido Elementary School District172
807Alvina Elementary School District171
808San Antonio Union Elementary School District170
809Mt. Baldy Joint Elementary School District167
810West Side Union Elementary School District166
811Shasta Union Elementary School District165
812Baker Valley Unified School District162
813Two Rock Union School District161
814Plaza Elementary School District160
815Cold Spring Elementary School District158
816Fieldbrook Elementary School District157
817Julian Union High School District157
818General Shafter Elementary School District153
819Point Arena Joint Union High School District153
820Browns Elementary School District150
821Kenwood School District150
822Merced River Union Elementary School District150
823Clear Creek Elementary School District149
824Bonny Doon Union Elementary School District146
825Nuestro Elementary School District145
826Valley Home Joint Elementary School District144
827Three Rivers Union Elementary School District143
828Shiloh Elementary School District141
829Tres Pinos Union Elementary School District141
830Big Springs Union Elementary School District137
831Gratton Elementary School District137
832Round Valley Joint Elementary School District136
833Happy Valley Elementary School District134
834Pleasant Valley Joint Union Elementary School District133
835Ballard Elementary School District132
836Magnolia Union Elementary School District130
837Mission Union Elementary School District129
838Plainsburg Union Elementary School District129
839Reeds Creek Elementary School District126
840Cuddeback Union Elementary School District123
841Latrobe School District123
842Burrel Union Elementary School District121
843Midway Elementary School District120
844Mountain Elementary School District120
845Alexander Valley Union Elementary School District119
846Belleview Elementary School District118
847Vista del Mar Union School District118
848Bolinas-Stinson Union School District117
849Roberts Ferry Union Elementary School District117
850Happy Camp Union Elementary School District116
851Bangor Union Elementary School District114
852Surprise Valley Joint Unified School District114
853Pacific Elementary School District108
854Stony Creek Joint Unified School District106
855Alta-Dutch Flat Union Elementary School District103
856Howell Mountain Elementary School District101
857Southern Trinity Joint Unified School District101
858Lagunita Elementary School District100
859San Ardo Union Elementary School District100
860Outside Creek Elementary School District99
861Twin Ridges Elementary School District97
862Big Sur Unified School District96
863Burnt Ranch Elementary School District96
864Snelling-Merced Falls Union Elementary School District96
865Pine Ridge Elementary School District95
866Lakeside Joint School District93
867Leggett Valley Unified School District92
868Kirkwood Elementary School District91
869Bradley Union Elementary School District89
870Junction City Elementary School District89
871Monte Rio Union Elementary School District89
872Mulberry Elementary School District85
873Allensworth Elementary School District84
874Knights Ferry Elementary School District84
875Whitmore Union Elementary School District84
876Alpine County Unified School District83
877Raymond-Knowles Union Elementary School District83
878Saucelito Elementary School District82
879Owens Valley Unified School District81
880Dunsmuir Elementary School District79
881McKittrick Elementary School District78
882Pioneer Union Elementary School District74
883Canyon Elementary School District68
884Mountain Union Elementary School District68
885McCloud Union Elementary School District66
886Castle Rock Union Elementary School District61
887Horicon Elementary School District61
888Igo-Ono-Platina Union School District57
889Garfield Elementary School District58
890Santa Clara Elementary School District56
891Dunsmuir Joint Union High School District55
892Nicasio School District55
893Delphic Elementary School District54
894San Lucas Union Elementary School District52
895Big Creek Elementary School District51
896Lewiston Elementary School District51
897Feather Falls Union Elementary School District50
898Pope Valley Union Elementary School District50
899Caliente Union Elementary School District49
900Peninsula Union School District43
901Hornbrook Elementary School District42
902Manchester Union Elementary School District42
903Belridge Elementary School District40
904Big Lagoon Union Elementary School District40
905Linns Valley-Poso Flat Union School District40
906Willow Creek Elementary School District39
907Junction Elementary School District37
908Gazelle Union Elementary School District36
909Graves Elementary School District36
910Bridgeville Elementary School District35
911Death Valley Unified School District35
912Oak Run Elementary School District33
913Fort Ross Elementary School District32
914French Gulch-Whiskeytown Elementary School District32
915Flournoy Union Elementary School District30
916Citrus South Tule Elementary School District29
917Bitterwater-Tully Elementary School District27
918Kneeland Elementary School District27
919Seiad Elementary School District27
920Montgomery Elementary School District26
921Cienega Union Elementary School District25
922Desert Center Unified School District24
923Mountain House Elementary School District22
924Laguna Joint Elementary School District18
925Willow Grove Union Elementary School District18
926Indian Diggings Elementary School District17
927Indian Springs Elementary School District16
928Kashia Elementary School District16
929Elkins Elementary School District15
930Hot Springs Elementary School District15
931Little Shasta Elementary School District14
932Orick Elementary School District13
933Coffee Creek Elementary School District12
934Forks of Salmon Elementary School District11
935Jefferson Elementary School District11
936Trinity Center Elementary School District11
937Maple Creek Elementary School District10
938Klamath River Union Elementary School District9
939Silver Fork Elementary School District9
940Union Joint Elementary School District9
941Green Point Elementary School District8
942Panoche Elementary School District7
943Bogus Elementary School District6
944Blake Elementary School District5
945Lincoln Elementary School District5
TOTAL6,180,666

Five Key Measures of California's Fiscal Health

Editor’s Note:  The recent election of John Moorlach as a state senator is one of the best things that has ever happened to California’s legislature. Not because of his party affiliation, or his ideology, but because he has a skill in short supply in Sacramento – he is a Certified Public Accountant. Moorlach is the only CPA currently serving in California’s state legislature. Earlier this month Senator Moorlach took his evaluation of the State’s fiscal health to the Senate floor, where he argued that California must focus on fixing the unfunded liabilities. Moorlach also released 5 key indicators of California’s fiscal health. In his own words:

We must remember that overspending from past legislatures, combined with growing unfunded liabilities and the lingering effects of the Great Recession, have left California in a weakened fiscal condition,” said Senator Moorlach.  “Even though this budget brings a measure of spending restraint to California, we still need a long-term budget framework that focuses on restoring our state’s fiscal health.

Five Key Measures of California’s Fiscal Health

1.  Tax Rates:  The state has the nation’s highest income, sales and gas taxes, when cap and trade is included. California also has the highest corporate tax in the western United States and the fourteenth highest property tax. According to the Tax Foundation’s 2015 Facts and Figures, that puts California fourth in overall tax burden on a per capita basis.

2.  Unfunded Pension Obligations:  The Legislative Analyst’s Office estimates current CalPERS, CalSTRS and UC Pension unfunded liabilities at approximately $140 billion.  As expressed on the graph below, the Pew Charitable Foundation found that, according to 2012 data, California is ranked highest in the nation for unfunded public employee pension obligations at $131.3 billion (Pew Charitable Foundation, most recent comparable data between states from 2012).

20150624-CPC-Moorlach-1

3.  Unfunded Retiree Medical Obligations:  Data from 2013 showed California ranked second in the nation with $66.0 billion in unfunded retiree medical costs. New York was number-one at $67.7 billion (2013 data by National Association of State Retirement Administrators).  However, the State Controller’s Office 2014 data suggests that California has since surpassed New York and now has $71.8 billion in unfunded retiree medical liability.

4.  Deferred Infrastructure Maintenance: California has 31,827 miles of major roads and at least 34 percent of these are rated in ‘poor’ condition.  The Reason Foundation’s Adrian Moore recently pegged the unfunded road maintenance number at $59 billion (OC Register, January 16, 2015).

5.  Unrestricted Net Assets/Deficits:  California’s most recent Comprehensive Annual Financial Report (CAFR) shows an unrestricted net deficit of $117 billion.  The unrestricted net asset (or deficit) is a summary of the state’s available assets after removing from the balance sheet fixed assets (buildings, parks, roads, etc.) minus outstanding debt obligations for these fixed assets.  This commonly used fiscal health indicator should be positive for healthy organizations.  Here’s a recent history of the net unrestricted assets for California.

20150624-CPC-Moorlach-2

About Senator John Moorlach: State Senator John Moorlach gained national attention 20 years ago when he was appointed Orange County Treasurer-Tax Collector and helped the County recover from its bankruptcy filing – at the time the largest municipal bankruptcy in U.S. History.

Analyzing the Cost and Performance of LAUSD Traditional High Schools and LAUSD Alliance Charter High Schools

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Summary:  This study examines cost-per-pupil for high school students in the Los Angeles Unified School District (LAUSD), comparing its traditional public schools to those attending its largest charter school network, the Alliance College Ready Public Schools. It also examines the educational achievement outcomes for traditional and charter high school students, focusing on nine LAUSD traditional schools and nine LAUSD Alliance charter schools. The schools were chosen because of their close proximity to each other and similar demographic makeup, limiting extraneous variables from corrupting the study, and making for as close to an “apples-to-apples” comparison as is possible. 

Charter schools have a lower cost per pupil than traditional schools:  Based on an analysis of relevant school costs and the number of enrolled high school students, the data shows the per pupil per pupil costs for Alliance charter high school students to be $10,649 per year, compared to $15,372 per year for students at traditional public high schools within LAUSD, that is, we find a per pupil cost differential of 44% in favor of Alliance charter schools.

Charter schools have higher API scores and graduation rates than traditional schools:  Academically, comparing LAUSD Alliance charter high schools to LAUSD traditional high schools located in the same neighborhoods, we found the Alliance schools have decisively higher API scores, 762 vs. 701, and higher graduation rates, 91.5% vs. 84.1%.

Charter schools have higher normalized SAT scores than traditional schools:  With respect to SAT scores, when we normalized the comparison between the LAUSD Alliance charter and LAUSD traditional schools under consideration to equalize the rate of test participation, we found that the Alliance charter students outperformed the LAUSD traditional students with average scores of 1417 vs. 1299 – a significant difference. Among college bound students, an SAT score of 1299 puts the student in the bottom 27% nationally. A score of 1417, by contrast, places the student at 41% nationally.

We have reached these conclusions by collecting district and school level data, and making common-sense adjustments where appropriate, and as noted in the text. Throughout this report, and especially in the footnotes, we have explained and documented our sources and calculations. We invite other researchers to conduct similar analysis and believe they will come to similar conclusions.

The academic comparisons we have made involve 18 high schools, nine LAUSD Alliance charter high schools, and nine LAUSD traditional high schools. Our financial comparisons are somewhat broader in scope – involving the cost per high school pupil attending one of the largest public school districts in the nation and those attending a large charter school system.

We can conclude from this data that an effective charter school operator can better learning outcomes at lower cost than traditional public schools serving a similar population. Ultimately, this finding supports the educational choice concept: by replacing a “one size fits all” solution with an array of educational choices, we can provide better results for California’s children and taxpayers.

INTRODUCTION

The purpose of this study is to help assess to what extent charter schools have the potential to provide a higher quality, more cost-effective educational solution for California K-12 students over traditional schools, particularly those in low income communities. Our study is not meant to provide a comprehensive assessment of the comparative quality of all traditional public schools vs. all public charter schools, but rather to focus on high school education in one of the most challenging parts of California for delivering quality educational outcomes, the low income communities of Los Angeles.

The students in these communities fall within the Los Angeles Unified School District (LAUSD). The charter schools we selected for analysis are part of the Alliance College Ready Public Schools (Alliance), a nonprofit company that operates 26 charter middle schools and high schools, all of them part of LAUSD, and most of them located in south-central Los Angeles. The first section of this study will analyze the per pupil costs for LAUSD traditional schools vs. LAUSD Alliance charter schools.

The second section of this study will analyze the educational performance of LAUSD traditional schools vs. LAUSD Alliance charter schools. We will look at SAT scores, API scores, dropout rates, and rates of college admission. A critical element of this analysis will be to reduce the data for LAUSD to those traditional schools that are in the same neighborhoods as the LAUSD Alliance charter schools. A district-wide LAUSD performance score would be distorted upwards by (1) the performance in many of the wealthier neighborhoods in the San Fernando Valley and elsewhere, and by (2) the upward skew represented by the presence of the three charter school operators within LAUSD (many of them in wealthier neighborhoods), enrolling nearly 40,000 students in 59 senior high schools [1], since they are formally part of LAUSD.

PREVIOUS STUDIES OF PER PUPIL COSTS

As Tom Rutten and Richard Riordan argue in a 2013 Los Angeles Daily News column entitled “The mysterious case of LAUSD’s finances,” LAUSD per pupil spending estimates vary widely [2]. They quote a district “baseline” estimate of $7,000, going on to discuss how that baseline is supplemented by numerous earmarked funds and categorical grants aimed at various segments of the student population.  And at the other extreme, Adam Schaeffer, in a 2010 Cato Institute study entitled “They Spend WHAT? The Real Cost of Public Schools,” reported that the “real” cost of public education per pupil at LAUSD was $25,208 [3].

We believe that Schaeffer’s number is overstated for three reasons. The first factor is the simple passage of time. His estimates were based on 2008 data. Between the 2008-2009 school year and the 2013-2014 school year, authorized expenditures in the LAUSD budget fell from almost $18 billion [4] to just over $13 billion [5]. Although part of this reduction can be attributed to declining enrollment, much of it is due to state spending cuts in the aftermath of the Great Recession that are just now being reversed. Second, Schaeffer uses authorized budget figures rather than actual expenditures. As we will see in the next section, LAUSD spends far less than its budgetary authority, and so it is more accurate to use actual instead of budgeted amounts. Finally, the budget figures referenced by Schaeffer includes some double-counting as we also discuss below.

Perhaps the closest thing we have to an official number is the 2013-14 “Current Expense per ADA” reported by the California Department of Education [6], which is $10,442. ADA stands for Average Daily Attendance which means the number of students marked “present” at all LAUSD’s schools on an average day. ADA is less than enrollment because some students are absent on any given day. To us, enrollment seems to be a more appropriate denominator for a cost per pupil calculation. If a student is absent 18 days during a 180-day school year, the district is still educating a student – and not nine-tenths of one.

On the other hand, “Current Expense” does not include all the costs school districts incur. Among the items excluded from current expense are facilities construction and retiree health benefits [7]. Since schools require buildings and teachers unions often demand post-employment benefits, public education cannot be provided by LAUSD without these types of expenditures. We thus find that both the numerator and denominator of the “Current Expense per ADA” are understated if the purpose is to calculate the cost of educating a single pupil.

In the analysis that follows, we use fully loaded numerators and denominators, finding that the two alterations largely cancel out. However, as will be seen, further adjustments needed to make LAUSD’s costs comparable to those of Alliance, significantly raise our LAUSD cost per pupil estimate.

PER PUPIL COSTS FOR LAUSD TRADITIONAL VS. CHARTER

In this section, we estimate per pupil costs for LAUSD traditional vs. Alliance charter. Because LAUSD is a complex entity and because we wish to fully justify our calculations, this section is quite long. While we believe policy specialists will find this discussion rewarding, more casual readers may wish to skip to the end of this section to see our bottom line.

As discussed in the previous section, cost analysis is more properly based on actual expenditures in audited financial statements rather than on budgets. Actual expenditures may vary substantially from budgeted amounts in either direction. In the case of LAUSD, the budget total substantially overstates actual expenditures.

For the fiscal year ending June 30, 2014, LAUSD’s budget (available at http://laschoolboard.org/sites/default/files/LAUSD2013-14FinalBudget.pdf) shows total authorized amounts of just over $13 billion [8]. This contrasts with actual expenditures of less than $8 billion [9] in the district’s audited financial statements. The audited statements are included in the district’s Comprehensive Annual Financial Report (CAFR) available at http://emma.msrb.org/EA696060-EA545171-EA941437.pdf.

This large discrepancy between the budget and audited financial statement amounts has two main causes. First, the budget total double-counts over $1 billion of Internal Service Fund expenditures. Quoting from page 19 of the budget:

Internal Services Funds, which total approximately $1.08 billion, account for the payment of employee health & welfare benefits, workers’ compensation, and liability insurance. These funds are for accounting purposes as required by State law. They serve as “pass-through” accounts. In other words, the $1.08 billion in expenditures here already show up in other funds, and to count them in addition to the other funds would be counting them twice. For this reason, Internal Service Funds should not be considered as part of the funds that help operate District schools.

Second, actual spending in all major governmental funds was substantially below authorized amounts in the budget. The biggest discrepancy occurred in district capital funds which had total authorized expenditures of $3.2 billion and actual expenditures of $0.7 billion. Operating and debt service funds also saw substantially less spending than authorized [10].

The audited financial statements contain two expenditure totals – one in the Statement of Activities and the other in the Governmental Fund Statement of Revenues, Expenditures and Fund Balances. Although they are not substantially different – $7.98 billion and $7.83 billion respectively – the relatively small discrepancy masks fairly large differences in how they are calculated. These differences warrant our attention.

Expenses in the Statement of Activities are presented according to the accrual basis of accounting while Governmental Fund presentation uses the modified accrual basis – an accounting style that is much closer to the cash basis. Cash accounting focuses on the actual expenditure of funds during the fiscal year, while accrual accounting focuses on the financial obligations accrued by the district during the year.

A reconciliation of the modified accrual and full accrual expenditure totals for LAUSD follows (amounts shown are in thousands of dollars):

Table 1 – LAUSD 2013-14 Expenditure Reconciliation,
Modified Accrual vs. Full Accrual Bases [11]

20150515-CPC_LAUSD-1b

Under the accrual basis, the repayment of bond principal is not considered an expenditure nor are capital outlays. However, the accrual method involves depreciating assets, which largely offsets the absence of capital expenditures.

It may be argued that capital outlays and/or bond principal should be added back to LAUSD’s total. The cost of building facilities is part of the overall cost of education and should not be excluded from per pupil costs. However, including both capital outlays and bond principal repayments in the total would be a form of double-counting, because the capital outlays are made with borrowed funds. The money should be captured either when it is borrowed and spent, or when it is repaid – not both times. Inclusion of the depreciation amount in the accrual expenditures serves the purpose of incorporating capital expenditures. Since LAUSD does not issue pension obligation bonds, virtually all of its borrowing supports capital expenditure. Thus everything financed with LAUSD’s bonds will be depreciated on the district’s books. Inclusion of the depreciation amount thus provides a reasonable proxy for capital expenditure, and we do not see a strong case for altering LAUSD’s accrual accounting expenditures for our calculations.

LAUSD’s accrual basis expenditures also include retiree healthcare benefits that current employees have earned but will not claim until they retire. These OPEB accruals are excluded from the modified accrual totals. Alliance does not offer retiree healthcare benefits – providing it with a significant cost saving relative to LAUSD. (Both LAUSD and Alliance offer pension benefits largely through CalSTRS – so accruals for cash retirement benefits should not be a major differentiating factor between Alliance and LAUSD).

Because Alliance only reports expenditures in accordance with the accrual method of accounting, we use LAUSD’s accrual method expenditure total of $7,967,671,000 for our comparisons. Alliance’s total expenditures for the fiscal year ending June 30, 2014 were $102,789,813 as shown on page 5 of its audited financial statements available at http://emma.msrb.org/ER822375-ER640652-ER1042507.pdf.

LAUSD reports total enrollment of 726,371 on page 157 of its CAFR, yielding a per pupil cost of $10,969. Alliance reports total enrollment of 10,020 students in its 2013-14 performance dashboard available at http://www.laalliance.org/performance/13-14/dashboards/Alliance-wide%20Performance%20Dashboard%202013-2014.pdf, yielding a per pupil cost of $10,258.

Thus, before making adjustments, we find that per pupil expenditures using the accrual basis, are $711 higher for LAUSD traditional than for Alliance charter – a difference of almost 7%. The calculations are summarized below.

Table 2 – Alliance Charter/LAUSD Traditional Expenditure per Enrolled Student Comparison (Initial)

20150515-CPC_LAUSD-2b

LAUSD’s enrollment total of 726,371 includes 95,381 students [12] enrolled in independent charter Schools. However, LAUSD expenditures shown in its financial audit do not include charter school expenses. As noted on page ii of the CAFR: “This report includes all funds of the District with the exception of the fiscally independent charter schools, which are required to submit their own individual audited financial statements”. Thus the 95,381 charter school students should be removed from the denominator of the cost per pupil calculation.We now make adjustments to these reported totals to increase their comparability.

LAUSD provides adult education while Alliance does not. By removing the adult education cost and enrollment from LAUSD data, we can more nearly achieve an apples to apples comparison. LAUSD’s audit reports adult enrollment of 32,267 and adult education costs of $75,993,000 [13].

Similarly, LAUSD provides early education services to pre-kindergarten children and infants. Alliance does not provide similar services. Consequently, we remove 12,829 early education enrollees and $128,407,000 in Child Development Fund expenditures [14] from the LAUSD totals.

In addition to Adult Education, LAUSD offers Career Technical Education (CTE) and Regional Occupational Programs (ROP). These two programs had combined enrollment of 29,779 and a total budget of $43.6 million [15], implying a per-student cost of $1464. The CAFR does not provide actual expenditures for these two vocational programs which are not offered by Alliance. But unless actual expenditures were far greater than budget, the two programs are much less expensive on a per student basis than LAUSD’s traditional K-12 program. Since LAUSD’s actual spending overall was below budget, using budgeted expenditures for the two programs is a conservative approach.

The adjustments made to LAUSD to eliminate enrollees and costs not associated with K-12 traditional public school students are summarized below. The Adult Education and Pre-K expenditure totals are based on the modified accrual accounting method; governmental financial statements do not break down accrual accounting data to the fund level.

Table 3 – Adjustments to LAUSD Amounts to Improve Comparability with Alliance

20150515-CPC_LAUSD-3b

After these adjustments, LAUSD per pupil costs rise to $13,881 or about 35% higher than the Alliance amount.

The adjusted cost comparison is summarized in the table below.

Table 4 – Alliance/LAUSD Expenditure per Enrolled Student Comparison (Adjusted)

20150515-CPC_LAUSD-4b

A further adjustment to these numbers is needed to reflect differences in grade profiles and differences in educational costs between elementary and high schools.

LAUSD and Alliance have substantially different grade profiles, because Alliance does not operate elementary schools. In the 2013-14 school year, all of Alliance students were in grades 6-12. Because most Alliance facilities are high schools, 72% of Alliance students were in grades 9-12 [16]. By contrast, 49% of LAUSD students were enrolled in elementary schools and only 23% were enrolled in high schools [17].

High school education is more expensive on a per pupil basis than elementary school education, largely due to the many extra programs that high schools offer. Although, per pupil costs within LAUSD are hard to obtain, we were able to find comparative data elsewhere[18]. Our review of Texas public school data showed per pupil expenditures averaging $6,654 in elementary schools and $10,323 in high schools [19]. The California Department of Education reports current expense per ADA for elementary and high school districts, i.e. districts which consist of all elementary schools or all high schools, respectively. For 2013-2014, California elementary school districts had an expense of $8,336 per ADA while high school districts had an expense of $9,569 per ADA [20].

This last observation suggests that educating a high school student in California is about 15% more expensive than educating an elementary school student. If we apply this differential to LAUSD and Alliance and if we assume that elementary and middle school students have equivalent costs, we can infer costs per high school student at LAUSD and Alliance from the overall per student costs presented in Table 4 above. The results of this calculation are shown in the table below.

Table 5 – LAUSD Traditional / Alliance Charter Expenditure per Student by Grade Level

20150515-CPC_LAUSD-new5

Taking into account the grade profile and assuming that high school students are 15% more expensive to educate than elementary and middle school students, we find a per pupil cost differential of 44% in favor of Alliance charter.

One other potential adjustment would benefit LAUSD in per pupil cost comparisons. Although we do not have enough data to quantity this adjustment, we describe it here. The issue involves special education students – those who require special accommodations due to various disabilities, and are thus more expensive to educate than children learning in traditional classroom environments.

A recent report on KPCC [21] states that LAUSD has 82,000 special education students and a $1.4 billion special education department budget – implying a per pupil cost of about $17,000. The LAUSD CAFR shows a somewhat lower expenditure amount – $1.318 billion [22] – and does not provide a figure for total special education enrollment [23].

Assuming the 82,000 special education enrollment figure is correct, that number accounts for about 15% of the district’s K-12 enrollment [24]. By contrast, Alliance reports that 9% of its students are in special education [25]. The organization does not break out costs for special education students in its financial reporting.

Thus, we can conclude that a comparison of costs aside from those associated with special education would be more favorable to LAUSD, but it is not clear how large the adjustment would be.

In conclusion, we find that LAUSD spends 44% more to educate each high school student than Alliance, but that a part of this differential may be explained by the greater proportion of special education students at LAUSD.

*   *   *

ACADEMIC PERFORMANCE COMPARISONS

While cost per pupil is a key variable in comparing the effectiveness of differing approaches to public education, it is not the whole story. The quality of various educational solutions, measured in terms of outcomes for students, taking into account various degrees of preexisting adversity faced by the students, forms an essential part of any comparative analysis.

When comparing academic performance in LAUSD traditional high schools vs. LAUSD Alliance charter high schools, district-wide comparisons are easy enough to gather, and offer some insights. But a more meaningful set of comparisons may be derived by presenting academic results between individual LAUSD traditional and LAUSD Alliance charter high schools that are located in close proximity to each other. This is based on the assumption that schools in the same neighborhoods will have student bodies that have similar characteristics, which we will attempt to verify using available data.

Accordingly, we have identified 18 high schools, nine that are part of the LAUSD Alliance charter network and nine that are LAUSD traditional public schools, organized into seven matches, where schools that are in the same neighborhoods are considered to be a match. In four cases, one Alliance charter high school is compared to one traditional high school located in the vicinity. In two cases (#4 and #5 on the list below), there are two traditional high schools that are both located very close to an Alliance charter high school, so both of them are considered. In one case (#3), there are two Alliance charter high schools that are both located very close to a traditional high school; both Alliance schools are considered. The maximum distance for any comparison is 3.4 miles, in most cases the schools being compared are about 2.0 miles apart.

List of LAUSD Traditional and Alliance Charter High Schools in Close Proximity:

(1) Alliance High School, Cindy and Bill Simon Technology High School, 10770 Wilmington Ave., Los Angeles. LAUSD High Schools, 1.6 miles away: South East Senior High, 2720 Tweedy Blvd., South Gate, and, 2.9 miles away, South Gate Senior High, 3351 Firestone Blvd, South Gate.

(2) Alliance High School, Patti & Peter Neuwirth Leadership Academy, 4610 South Main St., Los Angeles. LAUSD High School, 0.7 miles away, Dr. Maya Angelou Community High School, 300 E 53rd St, Los Angeles.

(3) Alliance High School, Collins Family College-Ready High School, 2071 Saturn Ave., Huntington Park. LAUSD High Schools, 2.8 miles away, Bell Senior High, 4328 Bell Ave, Bell, and, Maywood Academy Senior High, 3.3 miles away, 6125 Pine Ave., Maywood.

(4) Alliance High Schools, Environmental Science & Technology High School, 2930 Fletcher Drive, Los Angeles, and, Tennenbaum Family Technology High School, 2050 North San Fernando Road, Los Angeles. LAUSD High School, 2.4 miles and 3.4 miles away, respectively, John Marshall Senior High, 3939 Tracy St., Los Angeles.

(5) Alliance High Schools, Health Services Academy High School, 10616 South Western Ave., Los Angeles, and, Judy Ivie Burton Technology High School, 10101 South Broadway, Los Angeles. LAUSD High School, Middle College High School, 0.8 miles and 2.7 miles away, respectively, 1600 Imperial Highway, Los Angeles.

(6) Alliance High School, Marc & Eva Stern Math and Science High School, 5151 State University Drive, Los Angeles. LAUSD High School, 1.6 miles away, Woodrow Wilson Senior High, 4500 Multnomah St., Los Angeles.

(7) Alliance High School, Media Arts and Entertainment Design High School, 113 South Rowan Ave., Los Angeles. LAUSD High School, 3.2 miles away, James A Garfield Senior High, 5101 E Sixth St., Los Angeles.

Alliance (green) and LAUSD (red) High Schools

20150515-CPC_LAUSD-map1

Demographic Comparisons for LAUSD Traditional and LAUSD Alliance Charter High Schools in Close Proximity

The fact that two high schools are in the same neighborhood doesn’t prove they have a demographically similar student body. Before making academic comparisons it is important to review other variables. The next two tables examine the demographics of the 18 high schools, comparing the Alliance charter high schools to the LAUSD traditional high schools.

As can be seen in Table 6, the ethnic makeup is very similar between LAUSD Alliance charter and LAUSD traditional schools. Both groups of student bodies are 91% Latino. Of the remaining students, the Alliance schools are 5% African American compared with 2% in the Traditional schools, and the traditional schools have slightly more Asian (2% vs. 1%) and White (2% vs. 1%) students compared to Alliance [26].

Table 6 – Ethnic Composition of Alliance vs. LAUSD Students

20150515-CPC_LAUSD-6n

The other primary demographic variables that are relevant when assessing the similarity of student bodies are those that may present challenges to individual students. Using available per high school data, the next table attempts to make this assessment by examining the percentages in each group of schools of students who have learning disabilities, students who are English language learners, and students who are on the free or reduced lunch program (in both LAUSD Alliance and LAUSD traditional the percentage of students on the lunch program who get a free lunch vs. a reduced lunch are around 90%).

As shown in Table 7, LAUSD traditional has slightly more English language learners, at 17% vs. 16%. LAUSD Alliance has more students on the free/reduced meal program, 90% vs. 85%. LAUSD traditional, on the other hand, has significantly more students who are identified as having learning disabilities, 13% for LAUSD traditional vs. 8% for LAUSD Alliance charter.  It is difficult to conclude too much from this data. It would probably be reasonable to conclude that overall the student bodies at these 18 schools are very similar ethnically and demographically [27].

Table 7 – Other Demographic Characteristics of LAUSD Alliance vs. LAUSD Traditional Students

20150515-CPC_LAUSD-7n

Educational Outcomes:  LAUSD Alliance Charter Schools vs. LAUSD Traditional Schools

To evaluate the academic performance of students in LAUSD Alliance charter schools compared to LAUSD traditional high schools located in the same neighborhoods with similar student demographics, we focus on four variables, each school’s rate of attendance, their API (Academic Performance Index) score, the average SAT score per school, and the graduation rate per school.

These comparisons are displayed on Table 8. As can be seen, the reported average attendance at the LAUSD traditional schools, 95%, was nearly identical to the reported average attendance at the Alliance schools, 96%. On the other hand, the LAUSD Alliance schools display a distinct edge in their average API scores, 762 vs. 701, and in their graduation rates, 91.5% vs. 84.1%. With respect to average SAT scores, the raw data for the LAUSD traditional schools actually shows them outperforming the Alliance schools, 1299 for LAUSD vs. 1122 for the Alliance schools [28]. But this bears further analysis.

Table 8 – Academic Performance Indicators, Alliance vs. LAUSD

20150515-CPC_LAUSD-8n

To accurately compare the SAT scores of students in LAUSD Alliance charter schools with those attending LAUSD traditional high schools located in the same neighborhoods with similar student demographics, it is necessary to consider the relative proportions of students taking the test. While the LAUSD traditional students averaged 1299 on their SAT vs. 1122 for the Alliance charter students, outperforming them by 177 points, a much lower percentage of LAUSD traditional juniors and seniors actually took the test. As reported on Table 9, only 31% of the juniors and seniors enrolled in the LAUSD traditional schools took the SAT, vs. 72% of the Alliance charter school students.

To appreciate what an apples-to-apples comparison might reveal, imagine what the average SAT score would be in the LAUSD traditional schools if 72% of the juniors and seniors took the test. In this hypothetical example, also consider the fact that because the LAUSD traditional schools have a drop-out rate of 15.9% vs. 8.5% at LAUSD Alliance, an apples-to-apples comparison would have to actually assume a cohort of juniors and seniors whose numbers have not succumbed to a much higher rate of attrition. Put another way, taking into account attrition, more than 72% of LAUSD’s traditional still-enrolled juniors and seniors would have to take the SAT to properly compare their performance to LAUSD Alliance’s.

While data cannot exist for tests that were not taken, we can achieve something closer to an apples-to-apples comparison by excluding a portion of the LAUSD Alliance test results. If we assume that LAUSD traditional students who didn’t take the SAT would have had lower scores than the LAUSD students who did take the test, we can match up the LAUSD traditional and LAUSD Alliance charter samples by dropping the lower scores from Alliance. Since the LAUSD traditional schools had a test participation rate of 31%, we can get a comparable Alliance SAT average by only considering the top 686 scores – which corresponds to 31% of the 2189 enrolled juniors and seniors (see Table 9). According to data provided by Alliance, the top 686 SAT scores at the eight Alliance schools was 1417 – 118 points higher than the LAUSD traditional average [29].

Table 9 – SAT Performance Comparisons, Normalized Based on Rate of Participation20150515-CPC_LAUSD-8

 

CONCLUSION

Overall, we conclude that LAUSD Alliance charter high schools provide better outcomes at lower costs than comparable LAUSD traditional operated public schools in the same area. We estimated the per pupil costs for Alliance charter high school students to be $10,649 per year, compared to $15,372 per year for students at traditional public high schools within LAUSD, that is, we find a per pupil cost differential of 44% in favor of LAUSD Alliance charter schools.

Academically, comparing LAUSD Alliance charter high schools to LAUSD traditional high schools located in the same communities, we found the Alliance schools to have decisively higher API scores, 762 vs. 701, and measurably higher graduation rates, 91.5% vs. 84.1%. With respect to SAT scores, when we normalized the comparison between the LAUSD Alliance and LAUSD traditional schools under consideration to equalize the rate of participation, we found that the LAUSD Alliance students outperformed the LAUSD traditional students with average scores of 1417 vs. 1299. This differential is significant. Among college bound students, an SAT score of 1299 puts the student in the bottom 27% nationally. A score of 1417, by contrast, places the student at 41% nationally [30]. Alliance high schools have succeeded in producing academic achievers in the upper 1/3rd of their student body whose SAT scores are within striking distance of the national average, despite operating in some of the most disadvantaged communities in the United States.

We have reached these conclusions by collecting district and school level data, and making common-sense adjustments where appropriate, and as noted in the text. Throughout this report, and especially in the footnotes, we have explained and documented our sources and calculations. We invite other researchers to conduct similar analysis and believe they will come to similar conclusions.

Finally, we want to reiterate that the academic comparisons we have made are fairly narrow, involving 18 high schools, nine LAUSD Alliance charter high schools, and nine LAUSD traditional high schools. Our financial comparisons are somewhat broader in scope – involving the cost per high school pupil attending one of the largest public school districts in the nation and those attending a large charter school system. Because the sample size is still relatively limited, our study thus cannot support a categorical conclusion that charter schools are always better than public schools, or vice versa, but we can conclude from this data that an effective charter school operator can deliver better learning outcomes at lower cost than traditional public schools serving a similar population. Ultimately, this finding supports the educational choice concept: by replacing a “one size fits all” solution with an array of educational choices, we can provide better results for California’s children and taxpayers.

 

About the Authors:

Marc Joffe is a policy analyst for the California Policy Center. He is also the founder Public Sector Credit Solutions, established in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Ed Ring is the executive director for the California Policy Center. Previously, as a consultant and full-time employee primarily for start-up companies in the Silicon Valley, Ring has done financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

FOOTNOTES

1 – For a list of LAUSD charter Schools, refer to Los Angeles Unified School District, Charter Schools Division, “2014-15 Charter Schools Directory:
http://notebook.lausd.net/pls/ptl/docs/PAGE/CA_LAUSD/LAUSDNET/SCHOOLS/ADD_SCH_DOCS/CHARTER%20SCHOOLS%20DIRECTORY%202014-15%20PARENTS.PDF

For enrollment by LAUSD High School refer to California Department of Education, Analysis, Measurement, and Accountability Reporting Division (this table also includes SAT scores by school):
http://dq.cde.ca.gov/dataquest/satactap/sat.aspx?cyear=2013-14&cchoice=SAT3b&year=1314&cdscode=19647330000000&clevel=District&ctopic=sat&level=District

2 – Richard J. Riordan and Tim Rutten (November 1, 2013). The mysterious case of LAUSD’s finances. Los Angeles Daily News, http://www.dailynews.com/opinion/20131101/the-mysterious-case-of-lausds-finances-richard-j-riordan-and-tim-rutten

3 – Adam Schaeffer (March 10, 2010), They Spend What? Cato Institute Policy Analysis Number 662. http://object.cato.org/sites/cato.org/files/pubs/pdf/pa662.pdf

4 – LAUSD 2008-2009 Final Budget. Page I-51. http://notebook.lausd.net/pls/ptl/docs/PAGE/CA_LAUSD/LAUSDNET/OFFICES/CFO_HOME/ALL%20SECTIONS%20091108.PDF.

5 – LAUSD 2013-2014 Final Budget. Page 49. http://laschoolboard.org/sites/default/files/LAUSD2013-14FinalBudget.pdf.

6 – California Department of Education, 2013-14 Cost Per ADA spreadsheet, http://www.cde.ca.gov/ds/fd/ec/documents/currentexpense1314.xls.

7 – California Department of Education, Current Expense of Education. http://www.cde.ca.gov/ds/fd/ec/currentexpense.asp.

8 – LAUSD 2013-14 Budget, Page 49.

9 – LAUSD 2013-14 Comprehensive Annual Financial Report, Pages 15 and 18.

10 – The CAFR contains budget to actual comparisons for most funds at Page 20 and Pages 66-89.

11 – Adjustments described here were gathered from Pages 15, 18 and 19 of the LAUSD CAFR.

12 – This and other LAUSD enrollment numbers cited below are on page 157 of LAUSD’s CAFR.

13 – LAUSD CAFR page 74.

14 – LAUSD CAFR, Page 165.

15 – LAUSD Budget, Pages 25 and 29.

16 – Derived from the Alliance Performance Dashboard referenced earlier.

17 – Enrollment data by type of school is included in the LAUSD CAFR on Page 157. About 11% of LAUSD students are enrolled in K-12 schools, so the actual proportions of elementary and high school students are slightly higher than the numbers provided above. Later, we use an estimate of 26% high school students in LAUSD by proportionately allocating back those enrolled in K-12 schools.

18 – As this study was being completed, the authors found a set of LAUSD School Accountability Report Cards that contain per pupil costs by school site. Our preliminary analysis of these report cards shows average per pupil costs of $7,854 for elementary schools and $8,407 for high schools. These amounts generally exclude special education schools which have much higher costs and typically offer grades K-12.

19 – Author’s analysis of data downloaded from Texas Education Agency’s Academic Excellence Information System. http://ritter.tea.state.tx.us/perfreport/aeis/2012/xplore/DownloadSelData.html.

20 – California Department of Education, Cost per ADA Spreadsheet 2013-2014, ref. summary tab “Average by LEA Type.”
http://www.cde.ca.gov/ds/fd/ec/documents/currentexpense1314.xls

21 – Annie Gilbertson, Costs for LAUSD special ed services climb as parents feel the pinch, 89.3 KPCC, December 19, 2014. http://www.scpr.org/blogs/education/2014/12/19/17698/costs-for-lausd-special-ed-services-climb-as-paren/

22 – LAUSD CAFR Page 121.

23 – The CAFR only shows the number of children in special education schools, but does not include the number of special education students enrolled in traditional schools.

24 – K-12 enrollment totaled 556,115 as shown on Page 157 of the LAUSD CAFR. This is the 585,894 LAUSD students net of early education, adult education and independent charter schools shown in Table 3 above minus the 29.779 students in Career Technical Education and the Regional Occupational Program.

25 – 2013-14 Alliance-Wide Performance Dashboard, http://www.laalliance.org/performance/13-14/dashboards/Alliance-wide%20Performance%20Dashboard%202013-2014.pdf.

26 – The ethnic breakdown of the enrolled students at each of LAUSD high school, including the charter high schools, can be found from the CA Dept. of Education,
Educational Demographics Unit:
http://dq.cde.ca.gov/dataquest/Enrollment/EthnicEnr.aspx?cType=ALL&cGender=B&cYear=2013-14&Level=School&cSelect=Alliance+Gertz-Ressl–Los+Angeles+Uni–1964733-0106864&cChoice=SchEnrEth

27 – English Language Learner:
CA Dept. of Education, Selected District Level Data, Los Angeles Unified for the year 2013-2014
http://dq.cde.ca.gov/dataquest/cbeds3.asp?FreeLunch=on&PctEL=on&cChoice=DstProf2&cYear=2013-14&cTopic=Profile&myTimeFrame=S&cSelect=1964733–Los^Angeles^Unified

Free/Reduced Lunch Program:
CA Dept. of Education, Selected District Level Data, Los Angeles Unified for the year 2013-2014
http://dq.cde.ca.gov/dataquest/cbeds3.asp?FreeLunch=on&cChoice=DstProf2&cYear=2013-14&cTopic=Profile&myTimeFrame=S&cSelect=1964733–Los^Angeles^Unified

Students with disabilities data was provided by Alliance and LAUSD’s Office of Data and Accountability
http://notebook.lausd.net/portal/page?_pageid=33,131762&_dad=ptl

28 – CA Dept. of Education, API Reports
http://www.cde.ca.gov/ta/ac/ap/apireports.asp

CA Dept. of Education, SAT Scores
http://dq.cde.ca.gov/dataquest/satactap/sat.aspx?cyear=2013-14&cchoice=SAT4b&year=1314&cdscode=19647330111658&clevel=School&ctopic=sat&level=School

CA Dept. of Education, Cohort Graduation Rate
http://dq.cde.ca.gov/dataquest/CohortRates/GradRates.aspx?Agg=S&Topic=Graduates&TheYear=2013-14&cds=19647330106864&RC=School&Subgroup=Ethnic/Racial

Daily attendance data was provided directly by Alliance and LAUSD’s Office of Data and Accountability
http://notebook.lausd.net/portal/page?_pageid=33,131762&_dad=ptl

29 – Individual SAT scores for the nine schools under analysis were provided by Alliance. The overall averages were corroborated with CA Dept. of Education data. The top 686 scores, as calculated, were then extracted from that data.

30 – National percentile rankings for SAT 2014 for College Bound Seniors
https://secure-media.collegeboard.org/digitalServices/pdf/sat/sat-percentile-ranks-composite-crit-reading-math-writing-2014.pdf

Rolls Royce Health Care Plans for L.A. County Public Agencies

SUMMARY:  The price of health insurance in America has consistently risen faster than the rate of inflation and, despite the intentions of the Affordable Care Act (ACA), is projected to continue to do so for the foreseeable future.

A provision of the ACA known as the ‘Cadillac Tax’ is designed to discourage employers from purchasing excessively priced health insurance plans; which is intended to reduce at least one of the factors that contribute to the dramatic increase of price.

This paper draws on a wide array of research that demonstrates government employers are most likely to be affected by the ‘Cadillac Tax’ due to their propensity to purchase the most expensive forms of health insurance available for their employees.

A particularly striking form of excess – a $42,942 plan – for an employee of a small water district in Los Angeles County prompted an inquiry into the health costs for other public agencies in the County.

This analysis reveals that the largest Los Angeles County public employers are paying approximately 71% more for their employees’ health insurance than private employers, at an estimated cost of $676 million a year.

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INTRODUCTION

Despite the warning from the Government Accountability Office (GAO) of the impending burden to state and local governments from rising healthcare costs, many Los Angeles governments are purchasing wildly exorbitant health insurance for their employees, at taxpayers’ expense.

Last year the Water Replenishment District of Southern California (WRD) paid $42,942 for a single employee’s health insurance plan. Nearly half of the District’s full-time employees received a plan that cost at least $30,000 apiece.

In 2011, the WRD had four employees receiving plans that cost at least $30,000. By 2014, that number increased three-fold, demonstrating the $42,942 plan is not a remote outlier, but part of an agency-wide practice of vastly overpaying for health insurance.

Surprisingly, WRD employees are also part of the coveted “3% @ 60” pension plan – which calculates the retirement benefit by multiplying the number of years worked by 3 percent, and then multiplying that number by the employee’s highest salary.

Typically, plans with the generous 3% multiplier are reserved for police and fire employees. In fact, the 3% plan is so expensive that the Pension Reform Act of 2013 eliminated it completely for new hires. New employees at the WRD would be under the reduced, but sustainable, “2% @ 62” formula.

The total compensation package for WRD employees is quite generous as well – full-time WRD employees received an average $180,636 in 2013.

As the data available on TransparentCalifornia.com is making clearer, it is in the often-overlooked smaller, local government agencies where the most dramatic levels of excessive public compensation can occur.

Table 1: Water Replenishment District of Southern California Employee Compensation

Healthcare Graph 2

The problem is widespread

Unfortunately, California governments overpaying on health insurance goes well beyond the WRD. Transparent California previously reported on the numerous $20k+ health plans in Corte Madera and the Contra Costa Community College District, as well as the $30k+ plans found in the cities of Beverly Hills and Sierra Madre.

Pew Research confirms that the problem is nationwide – over the past 25 years, state and local government spending on health insurance increased 447% in inflation-adjusted dollars, and is projected to rise further.

This dramatic increase can be attributed, in part, to government wastefulness – government employers not only purchase the most expensive plans, they also ask their employees to contribute the least to help fund them.

In California’s public sector, this problem is accelerating at an alarming rate. From 2011-2013 the amount spent on health insurance by the State increased by 8% as compared to the average 1% decrease nationwide, according to Pew Research.

While the WRD’s excess is the highest in absolute terms, its impact is limited due to their small size. As such, it is more meaningful to analyze the larger districts in the state.

This analysis will incorporate data from the State of California and the largest government agencies in Los Angeles County – home to both the largest city and county in the state.

Table 2 compares two of the biggest special districts – the Los Angeles County Sanitation Districts and the Metropolitan Water District of Southern California – as well as the Los Angeles Department of Water and Power, the City of Los Angeles and the Los Angeles County government.

The Bureau of Labor and Statistics (BLS) provides comparable information for private employers. However, the information is only reported by geographical region, not individual state. As such, the Pacific regional data, of which California is the largest component, is used in this comparison.

The BLS data is by coverage type only. Therefore, the average employer cost is estimated assuming a 50/50 split between employees selecting single or family coverage plans, consistent with the trend found by the Medical Expenditure Panel Survey.

Table 2: Average Employer Cost of Health Insurance
Healthcare 1 Graph

Consistent with the nationwide data, Los Angeles governments pay significantly more for health insurance than the average private sector employer.

For just the five Los Angeles governments analyzed, the total amount paid in excess of the average private employer’s cost is approximately $676M, as shown in Table 3 below.

Table 3: Average Public vs Private Cost of Health Insurance and Total Cost of Public Excess, Los Angeles

Healthcare Graph 3


A bad problem gets worse

The forthcoming ‘Cadillac tax‘ provision of the Affordable Care Act is expected to pose a significant burden to government employers – due to their propensity to purchase Cadillac-style plans for their employees. Beginning in 2018, employers must pay a 40 percent tax on the excess of plans that cost more than $10,200 for single coverage and $27,500 for family coverage.

It must be noted that the threshold for the Cadillac Tax applies to the total cost of the plan. The values reported here are only the employer costs. If employees also contribute towards the cost – meaning the total cost is higher than just the employer’s share – the number of plans affected will rise significantly.

The WRD, for example, will have to pay at least $41,000 a year in penalty taxes for just the twelve employees with health care plans over the $27,500 cap at their current rates. Virtually the entire full-time staff – over 1,400 employees – of the Metropolitan Water District of Southern California received health plans that cost more than $10,200; if any of those plans are for single coverage only, they would be hit by the tax too.

Los Angeles County had 56,366 employees – about 67% of staff – who received health insurance that cost at least $10,200. Outside of the WRD, the County had the greatest individual cost – with 192 plans costing $37,148 each. For just these 192 employees, the County would have to pay a penalty tax of at least $740,966 a year beginning in 2018.

Given the recent, and projected, double digit increases in health insurance premiums, merely holding costs to the present level by 2018 would be a remarkable feat.

Finally, the City of Los Angeles appears best positioned to avoid being affected by the tax. In addition to having the lowest average cost, there was not a single plan with a cost of more than $16,400.

CONCLUSION

The increasing cost of healthcare is certainly much more complex than merely being the result of government wastefulness. A comprehensive solution would require an entire rethinking of how healthcare should be provided. Still, having a consumer as big as government routinely overpay for a product will contribute to its rising cost.

As taxpayers are struggling to pay their own health insurance premiums, government should be doing all it can to rein in costs. As bad as the healthcare situation is at the moment, there is simply no justification for a government agency to consistently pay over $20,000 a year, or more, for their employees’ health insurance.

*  *  *

About the Author: Robert Fellner is Research Director for TransparentCalifornia.com, a joint project of the California Policy Center and the Nevada Policy Research Institute.

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Unrecognized Legacy of Prop 39: $137 Billion in Payments Due for Money Already Borrowed and Spent

How much debt has accumulated as the State of California and its local K-12 school and community college districts relentlessly borrow money for school construction by selling bonds to investors?

No one seems to know. In April 2013, the California Policy Center published a report entitled Calculating California’s Total State and Local Government Debt, which attempted to calculate a reasonable estimate of debt obligations of the State of California and its local governments. The report estimated an astonishing debt total of $1.1 trillion, but researchers could not identify any recent sources to estimate the debt from general obligation bonds issued to finance educational construction.

There is a way to determine the amount of debt service (principal + interest) outstanding for educational districts. Researchers for the California Policy Center were able to add up total aggregate debt service for almost all California local educational districts in which voters approved a bond measure since the November 7, 2000 election.

Debt service for those California local educational districts is $136,500,250,898 as of January 2015.

Put in plain English, between now and 2055, California’s taxpayers will make $137 billion in principal and interest payments to pay back funds that have already been borrowed and spent.

Add this number to the $56,668,673,695 in debt service resulting from the three statewide bond measures for educational construction approved by voters, and the total debt service is $193,168,924,593.

See Appendix I – All California Educational Bond Measures Approved by Voters Since November 2000 Enactment of Proposition 39 – Ranked by Aggregate Debt Service

Obviously this debt is substantial, even after accounting for all of the caveats listed below.

As noted below in “Limitations on Using Debt Service Data for Educational Construction,” debt service for some school districts could not be determined, which makes the number determined by the California Policy Center to be lower than exact. In addition, numerous districts are now calling their bonds and issuing refunding bonds, which makes the number determined by the California Policy Center to be higher than exact. We believe these circumstances balance each other out.

Total debt service is about $137 billion for local educational districts where voters approved bond measures since the November 7, 2000 election. Including the three statewide bonds that voters approved since the November 7, 2000 election brings the total debt service to $193 billion.

How Were These Numbers Determined?

Municipal bonds are not bought and sold on Wall Street. Instead of using a centralized place (such as an “exchange”), issuers and investors buy and sell bonds “over the counter” through dealers and brokers registered with the Municipal Securities Rulemaking Board (MSRB), a quasi-governmental organization overseen by the U.S. Security and Exchange Commission. These dealers and brokers act as underwriters or intermediaries between issuers and investors.

Federal law generally requires underwriters in a primary offering of municipal bonds of $1 million or more to obtain and review an “Official Statement” from the issuer of those bonds. Those statements disclose financial information meant to inform a potential buyer and reduce the chance of “fraudulent, deceptive, or manipulative acts or practices.” By law these statements have to be posted on a publicly-accessible and free-to-use website: the Municipal Securities Rulemaking Board Electronic Municipal Market Access system, or EMMA.

Official statements include a chart that indicates how much aggregate principal and interest the issuer of the bonds would owe each year if the bonds weren’t refunded (called in so new bonds can be issued at a lower interest rate) or paid off early. Different official statements may place the aggregate debt service chart in different locations in an Official Statement. Charts may differ in title, format, or details of content. A few charts may not even total up the annual debt service. But the information is usually available. (Issuers of bonds through “private placement” do not need to post official statements on EMMA, because the information is provided directly to the private buyers.)

California Policy Center researchers used the EMMA database to determine debt service for each educational district where voters approved borrowing money for construction through bond sales after November 7, 2000. (That is the election date when California voters approved Proposition 39 and reduced the threshold for voter approval of bond measures for construction from two-thirds to 55 percent.) Researchers entered each district name into the EMMA system, identified the most recent bond offering or bond refunding from the list of bond issues, downloaded the associated Official Statement, located the aggregate debt service chart, and calculated the total debt service for 2015 and/or later years.

Limitations on Using Debt Service Data for Educational Construction

This data is a big step forward in informing Californians about the tremendous debt accumulated by educational districts that borrowed money for school construction by selling bonds. Nevertheless, the data has limitations. Here are 14 warnings about assessing the data out of context:

1. Some local educational districts have not yet borrowed any money as authorized by voters. Other districts have issued some bonds and plan to issue more bonds soon. Some districts have issued all of their bond authority. This means that debt service may be deceptively low in some districts that haven’t yet begun borrowing with gusto.

2. As mentioned above, educational districts in some circumstances can call in existing bonds and issue refunding bonds at a lower interest rate, thus reducing debt service. For this reason, school districts can argue that they intend to regularly issue refunding bonds, and therefore the amount that taxpayers will end up paying is somewhat less than what is listed for the current debt service.

3. For some educational districts, the current debt service will be paid off in a few years. For other school districts, the current debt service will be paid off in 40 years, thus allowing for a presumption that a long period of steady inflation and substantial increase in total assessed property value will mitigate the debt burden on property owners.

4. An argument can be made that borrowing a lot of money now at currently low interest rates is wise financial management, and debt service therefore is not an important issue to consider.

5. An educational district in a wealthy area can have significant debt service but also have high and stable total assessed property value. That debt service may be foolish, but it is not as dangerous as the same debt service in an less affluent educational district with unstable property values and an uncertain economic future.

6. Debt service becomes foolhardy and dangerous as the amount of interest owed increases relative to the amount of principal owed. Educational districts that issued a lot of Capital Appreciation Bonds in the past 15 years have debt service out of proportion to what they obtained through their construction program.

7. As mentioned above, some California educational districts are now issuing bonds through negotiated placement or private placement, which do not require official statements because the investors are qualified to perform their own assessment of the district’s financial status. Keep in mind that official statements are intended for the benefit of potential public investors, not for the benefit of taxpayers or other interested parties.

Private placements seem to be growing in popularity. Researchers were unable to determine current debt service for several small school districts without official statements on EMMA, and at least two of them (and probably all of them) used private placement for their most recent bond sales. It’s notable that the West Contra Costa Unified School District – perhaps the California educational district taking the most risks with school construction finance – apparently issued $135 million in bonds – including bonds with 40-year maturities – in February 2015 through private placement.

8. Debt service can accumulate from bond issues that occurred decades ago. California’s educational districts were winning approval for bond sales under the Proposition 13 two-thirds threshold for 20 years before Proposition 39, and some of that borrowed money is still being repaid back, with interest. For those school districts, debt service may look disproportionately high relative to the amount of money borrowed from 2001 to 2014.

9. There are a handful of local educational districts that have debt service from bond measures approved in 2000 or earlier but have not asked voters to authorize additional borrowing since the November 7, 2000 election. That debt service is not included in the total reported here. In addition, there are statewide bond measures for educational construction approved before November 7, 2000, including a $9.2 billion bond measure approved by voters in 1998 that included $6.7 billion for K-12 school districts and $2.5 billion for community college districts and California State University and the University of California campuses. The actual total debt service for all statewide bond measures and all local educational districts likely exceeds $200 billion.

10. Several K-12 school districts have merged in the past 15 years. Some official statements segregate debt service for the districts before they merged, and some combine the debt service.

11. Several community college district and K-12 school districts have created “School Facilities Improvement Districts” embedded within the complete jurisdiction of the districts. Some official statements segregate debt service for these subdistricts, and some combine the debt service for the subdistricts with the debt service for the complete district.

12. Certificates of participation, lease revenue bonds, and other schemes for educational districts to borrow money while evading Proposition 13 and Proposition 39 requirements are not included in official statements.

13. Community Facilities Districts funded by Mello-Roos bonds are not included in official statements.

14. Debt service is best considered in conjunction with information in annual financial statements prepared for the educational districts.

Despite these limitations, the debt service amounts available through the official statements posted on EMMA provide new insight into the debt owed by California local educational districts. Voters need to know that borrowing additional money via bond sales for school construction is adding to already existing debt.

The Devastating Impact of Retroactive Pension Increases in California

On January 27th, 2015 Kern County declared a fiscal emergency citing lower tax revenues from oil producers and growing unfunded pension liabilities as the cause. A review of their pension costs and growth of their unfunded liabilities over the past decade indicates the word “growing” is an understatement. A more accurate term would be “soaring”. The pension costs and liabilities indicate they, and not oil tax revenues are the root cause of their financial problems.

In reviewing past reports, Kern’s pension problems began 13 years ago when their Board of Supervisors decided to retroactively increase pensions to the highest levels allowed by law without developing a sound plan to pay for the increased cost. They were not alone in increasing pensions retroactively. In 2001 the state retroactively increased pensions under Senate Bill 400 for safety employees (prison, police and fire), with cities and counties following suit with their safety employees. Then non-safety general employee unions also wanted a piece of the action, and most had their pensions retroactively increased to various new formula levels they chose.

Sonoma and Kern County’s Pension Increase

For all active general employees, supervisors in both counties raised benefit levels back to the date people were hired providing a multiplier that went from 2.34% to 3% per year of service at 60 years of age. All safety employees had their multipliers reset from 2% at 50 to 3% at 50 years of age. These increases, along with lower than anticipated investment earnings, have increased pension costs in Kern County by 500% from an annual cost of $41 million in 2001 to $233 million today. Sonoma County’s costs have increased by 466% from $14.8 million in 2001 to $69 million today. And both of these amounts do not include the cost of their pension bond debt, more on that later.

The Unanticipated Consequences of the Retroactive Pension Increase

In Sonoma County, the increases had many unanticipated consequences that added significantly to the actuaries estimated cost impact on the pension fund.

The new formulas combined with additional items considered pensionable increased the average pension by $16,486 the year after the increase went into effect. An annuity that would pay this amount per year would cost $300,000.

The average age of new retirees dropped from a previously assumed age of 62 to 57 for general employees and from 56 to 51 for safety employees. So in addition to higher pensions, retirees received the enhanced pension for 5 additional years of their life.

The increase accelerated the number of new retirements from an average of 130 per year before the increase to 200 after. Salaries increased by 8.5% annually on average the first 3 years after the increase , versus the assumed rate of 4% because of promotions of existing employees to fill in the newly vacated management positions.

201500424-CPC_Churchill

A Billion Dollars in Pension Obligation Bonds

As a result of their additional pension costs, both counties separately issued about $500 million in pension obligation bonds. These are debt obligations issued without voter approval and for that reason are considered controversial since state law requires voter approval for any debt exceeding $300,000. The County sells the bonds and places the bond proceeds into the pension fund. The county then pays off the bond holders with interest, mostly from the county’s general or discretionary funds resulting in a total cost of about $1 billion per county when interest is included.

Yet, even with the dramatic growth of annual contributions and half a billion dollars in bond funds, the benefit increases have taken Kern’s pension plan from a surplus of $46 million in 2000 to an unfunded liability today of just under $2 billion. Sonoma’s unfunded liability has grown from $47 million in 2001 to $449 million today.

The Serious Problem with Interest Bearing Unfunded Pension Liabilities

These unfunded balances also carry interest payments because they are the present value of the money the county would need to place in the fund today, to fund the pension benefits that have already been earned. Since the money is not in the fund generating investment returns, each county needs to pay interest on the unfunded liability in an amount equal to their assumed rate of investment return which is 7.75% for Kern and 7.5% for Sonoma. This unfunded liability can be paid off over up to 30 years which triples the cost and means our kids will be paying for benefits earned in the past, something commonly referred to as intergenerational theft.

For example, if Kern County decides to pay its $2 billion liability over 30 years which it may need to do, the cost to taxpayers with interest is $6 billion. These are dollars that will not be available for other services such as maintaining roads and parks, keeping libraries open, and providing essential support services to those in need.

Both Counties are Facing Service and Balance Sheet Insolvency

Sonoma County has a $640 million backlog in road maintenance and the worst roads in Northern California. Due to pension costs, Sonoma County only has the money to maintain pavement preservation on 14% of its roads. In addition, Kern County has reached and Sonoma County is approaching balance sheet insolvency. Currently, Kern County lists $1.8 billion in net assets on its balance sheet. But new Government Accounting Standards Board (GASB) rules that became effective this year will require the county to add its $2 billion in pension liabilities to its balance sheet wiping out its net assets. The new standards will reduce Sonoma County’s net assets from $1.4 billion to about $500 million. In addition, Sonoma County has a large unfunded retiree healthcare liability of $311 million that should be listed as a liability though not currently required by the new standards. GASB is looking at this issue now.

When the next round of financial statements are issued, GASB changes will show the true net assets of cities and counties with their pension liabilities and the true financial condition of municipalities throughout the state will become visible, and shocking. A study one by John Dickerson indicated that for the 8 Northern California counties with their own pension funds GASB will reduce their Net Assets from $10 billion to $1 billion.

Without Pension Reform the Options are to Cut Services or Raise Taxes

Without substantive pension reform and a more equitable sharing of the costs between the employee and employer, there are really only two ways to deal with these liabilities, continue to cut services or raise taxes.

In addition to sharing costs, municipalities should consider a combination of hiring freezes, lay- offs, pensionable salary freezes or cuts in pay. Eliminating overtime and special pay items are other options that should be explored.

So far, most politicians are ignorant of the pension problem or they lack the courage to take on the government employee unions, bringing them to the mistaken idea that raising taxes is a preferred alternative to reforming the system. However, as noted in places like San Diego and San Jose, raising taxes to pay for pension costs is being repudiated by the voters.

Citizens Strongly Support Pension Reforms

A recent Reason-Rupe poll found 72 percent of respondents were concerned about their local and state governments’ ability to fund public employee pensions as currently promised. Of those surveyed, 76 percent of respondents believe that pension reform is a high priority for governments. Only 7 percent believed that nothing needs to be done to reform the system. Within the options for reform, there is support for transitioning to a 401k-style system for current (59 percent) and future retirees (67 percent). If reform is not palatable to elected officials for whatever reason, politicians should know that 66 percent of the public favor shifting public employees from guaranteed pensions to 401K style accounts if taxes would not have to be raised and 74% are opposed to raising taxes to pay for pensions.

The bottom line is taxpayers believe they deserve services they have received in the past for their tax dollars. At the same time, employees who have been promised benefits that are unaffordable lack retirement security and many worry that their pensions will be there when they retire. This is especially relevant after the rulings in Detroit and Stockton where the judges ruled pensions can be impaired in bankruptcy.

Simply looking at the math, it is obvious that pension systems in Sonoma and Kern counties – and in hundreds of cities and counties throughout the state – are in dire need of redesign and the longer politicians wait to fix them, the harder and more painful the changes are going to be.

The Time for the State Legislature to Act is Now

Reform is difficult in California due to what is referred to as the “California Rule”. Under years of judicial interpretation of the Contracts Clause in the constitution, governments in California are not able to reduce pension formulas for existing employees going forward and they cannot even require employees to contribute money towards paying off the unfunded liability that was mostly created by their retroactive pension increases.

However, some legal scholars believe if cuts are necessary to save the system, and there is a fiscal emergency, then benefits for existing employees can be cut. Maybe Kern County will be the test case.

In the meantime, instead of letting more cities and counties declare fiscal emergencies, the California legislature needs to act to amend the constitution so politicians and judges in favor of the status quo will stop standing in the way of solutions to this growing crisis.

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About the Authors:  This report is a collaborative effort headed by Ken Churchill, the director of New Sonoma, an organization of financial and business experts and concerned citizens dedicated to working together to solve Sonoma County’s serious financial problems. Ken Churchill has over 40 years of business and financial management experience as founder, CEO and CFO of a solar energy company and environmental consulting firm. He sold both companies and now grows wine grapes and produces wines under his Churchill Cellars label. For the past three years, Ken has been actively researching and studying the pension crisis and published a report titled The Sonoma County Pension Crisis – How Soaring Salaries, Retroactive Pension Increases and Poor Management Have Destroyed the County’s Finances.

Unaffordable California – It Doesn't Have To Be This Way

April 2015 Update:  Here’s a documented comparison of California taxes and economic climate with the rest of the states. The news is bad, and getting worse. But it doesn’t have to be this way! The state and local government policies that created an unaffordable California can be reversed.

PERSONAL INCOME TAX:  Prior to Prop 30 passing in Nov. 2012, CA already had the 3rd worst state income tax rate in the nation. Our 9.3% tax bracket started at under $50,000 for people filing as individuals. 10.3% started at $1 million. Now our “millionaires’ tax” rate is 13.3% – including capital gains (CA total CG rate now the 2nd highest in the world!).  10+% taxes now start at $250K. CA now has by far the nation’s highest state income tax rate.  We are 21% higher than 2nd place Hawaii, 34% higher than Oregon, 48% higher than the next 2 states, and a heck of a lot higher than all the rest – including 7 states with zero state income tax – and 2 more that tax only dividends and interest income. CA is so bad, we also have the 2nd highest state income tax bracket.  AND the 3rd.  Plus the 5th and 7th.
http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2013.pdf  Ref. Table #12
http://tinyurl.com/CA-income-tax-graph  and  http://tinyurl.com/CA-2nd-CG

20141229_Rider-2

SALES TAX:  CA has the highest state sales tax rate in the nation.  7.5% (does not include local sales taxes). Two new 2015 bills seek a combined $10 billion++ CA state and local sales tax increase.  At least one will pass.
http://taxfoundation.org/article/state-and-local-sales-tax-rates-2011-2013

GAS TAX:  CA has the nation’s 2nd highest gas tax at 66.0 cents/gallon (March, 2015).  Add in the new 10-15 cent CA “cap and trade” cost and CA is easily #1. National average is 48.9 cents.  Yet CA has the 6th worst highways.
http://www.api.org/statistics/fueltaxes/  (CA has nation’s 3rd highest diesel tax)
http://reason.org/news/show/21st-annual-highway-report

PROPERTY TAX:  California in 2014 ranked 17th highest in per capita property taxes (including commercial) – the only major tax where we are not in the worst ten states.  But the median CA property tax per owner-occupied home was the 10th highest in the nation in 2009 (latest year available).
http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation_2015_SBTCI.pdf, Ref. page 73.
http://www.taxfoundation.org/taxdata/show/1913.html

“IMPACT FEES” ON HOME SALES:  Average 2012 CA impact fee for single-family residence was $31,100, 90% higher than next worst state. 265% higher than jurisdictions that levy such fees (many governments east of the Sierras do not). For apartments, fee averaged $18,800, 290% above average outside state. The fee is part of the purchase price, so the buyer pays an annual property tax on the fee!
http://www.newgeography.com/content/003882-california-homes-require-real-reach

“CAP AND TRADE” TAX:  CA has now instituted the highest “cap and trade” tax in the nation – indeed, the ONLY such U.S. tax. One study estimates the annual cost at $3,857 per household by 2020. Even proponents concede that it will have zero impact on global warming.
http://tinyurl.com/WSJ-CA-cap-and-trade

SMALL BUSINESS TAX:  California has a nasty anti-small business $800 minimum corporate income tax, even if no profit is earned, and even for many nonprofits.  Next highest state is Rhode Island at $500 (only for “C” corporations).  3rd is Delaware at $175. Most states are at zero.
http://tinyurl.com/CA-800-tax

California small businesses failed in 2011 at a rate 69% higher than the national average — the worst state in the nation.
http://money.cnn.com/2011/05/19/smallbusiness/small_business_state_failure_rates/index.htm  (based on Dunn & Bradstreet study)

CORPORATE INCOME TAX:  CA corporate income tax rate (8.84%) is the highest west of the Mississippi (our economic competitors) except for Alaska.
http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare
Ref. Table #15 – we are 8th highest in nation in per capita corporate tax collections

BUSINESS TAX CLIMATE:  California’s 2015 “business tax climate” ranks 3rd worst in the nation – behind New York and anchor-clanker New Jersey. In addition, CA has a lock on the worst rank in the Small Business Tax Index – a whopping 8.3% worse than 2nd worst state.
http://taxfoundation.org/article/2015-state-business-tax-climate-index
http://www.sbecouncil.org/wp-content/uploads/2014/04/BTI2014Final.pdf

LEGAL ENVIRONMENT:  The American Tort Reform Foundation ranks CA the “worst state judicial hellhole” in U.S. – the most anti-business.  The U.S. Chamber of Commerce ranks CA higher – “only” the 4th worst state (unfortunately, sliding from 7th worst in 2008).
http://www.judicialhellholes.org/wp-content/uploads/2014/12/JudicialHellholes-2014.pdf
http://www.instituteforlegalreform.com/states/california

FINES AND FEES:  CA driving tickets are incredibly high. Red-light camera ticket $490. Next highest state is $250.  Most are around $100.
http://reason.org/blog/show/red-light-cameras-and-the-enigmatic

CA needlessly licenses more occupations than any state – 177.  Second worst state is Connecticut at 155.  The average state is 92. But CA is “only” the 2nd worst licensing state for low income occupations.
http://cssrc.us/publications.aspx?id=7707
http://bit.ly/1ff0OGu

CA has the highest/worst state workers’ compensation rates in 2013, up from 3rd in 2012. CA rates are 21.3% higher than 2nd highest state, 88% higher than median state. Yet we pay low benefits — much goes to lawyers.
http://riderrants.blogspot.com/2014/10/california-has-worst-workers.html

OVERALL TAXES:  Tax Foundation study ranks CA as the 4th worst taxed state. But if counting ONLY in-state and local taxes, we are arguably the 2nd highest.
http://tinyurl.com/Tax-Foundation-CA-rank

UNEMPLOYMENT:  CA is tied for 3rd worst state unemployment rate (February, 2015) – 6.7%.  The national unemployment rate is 5.5%.  National unemployment rate not including CA is 5.3 %, making the CA unemployment rate 25.6% higher than the average of the other 49 states. We were at 4.8% in Nov, 2006 – vs. national 4.6%.
http://www.bls.gov/web/laus/laumstrk.htm

Using the 2014 U-6 measure of unemployment (includes involuntary part-time workers), CA is just behind Nevada at 15.2% vs. national 12.0%.  National U-6 not including CA is 11.6%, making CA’s U-6 31.4% higher than the average of the other 49 states.
http://www.bls.gov/lau/stalt.htm

EDUCATION:  CA public school teachers are the 4th highest paid in the nation.  CA students rank 48th in math achievement, 49th in reading.
http://www.lao.ca.gov/reports/2011/calfacts/calfacts_010511.aspx  (page 36)
http://www.cde.ca.gov/fg/fr/sa/cefavgsalaries.asp

California, a financially challenged state, still gives away community college education at fire sale prices. Our Community College tuition and fees are the lowest in the nation.  How low?  Nationwide, the average community college tuition and fees are more than double our California CC’s.
http://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fees-sector-and-state-over-time

This ridiculously low tuition devalues education to students – often resulting in a 25+% drop rate for class completion.  In addition, because of grants and tax credits, up to 2/3 of California CC students pay no net tuition at all!
http://tinyurl.com/ygqz9ls

Complaints about increased UC student fees too often ignore a key point — all poor and many middle class CA students don’t pay the “fees” (our state’s euphemism for tuition).  There are no fees for most California families with under $80K income.  55% of all undergraduate CA UC students pay zero tuition, and another 14% pay only partial tuition.
http://www.universityofcalifornia.edu/blueandgold/
http://tinyurl.com/UC-zero

WELFARE AND POVERTY:  1 in 5 in Los Angeles County are receiving public aid.
http://www.latimes.com/news/local/la-me-welfare22-2009feb22,0,4377048.story

California’s real poverty rate (the new census bureau standard adjusted for COL) is easily the worst in the nation at 23.4%.  We are 57.3% higher than the average for the other 49 states (up from 48.8% higher last year).  Indeed, the CA poverty rate is 17.0% higher than 2nd place Nevada.
http://www.census.gov/content/dam/Census/library/publications/2014/demo/p60-251.pdf  (page 9)

California has 12% of the nation’s population, but 33% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 7 states combined.  Unlike other states, this “temporary” assistance becomes much more permanent in CA.
http://www.utsandiego.com/news/2012/jul/28/welfare-capital-of-the-us/?print&page=all

California ranks 48th worst for credit card debt and 49th worst for percentage of home ownership.
http://riderrants.blogspot.com/2013/02/more-dismal-california-economic-rankings.html

GOVERNMENT INSOLVENCY: California now has the 2nd lowest bond rating of any state – Basket case Illinois recently beat us out for the lowest spot.  We didn’t improve our rating – Illinois just got worse.
http://taxfoundation.org/blog/monday-map-state-credit-ratings-0

The average California firefighter is paid 60% more than paid firefighters in other 49 states. CA cops are paid 56% more. CA 2011 median household income (including gov’t workers) is 13.4% above the national average.
www.tinyurl.com/CA-ff-and-cop-pay
www.en.wikipedia.org/wiki/List_of_U.S._states_by_income

HOUSING COSTS:  Of 100 U.S. real estate markets, in 2013 CA contained by far the least affordable middle class housing market (San Francisco). PLUS the 2nd, 3rd, 5th, 6th and 7th. San Diego is #5 (with “middle class” affordable homes averaging 1,056 sq. ft.)
http://riderrants.blogspot.com/2013/10/the-us-least-affordable-housing-market

TRANSPORTATION COSTS:  CA has 2nd highest annual cost for owning a car – $3,966. $765 higher than the national average.
http://tinyurl.com/lmxnucs

WATER & ELECTRICITY COSTS:  California residential electricity costs an average of 35.4% more per kWh than the national average. CA commercial rates are 60.3% higher.  For industrial use, CA electricity is 85.4% higher than the national average (July, 2014).  NOTE: SDG&E is considerably higher.
http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_06_a 

A 2011 survey of home water bills ranking the 20 largest U.S. cities found that for 200 gallons a day usage, San Diego was the highest cost.  At 400 gal/day, San Diego was third highest.
http://www.circleofblue.org/waternews/wp-content/uploads/2011/05/allstats590.jpg

BUSINESS FLIGHT:  In 2012, our supply of California businesses shrunk 5.2%. In ONE year. NOTE: That’s a NET figure – there were 5.2% fewer businesses in CA in 2012 than were here in 2011.  Indeed, in 2012, CA lost businesses at a 67.7% higher rate than the 2nd worst state!
http://riderrants.blogspot.com/2013/07/in-2012-ca-lost-businesses-at-677.html

A survey of U.S. CEO’s ranks California “the worst state in which to do business” for the 10th straight year (May, 2014).
http://chiefexecutive.net/best-worst-states-for-business-2014#ranking

From 2007 through 2010, 10,763 manufacturing facilities were built or expanded across the country — but only 176 of those were in CA. So with roughly 12% of the nation’s population, CA got 1.6% of the built or expanded manufacturing facilities. Stated differently, adjusted for population, the other 49 states averaged 8.4 times more manufacturing growth than did California.
http://www.cmta.net/20110303mfgFacilities07to10.pdf  – prepared by California Manufacturers and Technology Association

OUT-MIGRATION:  California is now ranked as the worst state to retire in.  Easily the lowest percentage of people over age 65. We “beat” ’em all – NY, NJ, etc.
https://www.fidelity.com/insights/retirement/10-worst-states-to-retire-2014

The median Texas household income is 18.1% less than CA. But adjusted for COL, CA median household income is 16.1% less than TX.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States#Median_income

Consider California’s net domestic migration (migration between states).  From 2003 through 2012, California lost a NET 1.43 million people.  Net departures slowed in 2008 only because people couldn’t sell their homes.  But more people still leave each year — in 2011 and again in 2012, we lost about 100,000 net people to domestic out-migration.  In 2013, 49,000. Again, note that these are NET losses.  These are not likely the welfare kings and queens departing.  They are primarily the young, the educated, the productive, the entrepreneurial, the ambitious, the wealthy (such as Tiger Woods) – and retirees seeking to make their nest-eggs provide more bang for the buck.
https://twitter.com/SenTedCruz/status/464827967747526656/photo/1
http://www.governing.com/gov-data/census/census-state-population-estimates-births-deaths-migration-totals-2013.html

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Richard Rider is the chairman of San Diego Tax Fighters, a grassroots pro-taxpayer group. Rider successfully sued the county of San Diego (Rider vs. County of San Diego) to force a rollback of an illegal 1/2-cent jails sales tax, a precedent that saved California taxpayers over 14 billion dollars, including $3.5 billion for San Diego taxpayers. He has written ballot arguments against dozens of county and state tax increase initiatives and in 2009 was named the Howard Jarvis Taxpayers Association’s “California Tax Fighter of the Year.” Rider updates this compilation of statistics on California every month; they are updated here quarterly.