Table A-4 California School Construction & Finance History

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)
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1879The California Constitution allows school districts to issue general obligation bonds subject to the approval of two–thirds of local voters.
1947The State Allocation Board (SAB) is created to provide loans for school facilities paid for by proceeds from state bond measures.
1978Proposition 13 embeds tax limitation language and a two-thirds voter threshold for tax increases in Article XIII of the California Constitution. It states that “the maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property” unless approved “by a two-thirds vote of the qualified electors of such district.” (Ad valorem means “according to value” in Latin and indicates a tax is imposed on the value of property - in other words, a property tax.) It also prohibits local governments from issuing General Obligation bonds. The state helps to fund school construction through grants.
1980California voters reject Proposition 4, which would have restored the authority of local governments to issue bonds if two-thirds of voters authorize it.
1982E.F. Hutton begins underwriting municipal Capital Appreciation Bonds, a year after the first corporate Capital Appreciation Bonds were issued.
1986In the first of two statewide ballot measures to whittle away at Proposition 13, Proposition 46 amends Proposition 13 and allows school and college districts (and other local governments) to issue general obligation bonds if approved by a two-thirds vote. Community colleges and K-12 school districts have to consider the challenging but not impossible hurdle of winning two-thirds voter approval to obtain authorization to borrow money for construction.
1993Senate Bill 872 gives K-12 school and community college districts authority to sell bonds at a public sale at face value, above face value (at a premium), or below face value (at a discount). It authorizes local governments to adopt "modern" additional and alternative methods to issue (sell) and refund (refinance) general obligation bonds secured by a general levy of ad valorem taxes, in particular zero-coupon bonds (Capital Appreciation Bonds). Supporters of the bill contend it would “let cities and counties stabilize their debt and get the best interest rates” and “likely result in improved debt structuring with correspondingly reduced costs to property taxpayers.” It would also allow local agencies to “access a wider pool of investors who are interested in a broader array of financing instruments, terms of maturity, and tender options.” No individual or organization opposes SB 872 or expresses formal concerns about it. It passes the State Senate 38-0 and passed the State Assembly 76-0, with the Senate then agreeing to minor amendments on a 37-0 vote. In 1994, school districts begin selling Capital Appreciation Bonds.
1996The California legislature and Governor Pete Wilson establish a “Class Size Reduction Program” to reduce the number of students per certificated teacher in various grades. School districts claim they lacked sufficient facilities to implement the requirement, and they blame Proposition 13 for the deficiency. In addition, some school districts “perceived sort of ad-hoc discretionary nature of decisions by the Board” in which certain school districts used connections and relationships with board members to gain an advantage in the disbursement process. Various interest groups began exploring ways to get more money for school construction.
1998The California legislature passed and Governor Pete Wilson signs Senate Bill 50, the Leroy F. Greene School Facilities Act of 1998. It establishes the current funding structure for school construction in California by incorporating both state and local funding sources for school construction. The state pays 50 percent of the cost of new school construction and 60 percent of the cost for school modernization, generally on the condition that local school districts provide matching funds. The State Allocation Board oversees and directs the Office of Public School Construction - a successor agency to the Office of Local Assistance - in the California Department of General Services to manage the grant program. The post-1998 State Allocation Board has been described as a “quasi-legislative, sometimes quasi-judicial body” with state legislators comprising a majority of the board but acting as an agency of the executive branch, as permitted in a special provision in the California Constitution.
1998Voters approve Proposition 1A, which authorizes the state to borrow $9.2 billion to support matching grants for school and college construction projects.
1999Senate Bill 1118, sponsored by the Office of the California State Treasurer, is enacted to “streamline the complex procedures governing school bond elections and issuance.” It establishes the current system for how bond measures are brought before voters and how bond proceeds are managed after approval. It outlines the purposes for which a school or college district can use bond proceeds. It authorizes the creation of various accounts to hold money for various purposes related to bond finance and construction. The legislative record does not indicate that any individual or organization opposed SB 1118 or expressed concerns about it. It passes the State Senate 40-0 but was opposed by some Republicans in the State Assembly, where it passed 50-20 with 10 members of the Assembly (including some Democrats) not voting. Bill analyses for committees about SB 1118 provided almost no context and incompletely listed the many new provisions that the bill would add to state law.
2000In March, 51% of California voters reject Proposition 26, which would have reduced the voter threshold for approval of General Obligation bond measures from two-thirds to a simple majority.
2000In November, 53% of California voters approve Proposition 39, which creates an exception to Proposition 13 by allowing school and college districts an option of proposing General Obligation bond measures that win approval with a 55% voter threshold instead of two-thirds.

In addition, the passage of Proposition 39 triggers enactment of Assembly Bill 1908, which imposes requirements on school and college districts that win approval to issue bonds under the criteria of Proposition 39:

Debt obligations resulting from the bond measure cannot exceed 2.5% of assessed value for unified districts and 1.25% for elementary and high school districts.
Tax levies resulting from the bond measure cannot exceed $60 per $100,000 of assessed value for unified districts and $30 per $100,000 of assessed value for elementary and high school districts.
An independent citizens bond oversight committee with appointed representatives from specific constituencies must be established to ensure proceeds of bond sales authorized by the bond measure are only spent on projects identified in the ballot statement provided to voters.
2002Voters approve Proposition 47, which authorizes the state to borrow $13.05 billion to support matching grants for school and college construction projects.
2004Voters approve Proposition 55, which authorizes the state to borrow $12.3 billion to support matching grants for school and college construction projects.
2006Voters approve Proposition 1D, which authorizes the state to borrow $10.4 billion to support matching grants for school and college construction projects.
2006Assembly Bill 1482 brings a bit more transparency to the process of bond sales by requiring public notice of the method of sale and other pertinent information when a district intends to issue bonds. It was introduced by Assemblyman Joe Canciamilla, and signed into law by Governor Arnold Schwarzenegger in 2006. It passed the State Senate 28-4 with eight members not voting and passed the State Assembly 68-5 with six members not voting. The revised version of the bill was supported by the California Association of County Treasurers and Tax Collectors.

As introduced, this bill required that all sales of bonds by school districts occur through a competitive bid process, with specific exceptions granted in limited circumstances that would allow for a negotiated sale, if approved by the county treasurer or the State Treasurer. Opposition was strong from groups heavily involved in promoting bond measures for school construction, including California’s Coalition for Adequate School Housing (C.A.S.H.), the California Public Securities Association, the Association of California School Administrators, the California Association of School Business Officials, and the Small School Districts' Association. The two largest school districts in the state - Los Angeles Unified School District and San Diego Unified School District - also opposed it.

The Assembly Education Committee heard the bill but did not take action. Assemblyman Canciamilla then submitted a request to the Joint Legislative Audit Committee asking for an audit to determine to what extent true cost of issuance differed between comparable school district general obligation bond issues sold through a competitive bid process versus negotiated sale. The Audit Committee did not approve the request.Ultimately, the bill directed the state to collect additional information to get better insight on whether competitive bidding (as opposed to negotiated sales) provides lower costs to the bond issuer.
2007Housing prices in some areas of the state begin a dramatic four-year drop, in some regions declining 50% from their zenith, thus reducing assessed property valuation and the tax and debt limits based on it.
2009Assembly Bill 1388 gives local governments such as counties and cities the same authority as school districts and college districts to sell bonds at a negotiated sale for a price at, above, or below par value, under criteria already in place for educational districts. It was amended in the Senate to repeal a provision from SB 872 (1993) that prohibited a bond issue from being structured so that the maximum annual debt service payment of principal and interest to amortize the bonds never exceeds the minimum annual debt service payment by more than 10 percent.

No elaboration or explanation was provided in bill analyses regarding the amendment to AB 1388. The bill text itself simply said "Section 53508.5 of the Government Code is repealed." Obviously someone knew that this restriction was hindering bond sales – especially those involving Capital Appreciation Bonds.

School and college districts were selling Capital Appreciation Bonds shortly after the passage of SB 872 in 1993, but AB 1388 apparently encouraged their use at a time when educational districts found themselves unable to sell bonds for construction projects. The bill was sponsored by the California Public Securities Association and supported by the California State Association of Counties and League of California Cities. The legislative record does not indicate that any individual or organization opposed the bill or expressed concerns about it. It passed the State Senate 39-0 and passed the State Assembly 77-0.
2010The California Association of County Treasurers and Tax Collectors supports Senate Bill 623, which would have prohibited a local agency from using a bond underwriter that also provides campaign services to pass a bond measure, and Senate Bill 1461, which would have prohibited a local agency from using a bond underwriter or a financial advisor or a legal advisor that also provides campaign services to pass a bond measure or conducts feasibility studies and polling for a potential campaign. Both of these bills failed to pass the California legislature after resistance from school and college districts and parties involved in bond finance and in campaigns to pass bond measures.
2010Momentum starts in the California legislature and grows in the next six years to place another statewide bond measure on the ballot to fund school and community college construction.
2012California political leaders find out that the Poway Unified School District sold about $100 million in non-redeemable Capital Appreciation Bonds in 2011 that will impose almost $1 billion in debt service over 40 years. Other educational districts that sold Capital Appreciation Bonds with unusually high ratios of debt service to principal are subsequently exposed.
2013Assembly Bill 182 attempts to reign in the worst excesses of Capital Appreciation Bonds while still allowing school and college districts to use them as a debt finance tool. Assemblywoman Joan Buchanan - chairwoman of the Assembly Education Committee - introduces the bill, and it was signed into law in whittled-down form by Governor Jerry Brown in 2013.
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