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"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

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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.

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