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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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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.

When Borrowing $142.4 Billion for School Construction Isn't Enough

On January 12, 2015, the Sacramento Bee reported that “school-construction and home-building groups have launched an effort to qualify a $9 billion school bond for the November 2016 ballot…The last state school bond was in 2006, and the pot of new construction and modernization money is virtually empty.”

See California School Builders, Others to Gather Signatures for November 2016 Bond Measure

If the proposed bond measure qualifies for the ballot, its title will be the “Kindergarten Through Community College Public Education Facilities Bond Act of 2016.” Read the proposed text and the “Findings and Declarations” to justify the bond measure:

Kindergarten Through Community College Public Education Facilities Bond Act of 2016 – Request for Title and Summary for Proposed Initiative

According to the Findings and Declarations, the bond measure will “provide a comprehensive and fiscally responsible approach for addressing the school facility needs for all Californians.”

What it doesn’t mention is that California voters since 2002 have authorized the state, K-12 school districts, and community college districts to borrow a total of $142.4 billion for K-12 school and community college construction.

It also doesn’t mention that bond measures authorize governments to borrow money via bond sales and then pay it back over time, with interest. That $9 billion will likely end up costing about $20 billion over 30-40 years. The $142.4 billion authorized since 2002 for educational construction will likely end up costing $300 billion or more.

Finally, it doesn’t mention that the State of California already has $75.7 billion in outstanding bond debt and an additional $25.7 billion in authorized-but-unissued bonds. Note also that the State of California has not yet sold $9 billion of the $9.95 billion it is authorized to borrow via bond sales for California High-Speed Rail.

Obtain a PDF version of the list of 870 state and local bond measures approved by California voters since 2002 for K-12 school district and community college district construction:

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Kevin Dayton is the President & CEO of Labor Issues Solutions, LLC, and a policy analyst for the California Policy Center. Dayton is the author of frequent postings about generally unreported California state and local policy issues at on the California Policy Center’s Prosperity Forum and Union Watch, as well as well as on his own website LaborIssuesSolutions.com. Follow him on Twitter at @DaytonPubPolicy.

Latest November 2014 Election Results – 113 Bonds for 108 California Educational Districts

The California Policy Center has now posted updated November 4, 2014 election results for the state’s 113 bond measures for K-12 and community college districts. These revised results incorporate almost a month of ballots counted and reviewed by county elections offices.

The most significant change is that the largest of the 113 bond measures considered by voters – the $574 million Measure J for the North Orange County Community College District – now appears to be winning by a mere 15 votes. On election night and for a couple of weeks afterwards, this bond measure was not quite at the threshold for passage of 55% voter approval.

Out of 113 bond measures totaling $11,775,300,000 ($11.8 billion) for 108 educational districts, 90 bond measures passed totaling $9,769,950,000 for 85 educational districts.

This means voters authorized California local educational districts to borrow $9.8 billion for construction by selling bonds to investors. With interest, these bond measures may end up costing $20 billion over the next 40-50 years.

A chart of the election results is below, or you can access a PDF version of the election results at https://californiapolicycenter.org/wp-content/uploads/sites/2/2014/12/2014-11-04-Bond-Measure-Election-Results-FINAL.pdf.

2014-11-04 Bond Measure Election Results FINAL