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Is $288 Million the Right Price for Orange Unified High School Upgrades?

Given declining enrollment, Orange Unified School District’s $288 million bond measure may fund more school upgrades than students need.  There is also a risk that the taxpayer cost of debt service for the bond issue will exceed the district’s forecast rate of $29 per $100,000 of assessed valuation.

According to statistics from Ed Data, enrollment across the four OUSD high schools fell from 9,311 in the 2010-2011 school year to 8,936 in 2014-2015, the latest school year for which figures are available. The district projects continued enrollment declines through 2018-2019, but does not provide a breakout by school. Total OUSD enrollment – excluding charters – fell from 27,344 in 2014-2015 to 26,685 in 2015-2016, and is expected to reach 26,135 in 2018-2019.

Using the current enrollment of 8,936 students, proposed renovations to the four high schools would cost over $32,000 per pupil (excluding interest). By contrast, Orange Lutheran High School completed its own upgrade in 2014 at a cost of less than $12,000 per pupil.

CAFETERIA PLANNING: The cafeteria at private Orange Lutheran, part of a recent $12,000 per pupil upgrade. In the same city, union-controlled Orange Unified wants to spend $32,000 per pupil to renovate four high schools.

CAFETERIA PLANNING: The student cafeteria at private Orange Lutheran High School, part of a recent $12,000 per pupil upgrade. In the same community, union-controlled Orange Unified wants to spend $32,000 per pupil (plus interest) to renovate four high schools.

Nationally, the median cost of building a new high school was $45 million in 2014 according to School Planning and Management (although the median high school housed 1,000 students, about half the number in OUSD schools). This suggests that the cost of renovating OUSD’s four high schools, at an average cost of $72 million each, may not represent a savings over building new facilities.

Further, the district may spend more than $288 million on the renovations if it is able to obtain Proposition 51 matching funds.  If Prop 51 passes in November ,the state’s Office of School Construction will have $9 billion in state general bond proceeds that can be allocated to school districts renovating and building schools.

With a shrinking student population and the potential availability of state matching funds, it appears that the district could borrow much less than $288 million to ensure that high school students have an appropriate learning environment. This raises the question of how the board decided to ask for $288 million in borrowing authority.

The district hired an opinion research firm to poll voters on a possible bond measure. In one survey, the research firm asked voters whether they would approve bond measures at four different tax levels – $25, $29, $34 and $39 per $100,000 of assessed valuation. They found than less than 55% of the electorate would support a bond measure that added $34 or $39 of taxes per $100,000 of assessed value, but that 59% favored a $29 measure and 62% supported a $25 measure. Thus, it would appear that the bond measure was sized on the basis of voter appetite – not on an objective assessment of actual renovation needs and costs.

On October 4, the district’s financial advisor presented a financing plan consistent with the proposed $29 tax increase per $100,000 of assessed value. The plan assumes that $79 million of bonds would be sold shortly after the election and the remaining $209 million would be sold in 2021. Projected debt service rises from $9.5 million in 2017 to $28.8 million in 2046 – representing a 4% annual rate of increase. For the tax rate to stay at $29 per $100,000, assessed valuations will have to also rise by 4% annually. According to the financial advisor’s data, OUSD has experienced annual assessed value increases of 4.26% over the past 15 years. If this trend continues, the tax rate for the new bonds would actually decline slightly – as the tax base expands slightly faster than the debt service costs. If, however, the valuation increase does not materialize, perhaps because of depressed economic conditions or an earthquake, the tax rate would have to increase.

$288 Million Orange USD Bond Measure Would Add to Large Pile of Existing Debt

If Orange Unified voters approve Measure S this November, newly authorized bonds will be added to an already large district debt. A California Policy Center review of OUSD financial reports finds that the district owed $120 million to bond investors as of June 30, 2016.

The largest portion of OUSD’s bond obligations takes the form of an unusual OPEB bond. While many California public agencies have issued bonds to cover their pension obligations, few have borrowed to cover Other Post Employment Benefit obligations. OUSD is a pioneer in this area, but it is not clear whether innovation in OPEB funding is desirable.

In April 2008, OUSD’s board approved the issuance of a variable-rate bond to cover the district’s estimated $93.8 million OPEB obligation. The plan was to invest the proceeds into an actively managed portfolio of bonds and stocks. The bond proceeds and investment gains would be used to pay retiree healthcare expense, freeing the district’s general fund to cover educational expenses.

In May 2008, the district issued $94.8 million of “Index Rate Taxable Retirement Health Benefits Funding Bonds, Series A.” One million dollars of the bond proceeds went to various service providers including California Financial Services, who acted as the financial advisor on the deal for a fee of just over $450,000.

The remaining proceeds were invested in a vehicle called Futuris Public Entity Investment Trust, which is managed by Keenan & Associates. The investment got off to rocky start due to the Great Recession. In the fiscal year ending June 30, 2008, the trust lost $3.3 million; it shed another $7.3 million in the year ending June 30, 2009.

The investment losses exacerbated a fiscal crisis confronting OUSD at the time. The board engaged the state’s Fiscal Crisis and Management Assistance Team to assess district finances. In its report, FCMAT recommended that the board “seek advice from an independent investment advisor regarding strategies to address the decline in OPEB bond program asset values.”

It is not clear from board minutes whether this recommendation was followed, but the stock market rebound that started in 2009 raised the value of OUSD’s investments and relieved its fiscal distress. Last year, Standard and Poor’s upgraded the OPEB bonds from A+ to AA- citing the district’s “very strong available general fund reserves.” The district also benefited from its choice to issue variable rate bonds, with interest rates periodically reset based on changes in the London Interbank Offer Rate (LIBOR). Although banks attempted to manipulate LIBOR, it fell during the Recession and has remained low ever since. Consequently, debt service costs for the OPEB bonds have been lower than expected.

That said, it does not appear the bonds have provided the general fund relief originally intended. Each year the district pays about $2.9 million in debt service on the OPEB bonds, and it remains unclear whether the invested bond proceeds can shoulder the district’s mounting retiree healthcare costs.  In some recent years, the district has transferred additional money into its Retiree Benefits Fund to support OPEB payments.

In addition to the $83 million still outstanding on the district’s OPEB bond, OUSD also owes $28 million on Certificates of Participation and $9 million on Capital Lease obligations. OUSD also has two Mello-Roos districts that have issued bonds. The $12 million in outstanding principal on these Mello-Roos bonds (issued by Community Facilities Districts 2005-1 and 2005-2) is technically not an obligation of the school district, but debt service payments are funded by taxes on certain homes within OUSD.

OUSD spends taxpayers' money to persuade taxpayers to let them spend more taxpayer money

Officials of the Orange Unified School District have spent more than $50,000 to support a $288 million bond measure on the November ballot. Expenses include $23,200 for opinion polling and $6,000 per month for campaign consultants, according to documents reviewed by the California Policy Center: School board members authorized the district to spend up to $128,000 on the effort. If voters approve the bond, there will be additional costs – $225,000 for financial advisors and $265,000 for legal advice.

The district’s use of public funds rests on a crucial legal distinction, said Orange Unified Superintendent Michael Christensen. It’s legal to use taxpayer dollars to educate the public, but not to campaign.

Critics say that’s a distinction without a difference during the campaign season.

“It should be illegal for school district resources to be allocated for political campaigns, political polling, campaign strategists and consultants. It’s a shameful abuse of our tax dollars,” said former Villa Park Councilwoman Deborah Pauly, who opposes the bond. “It’s not surprising that OUSD has squandered $50,000 trying to trick well-meaning voters into increasing their own property taxes for the next 30 years.”

Bonds are loans in which borrowers – in this case, the school district – pay lenders interest on the principal for a period of years. The district makes those interest payments with income from new taxes. Orange school trustees voted July 21 to set that tax at $29 for every $100,000 of assessed property value. The owner of a house or building valued at $1 million would pay $290 per year, for example.

But residents won’t know the full cost of the bond until after the measure is passed and bonds are ready to be issued. The interest rates depend on the market, though Christensen said his staff estimates the rate will be around 4.85 percent. If he’s right, the total cost of a $288 million bond will be roughly $547 million, with about $259 million going toward interest alone.

Though district officials say all Orange Unified schools need a makeover, the measure would refurbish only the district’s four high schools – El Modena, Canyon, Villa Park and Orange. That’s an average of $137 million for each of the four schools.

The bond proposal does nothing to refurbish Orange Unified’s six middle schools or 29 elementary schools.

There was a time when OUSD saved cash for new buildings and maintenance of old ones. That changed in 2002, with a union-backed campaign to recall conservative district trustees, including a high-profile teachers strike in April 2002 and the claim that the district’s conservatives had been so stingy with teacher pay that the district was bleeding qualified teachers.

“Since 1998, Orange’s most experienced educators have departed in droves – more than 1,000 teachers and administrators, including Teachers of the Year, mentor teachers, counselors, librarians, nurses, reading specialists and special education teachers,” a union advocate wrote in the Los Angeles Times.

Behind that dramatic claim was a district that actually saved cash against the certain need of school repairs. But union power triumphed over thrift. In June, the conservatives were shown the exits and union-backed candidates promptly took their places. Once in control of the gavel, district trustees commissioned a report that concluded, “Orange Unified had consistently overestimated its expenses and underestimated district revenues and kept unnecessarily high levels of emergency reserves,” the Los Angeles Times reported.

Those “unnecessarily high” reserves were liquidated to pay for teacher salary increases in 2002. Just two years later, Orange Unified asked voters to approve a bond, first in March, and then again in November. Both times it was denied. Then, in 2014, it lost a bond vote that would have allowed the district to borrow $296 million.

With three bond failures since 2002 – and a controversial fourth bond measure coming in three months – Orange voters seem to be sending a clear message to the district. School officials know how to spend, but voters remember a time, before 2002, when school officials knew how to save.

Ethan Musser is a rising senior at Mississippi State, and a Journalism Fellow at the California Policy Center in Tustin. This article first appeared in the Orange County Register.