Topics and Tips

State School Bonds
Shaken and Stirred

In September of this year, construction workers broke ground on a new school in Natomas — a relatively new community built on flat, formerly rural land just north of Sacramento. With room to grow, the suburb continues to attract families and more students, adding to the demand for buildings for schools and classrooms.

IN the face of this demand, the Natomas Unified School District is also under pressure to find the necessary resources.

"Last November, Natomas Unified passed a facilities bond for $129 million," says Trustee Lisa Kaplan. "But with the state out of [facilities] money we had to figure out financing completely on our own."

The K-12 Natomas USD, home to more than 13,500 students, is not alone.

In January of this year, Gov. Jerry Brown proposed that California significantly reduce its role in school facility projects. Meanwhile, there has been increasing scrutiny over how such projects are paid for and promoted. Taken together, how districts will be able to fund school construction moving forward is an open question.

OVERVIEW

For decades, California state government and its nearly 1,000 public school districts have been partners in building and repairing schools. The needs are not small, nor are the costs. The University of California, Berkeley's Center for Cities and Schools estimates the future cost to build and renovate the state's schools at $117 billion over the next ten years.

To help pay for these projects, California school districts have primarily used bonds, which function as loans — the district taxpayers (on behalf of the district) make regular interest payments to the bondholder followed by a final principal payment when the bond matures.

But many California schools are aging and are at least 50 years old (generally a conservative estimate of a building's useful life).

"The sad fact is that we actually don't know how much money is needed to upgrade our existing schools," says Jeff Vincent, deputy director of the Center for Cities and Schools, which is working on its own estimate. "There is no statewide information on conditions and qualities for all schools involved."

Meanwhile, school boards, districts and state officials are grappling with how to best house students, provide them with modernized, technologically equipped schools, all while trying to figure out how to pay for it without state assistance. Recent court decisions and legislation are shaping this debate.

Under the School Facilities Program, state funds have traditionally served as a critical part of school construction. New school construction projects are funded by a 50/50 match of funds from the state and local funds, while school renovation and maintenance projects are funded by the state kicking-in 60 cents for every dollar.

"In practice, the state funds less than 50 percent and closer to 40 percent, because the formula doesn't reflect the true cost of construction," Nancy Chaires, a legislative advocate for the California School Boards Association, says. "This is true for the modernization program, it covers a smaller share than it's supposed to."

Private fees from developers also help districts provide the local match.

For nearly two decades, this system has paid for school construction, helped in part in 2000 when Proposition 39 was approved by voters, lowering the vote threshold required to pass a local bond to 55 percent. (The need for local bonds was in part driven by the passage of Prop. 13 in 1978, which limited school districts' ability to ask voters to raise property taxes to help support schools).

During this time, school districts and students benefitted from more classrooms to relieve overcrowding, new equipment and infrastructure such as wireless capability, modern kitchens and air conditioning, and improved and safer buildings. However, other issues have flared up and have drawn scrutiny.

The non-partisan state Legislative Analyst's Office studied school construction projects in a January report, "2015-16 Budget: Rethinking How the State Funds School Facilities." The LAO concluded the state's program is overly complex, costly and favors some types of districts over others.

"The sad fact is that we actually don't know how much money is needed to upgrade our existing schools. There is no statewide information on conditions and qualities for all schools involved."
—Jeff Vincent, deputy director, Center for Cities and Schools

"The existing program fails to treat school facility costs as an ongoing expense despite the recurring nature of school facility needs, allows disparities based on school district property wealth, fails to target funding according to greatest need, results in excessive administrative complexity, and lacks adequate accountability mechanisms," the report said.

Gov. Brown weighed in too, saying he would like the state to dramatically lessen its role in school construction and renovations, except in certain cases. According to state officials, Gov. Brown is concerned about ongoing debt from bond obligations, which costs the state about $2.3 billion each year. Note that this figure is for all the bond debt carried by the state and not just schools. The state Legislature is also concerned about debt, which is one of California's fastest rising costs. Bond debt can also be costly for school districts. The Poway Unified School District, for instance, passed a $105 million bond in 2011 for facilities projects and the amount ballooned to almost $1 billion.

While rates for general obligation bonds are currently relatively low, recent controversies surrounding school districts Continued on page 34 using capital appreciation bonds (CABs), led to the Legislature pushing through reforms on the uses of that type of financing.

Gov. Brown has blocked efforts to place statewide bond measures on the ballot. Meanwhile, the state program for funding school facilities projects has run out of money.

CONFLICTS OF INTEREST

Away from Gov. Brown's proposal, the current system has faced other challenges including issues of conflict of interest and transparency.

A June 2015 ruling by the 5th District Court of Appeal in Fresno called into question long-popular, lease-leaseback school construction agreements. "The case involves both, a challenge to the legality of lease-leaseback and a complaint of conflict of interest," CSBA General Counsel Keith Bray says. "Potential conflict scenarios under Section 1090 should always send up flares for board members because, unlike employees, it is presumed that the board member with the conflict participated in the decision."

Through lease-leasebacks, districts can lease property to contractors while a building is being built or renovated. Contractors then sublease the property to the districts to pay for the cost of construction.

In the Fresno case, Davis v Fresno Unified School District, a local contractor sued the Fresno USD alleging there was a conflict of interest in the issuance of a $37 million contract for the construction of a middle school. Specifically, the plaintiff took issue with the fact that Fresno issued the construction contract to a firm that had also advised the district during the preconstruction phase — a practice that is common in lease-leaseback and design-build procurement. The Fresno Superior Court and the Appeals Court agreed with the plaintiff and the California Supreme Court refused to hear an appeal.

GOV. BROWN'S PLAN

Gov. Brown has suggested raising the cap on how much schools can borrow (based on community property assessments), increasing the impact fees paid by home developers, loosening restrictions on how districts can spend maintenance money, and encouraging 34 Fall 2015 | Funding and Finance Issue districts to use some of their Local Control Funding Formula funds for maintenance.

But school districts say they are already financially burdened with day to day costs and withdrawing state support would leave them unable to fix schools or build new ones.

Says Natomas USD's Kaplan, "I am very concerned about many districts in California if Gov. Brown is able to reduce the state's role in school construction. Too many studies show the quality of facilities have a direct effect on the ability of students to learn."

In particular, Kaplan worries the proposed shift would favor wealthier districts who can take on the added financial burden, and further setback districts with smaller budgets and lower property values, and places unable to pass a local bond.

"Developer fees do not even get near covering the cost of a new building and are not intended to modernize schools or get rid of portables," she says.

Independent of Gov. Brown's plan, the Legislative Analyst's Office has proposed an annual grant program, supplemented by local bonds and developer fees. The program would provide a share of anticipated costs based on the replacement value of existing buildings, their estimated average lifespan and student Average Daily Attendance. In return, participating districts would be required to have five-year facility accountability plans. It also suggests changing the current "first-come-first-served" system, which it says, "rewards districts that have more resources or are able to apply more quickly for state funding."

In addition, Palmer says school districts may use certificates of participation and Mello-Roos bonds [for special facilities] to construct or renovate school buildings.

"It would be helpful if the state provided guidelines to school districts on reasonable costs for construction, consultants and other services so that we can be assured we are getting the best deal for taxpayers," Poway USD's board president Kimberley Beatty says of the need for something similar to the federal Consumer Financial Protection Bureau. "Most of us are not financial experts and even though our mandate is the education of the next generation, we additionally have oversight and accountability roles. Some sort of state guidelines or fact sheets would be very helpful."

In Natomas, Kaplan suggests educational organizations such as CSBA form construction project sub-committees to help guide districts and boards. She also urges school board members to contact their legislators.

California's Coalition for Adequate School Housing (CASH), a school facility advocacy group, meanwhile plans its own end-around on Gov. Brown's proposed ban on statewide Bonds.

"We are taking a page from the Governor's play book," Tom Duffy, a legislative advocate for CASH says, of an effort to place a $9 million school and community college construction measure on the state ballot in November 2016.

PLANNING AHEAD

While California school construction and facility modernization issues continue to be hammered out, school leaders stress important strategies to help school boards and districts better manage the process.

"Communicate regularly with constituents about the need for new or modernized school facilities and their value to students," Chaires Espinoza says. "Use specific examples of how these expenditures will improve the educational experience of students."

Similarly, Duffy encourages LEAs to start the bond information process as early as possible.

"You need to be talking to architects, financial advisors, figuring out dollar amounts and what the needs are," he says. "Then share that information by going to schools and talking to principals, teachers, coaches, and by talking to the community including the PTA 36 Fall 2015 | Funding and Finance Issue and making sure they know why the project is important and needed."

Poway's Beatty also suggest including community members with financial or construction experience on related district advisory committees.

With the popular lease-leaseback program now uncertain, CSBA's Chaires Espinoza encourages districts to seek other options until the case is decided.

"Districts currently in development of a lease-leaseback should seek input from legal counsel," she adds.

Natomas USD's Kaplan says the lease-leaseback had been a practice used by districts for decades. Meanwhile, she says the district needs to construct at least two new schools in the next three years and has already added 2,000 students in two years without adding any new classrooms.

"In total, Natomas USD has about $300 to $350 million worth of projects that need to be considered," Kaplan says.

For now, she hopes the CASH ballot measure is on the ballot in 2016, the lease-leaseback program continues, and Gov.

CSBA HAS SEVERAL PARTNERS WHO OFFER FINANCING OPTIONS FOR SCHOOLS.

Check out the link on our website for more specific details on each.

www.csba.org/ProductsAndServices/Financing.aspx

-Cash Reserve Program (Mark Farrell, Dale Scott & Company)

-Certificates of Participation (Mark Adler, Piper Jaffray & Co.)

-Federal Bonds Program (Joey McLiney, McLiney & Co.)

-Flexfund Program (George K. Baum & Co.)

Brown's plan to get the state out of school construction does not materialize.

Until these matters are resolved, local bonds and the current level of developer fees will have to do. At the top of the list is the new building for Natomas Star Academy, now in a commercial building similar to a storage facility.

Similar to many school districts across California, Kaplan says, "We can't wait on what is going to happen with the state program — we need to construct schools now." cs

Hugh Biggar (hbiggar@csba.org) is a staff writer for California Schools .