BILL ANALYSIS Ó SB 581 Page 1 Date of Hearing: June 12, 2013 ASSEMBLY COMMITTEE ON EDUCATION Joan Buchanan, Chair SB 581 (Wyland) - As Amended: April 8, 2013 SENATE VOTE : 37-0 SUBJECT : School bonds: bond accountability SUMMARY : Requires the governing board of a district to provide the citizens' oversight committee a response to any and all findings, recommendations and concerns raised in the Proposition 39 of 2000 annual, independent financial and performance audits of local education bond funds within three months of receiving the audits, and requires the draft and final audits to be submitted to the citizens' oversight committee at the same time they are submitted to school or community college districts. EXISTING LAW : 1)Authorizes, under Section 1 of Article XIII A of the California Constitution, school districts, community college districts, or county offices of education to pass a general obligation bond by a 55% vote, provided that the local initiative includes the following accountability measures: a) A requirement that the proceeds from the sale of the bonds be used only for the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition or lease of real property for school facilities, and not for any other purpose; b) Provide a list of the specific school facilities projects to be funded and certification that the school district board, community college board, or county office of education has evaluated safety, class size reduction, and information technology needs in developing that list; c) A requirement that the school district board, community college board, or county office of education conduct an annual, independent performance audit to ensure that the funds have been expended only on the specified projects; and, SB 581 Page 2 d) A requirement that the school district board, community college board, or county office of education conduct an annual, independent financial audit of the proceeds from the sale of the bonds until all of those proceeds have been expended for the school facilities projects. 2)Requires the annual, independent financial and performance audits for the preceding fiscal year to be submitted to the citizens' oversight committee by March 31 of each year and requires the audits to be conducted in accordance with the Government Auditing Standards issued by the Comptroller General of the United States for financial and performance audits. FISCAL EFFECT : None. This bill is keyed non-fiscal by the Legislative Counsel. COMMENTS : Proposition 39 . In 2000, voters passed Proposition 39, a Constitutional Amendment which, among others, gave districts the opportunity to seek approval of a local education bond based on a 55% vote rather than a 2/3 vote, provided that the local bond initiative meets the following accountability measures: 1)The initiative identifies a list of the specific school facilities projects that will be funded by bond proceeds; 2)A requirement that the school board, community college board, or county office of education conduct an annual, independent performance audit to "ensure that the funds have been expended only on the specific projects listed;" and, 3)A requirement that the school board, community college board, or county office of education conduct an annual, independent financial audit of the proceeds from the sale of the bonds until all of those proceeds have been expended for the school facilities projects. Both the financial audit and performance audits must be reviewed by an independent citizens' oversight committee. AB 1908 (Lempert), Chapter 44, Statutes of 2000, a companion bill to Proposition 39, requires each district, within 60 days of the passage of a local bond with 55% to appoint a citizens' oversight committee to monitor and review expenditures to ensure SB 581 Page 3 compliance with Proposition 39 requirements, and to keep the public informed about bond expenditures. Existing law requires the governing board of the district to provide the citizens' oversight committee with any necessary technical and administrative assistance and sufficient resources to publicize the committee's conclusions, without using bond funds. All committee proceedings must be open to the public and notice to the public must be provided in the same manner as the proceedings of the governing board. The committee is required to issue regular reports at least once a year, on its activities, and minutes of the proceedings and all documents received and reports issued are required to be a matter of public record and to be made available on an Internet website maintained by the district. SB 1473 (Wyland), Chapter 294, Statutes of 2010, requires the audits to be conducted in accordance with the generally accepted government auditing standards (GAGAS), informally known as the "Yellow Book", issued by the comptroller general of the United States, and SB 423 (Wyland), Chapter 237, Statutes of 2011, requires the audits to be submitted to the citizens' oversight committee by March 31 of each year. This bill has two requirements. The first provision requires the governing board to provide the citizens' oversight committee with responses to any and all findings, recommendations, and concerns addressed in the financial and performance audits within three months of receiving the audits. The author states, "The problem is that districts need to respond to their own audit and justify it." The following is an example provided by the author's office: "The Sweetwater Union District High School in San Diego California passed Proposition O, a $644 million construction bond passed, in 2006. The Proposition O citizens' bond oversight committee has struggled to keep track of construction-project spending since Proposition O was passed in 2006, with little compliance from the school district. The district borrowed funds for two years to pay for teacher salaries and maintenance upkeeps. The district borrowed $28 million in the 2008-2009 school year, $40 million in 2009-2010, and was looking to borrow $58 million in 2010-2011, until negative media attention drove them to back away. During this SB 581 Page 4 time, the District did not respond to the bond oversight committees concerns, findings and recommendations. In 2012, the District did not give the committee any financial report. Additionally, the President of the citizens' bond oversight committee worked with the district to develop a model report form that the committee could understand and use to track expenditures, but the district utilized a form that bore no relation to the one they had agreed upon." The second provision requires both the draft and final audits to be submitted to the citizens' oversight committee at the same time they are submitted to the school district or community college district. The author states that the citizens' oversight committees need to be engaged in the process and requiring the audits to be provided to the committee when they are submitted to the school and community college districts will provide access to the documents to enable the committee to prepare an appropriate analysis that has been coordinated at an appropriate time. Is it appropriate to require sharing of draft audits? Several organizations oppose this bill unless the requirement to provide draft audits to the citizens' oversight committee is removed from the bill. The California Society of CPAs states that current law precludes drafts of audit reports from being used in court proceedings; draft audits are works in progress that are incomplete and could communicate incorrect or misleading information and should not be relied upon as accurate information. Staff recommends striking the requirement for draft audits to be provided to the citizens' oversight committee at the same time that they are provided to governing board of school and community college districts. Technical amendment . This bill creates new subdivisions. However, the author of this bill had previously authored a bill to require the audits to be submitted to the citizens' oversight committee by March 31 of each year. Staff recommends an amendment to rewrite this section of the law clarifying that the financial audit shall be submitted to the citizens' oversight committee when they are submitted to the school and community college districts, but no later than March 31 of each year. Related legislation . SB 584 (Wyland), also scheduled for the June 12, 2013 hearing, requires the State Controller, on or before January 1, 2015, in consultation with the State SB 581 Page 5 Allocation Board, the Department of Finance, and the California Department of Education, to submit content to the Education Audit Appeals Panel to be included in the audit guide, Standards and Procedures for Audits of California K-12 Local Educational Agencies, beginning in the 2015-16 fiscal year, that is related to the financial and performance audits required for school facility projects pursuant to Proposition 39 of 2000. Previous related legislation . SB 423 (Wyland), Chapter 237, Statutes of 2011, requires the Proposition 39 financial and performance audits for the preceding fiscal year to be submitted to the citizens' oversight committees by March 31 of each year. SB 1473 (Wyland), Chapter 294, Statutes of 2010, requires the annual, independent financial and performance audits required by Proposition 39 to be conducted in accordance with the Government Auditing Standards issued by the Comptroller General of the United States, to the extent required by Proposition 39. REGISTERED SUPPORT / OPPOSITION : Support California League of Bond Oversight Committees (co-sponsor) Howard Jarvis Taxpayers Association (co-sponsor) CalTax Opposition California Association of School Business Officials (unless amended) California Society of CPAs (unless amended) Vicenti, Lloyd & Stutzman LLP (unless amended) Analysis Prepared by : Sophia Kwong Kim / ED. / (916) 319-2087