BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 882 |Hearing |7/8/15 |
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|Author: |Wilk |Tax Levy: |No |
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|Version: |6/25/15 |Fiscal: |No |
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|Consultant|Grinnell |
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SCHOOL BONDS: TERM OF BONDS: FURNISHING AND EQUIPPING
CLASSROOMS
Require all school district bond issues that finance furniture
and equipment to have a weighted average maturity that doesn't
exceed 120% of the average reasonably expected economic life of
the financed project.
Background and Existing Law
When public agencies issue bonds, they essentially borrow money
from investors, who provide cash in exchange for the agencies'
commitment to repay the principal amount of the bond plus
interest in the future. The California Constitution requires
counties, cities, and school districts to get voter approval for
long-term debt (Section 1, Article XIIIA). Counties, cities,
school districts, community college districts, and some special
districts can issue general obligation (GO) bonds, secured by ad
valorem, or according to value, property tax revenues with
2/3-voter approval. Proposition 39 (2000) allows school
districts and school facility improvement districts to issue GO
bonds to build, rehabilitate, or replace schools with 55% voter
approval subject to certain conditions, including tax limits.
For many years, the Education Code provided the sole avenue for
school and community college districts to sell GO Bonds, which
limited the number of years a community college or school
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district could issue a bond to 25 years, with a maximum interest
rate of 8%. In 1993, the Legislature added sections to the
Government Code to allow cities, counties, cities and counties,
special districts, and school and community college districts to
issue 40-year bonds. However, in 2013, the Legislature
responded to school districts selling capital appreciation bonds
with debt to principal ratios of 10 to 1 or worse, by limiting
maximum bond terms that allow for capitalization of interest to
25 years along with other reforms, such as an interest rate cap,
maximum debt to principal ratio, and call option requirement (AB
183, Buchanan, 2013). That measure also required bonds school
districts issue under the Government Code with maturities longer
than 30 years to make a finding that the useful life of the
facility financed with the bonds equals or exceeds the maturity
date of those bonds.
Under Proposition 39, bond proceeds may be spent on "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," so many school districts have issued
bonds for furnishing classrooms and purchasing technology to
help students learn in addition to school facilities, instead of
paying for these items out of general revenues. Legislative
Counsel has since opined that while portable electronic devices
such as iPads were not in existence when Proposition 39 was
passed, they are evolved from desktop computers and as such, a
court would construe Proposition 39 to authorize the purchase of
portable electronic devices, as long as they were intended for
use in a manner closely connected to classroom instruction at a
school facility.
The Code of Federal Regulations requires the bonds to have a
weighted average maturity of less than 120% percent of the
average reasonably expected economic life of the facilities
being financed with bond proceeds to remain tax exempt, so
school districts often issue bonds with different maturities for
furnishing or equipment, called serial bonds. Shorter-term
bonds are more appropriate for acquiring technology or other
relatively short-lived capital improvement projects, and align
the costs of furniture or technology with the current generation
of users to pay for the system. These "Ed-Tech Bonds" are a
series of short-term bond financings repaid in approximately
three-year increments, matching each borrowing to the useful
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life of the equipment. School districts can also "blend" the
useful life of all financed assets into one issue to meet the
rule.
Proposed Law
Assembly Bill 882 amends both the Education and Government
Codes, to require all school bond issuance that include
furnishing and equipping schools to have a weighted average
maturity that doesn't exceed 120% of the average reasonably
expected economic life of the financed project.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author, "In November
of 2000, voters passed Proposition 39, a Constitutional
Amendment which, among others, gives school districts and
community colleges the opportunity to seek approval of a local
General Obligation bond based on a 55% vote. On top of using
bond funds for the construction and modernization of schools,
local educational agencies use bond funds to furnish and equip
school facilities, including furniture such as desks as well as
desktop computers and other forms of technology. AB 882 would
specify the term of a bond used for the purposes of furnishing
and equipping a classroom, including electronic equipment, shall
not exceed 120% of the bond maturity of the average reasonably
expected economic life. My bill is consistent with federal tax
rules to ensure that taxpayers are not paying long term bonds
for items that have a shorter lifespan, and will reduce costs
for these purchases. According to a Legislative Counsel
opinion, portable electronic equipment such as ipads or tablets,
are a type of equipment that is allowable under Proposition 39.
This bill is consistent with the provisions in Proposition 39
and does not prohibit the use of Prop 39 bond proceeds to
purchase technology. I am a huge proponent of equipping students
with technology in the classroom, especially given our new
common core standards. If we don't empower our students with
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modern technology, we are putting our students at a disadvantage
to provide them the opportunity to develop 21st century skills.
AB 882 will protect taxpayer dollars by ensuring Prop 39 bond
funds are paid off based on the life expectancy of the items
being purchased. Finally, it is my hope this measure can be used
as a platform to encourage further technology in the classroom
and as a state, find ways to provide technology to those rural
and disadvantaged communities."
2. Necessary ? AB 882 responds to the practice of school
districts using bonds to finance personal electronic devices for
education purposes; however, the measure only restates current
requirements in federal regulations that school districts must
comply with or risk having the Internal Revenue Service (IRS)
revoke the tax-exempt status of its bonds. While inserting the
requirement in state law places the responsibility on school
districts to ensure compliance themselves, instead of waiting
for the IRS, what's the necessity or value of doing so?
Inserting additional, duplicative language may make bond
issuance more complicated and costly for school districts
seeking clean opinions from bond counsel. Districts can't
always identify with certainty the exact projects that may be
funded at issuance, and AB 882 could result in districts having
to issue a different set of bonds should a project financed by a
first set be delayed. Opponents of bond issues could also use
AB 882's standard to challenge the validity of the school
district's bonds because of differences measuring economic life,
resulting in disputes and additional litigation. Additionally,
the state standard would bind school districts if federal
regulations change. The Committee may wish to consider whether
AB 882 is necessary.
3. Incoming ! The Senate Committee on Education approved AB 882
on an 8-0 vote. The Committee on Governance and Finance is
hearing the measure as the committee of second referral.
Assembly Actions
Senate Education 8 - 0
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Assembly Floor 79 - 0
Assembly Education 7 - 0
Support and
Opposition
Support : Unknown
Opposition : Coalition for Adequate School Housing, Community
College Facility Coalition, San Diego Unified School District.
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