BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 882 |Hearing |7/8/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Wilk |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |6/25/15 |Fiscal: |No | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- 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 AB 882 (Wilk) 6/25/15 Page 2 of ? 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 AB 882 (Wilk) 6/25/15 Page 3 of ? 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 AB 882 (Wilk) 6/25/15 Page 4 of ? 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 AB 882 (Wilk) 6/25/15 Page 5 of ? 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. -- END --