BILL ANALYSIS Ó
AB 2429
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Date of Hearing: April 25, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2429
(Thurmond) - As Amended March 18, 2016
Majority vote. Non-fiscal.
SUBJECT: School district and community college district bonds
SUMMARY: Increases the level of bonded indebtedness for school
districts and community college districts. Specifically, this
bill:
1)Increases the cap on bonded indebtedness for elementary and
high school districts from 1.25% to 2% of the taxable property
of the district.
2)Increases the cap on bonded indebtedness for unified and
community college districts from 2.5% to 4% of the taxable
property of the district.
EXISTING LAW:
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1)Authorizes school districts and community college districts to
issue general obligation (GO) bonds upon approval by voters
and establishes a process and guidelines for such issuances
under the Education Code. Authorizes any city, county, city
and county, school district, community college district, or
special district to issue GO bonds, secured by the levy of ad
valorem taxes, and establishes a process for such issuances
under the Government Code. (Education Code (EC) Section 15100
et seq. and Government Code Section 53506 et seq.)
2)Specifies that the total amount of bonds issued by a school
district shall not exceed 1.25% of the taxable property of the
district and that the tax rate shall not exceed $30 per
$100,000 of taxable property. (EC Sections 15102 and 15268)
3)Specifies that the total amount of bonds issued by a unified
school district and a community college district shall not
exceed 2.5% of the taxable property of the district and that
the tax rate shall not exceed $60 per $100,000 of taxable
property for a unified school district and $25 per $100,000 of
taxable property for a community college district. (EC
Sections 15106 and 15270)
FISCAL EFFECT: None.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"Our school districts and state will highly benefit from AB
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2429. By increasing the caps on bonded indebtedness districts
will be able to generate revenue up to the new limits for
bonds approved by voters without seeking a State Board of
Education waiver, thereby reducing administrative costs for
the State Board of Education and for districts. I will also
emphasize that this bill does not change the limits on tax
rates and leaves intact the process to seek a State Board of
Education waiver."
2)Arguments in Opposition . The opponents state that individual
"school districts already have the ability to seek a waiver
from the Department of Education ? and many successfully
have." The opponents argue that a statewide solution of
increasing the caps on the total amount of bonds issued by
school districts and community college districts "establishes
a negative precedent and is unwarranted." Furthermore, the
opponents point out that the State Board of Education already
is authorized to raise the statutory rates on bonded
indebtedness for districts that seek a waiver. Finally, they
underscore that tens of billions of dollars statewide are
already authorized but not expended, and some school districts
have
so little demand for these funds that they are seeking to remove
them from the County Treasury in order to invest them in
longer term instruments." All in all, the opponents believe
that "taxpayers are better protected by the status quo of
continuing to authorize individual school districts to be
granted a higher percentage of bond debt, and not applying
this in a blanket fashion."
3)School Bonds: Background . Funding for construction of new
schools and modernization of old schools comes from both state
and local sources. State funding comes from voter-approved GO
bonds, which require the approval of a majority of the state's
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voters.<1> Local funding comes from a variety of sources
including local parcel taxes, GO bonds, Mello-Roos bonds and
developer fees. School districts in California had
traditionally financed their operations through local property
taxes. However, Proposition 13 (1978) limited the property
tax rate to 1% of the full cash value of the property, which
resulted in cuts across districts and curtailed districts'
ability to raise revenues. Parcel taxes, as a special
district tax, can generally be used by school districts for
any purpose; but those taxes require two-thirds voter
approval. Prior to 2001, the California Constitution required
that local GO bonds for schools and community colleges also be
approved by a two-thirds vote of the local electorate. With
the passage of Proposition 39 in 2000, a local education bond
may now be approved by 55% of the local electorate.<2> This
lower voter threshold has contributed to increased passage
rates for local school bond measures. According to the
California Debt and Investment Advisory Commission (CDIAC),
state and local government entities have issued more than $1.5
trillion in debt over the last 30 years. In particular,
schools issue more new debt than any other local governments,
with K-14 school and community college districts issuing more
than $12.7 billion in debt for facilities and equipment in
just the last year alone.
In order for a community college or school district to issue
bonds, it must order an election and approve ballot measure
language. Subsequently, the county registrar must distribute
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<1> For example, Proposition 1D, officially the
Kindergarten-University Public Education Facilities Bond Act of
2006, was placed on the November 2006 ballot as a result of
Governor Schwarzenegger signing Assembly Bill 127 (Chapter 35,
Statutes of 2006) into law on May 20, 2006. Proposition 1D was
approved by 56.9% of the voters providing $10.416 billion in GO
bonds for educational facilities, of which $7.329 billion is
earmarked for kindergarten through twelfth-grade projects.
<2> California Constitution, Article XIII A, Section 1(b)(3).
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a sample ballot containing the text of the measure, a
projection of tax rates needed to repay the bond prepared by
the district, a legal analysis from the county counsel, and
arguments for and against the bond measure. If voters approve
the measure, then the district may pass a resolution to sell
the bonds.
4)Limitations on the Issuance of Local School Bonds . In
anticipation of the passage of Proposition 39, the Legislature
enacted the Strict Accountability in Local School Construction
Bonds Act of 2000 (Act) [AB 1908 (Lempert), Chapter 44,
Statutes of 2000]. This Act placed a number of restrictions
on the usage of the 55% approval option for local school
bonds, required school districts to appoint a local bond
citizens' oversight committee to oversee bond expenditures and
imposed limitations on bonded indebtedness and tax rates.
Specifically, existing law prohibits a community college or a
school district from issuing bonds where the total amount of
bonds exceeds 1.25% of the taxable property of the district,
as shown by the last equalized assessment of the county or
counties in which the district is located. The property
includes all unitary and operating non-unitary property of the
district.
Existing law also limits the tax rate levied to meet the
requirements of Section 18, Article XVI of the California
Constitution<3> in the case of indebtedness incurred by a
school district to $30 per $100,000 of taxable property within
the district. In the case of a unified school district or
community college district, the aggregate amount of bonds that
may be issued may not exceed 2.5% of the taxable property of
the district. In that case, the tax rate may not exceed $60
(or, for a community college district $25) per $100,000 of
assessed valuation for a school district.
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<3> In addition to its statutory limits, Article XVI, Section 18
of the California Constitution prohibits cities, counties, and
school districts from entering into indebtedness or liability
that in any year exceeds income and revenue for that year,
unless the two-thirds of voters approve the obligation.
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Local school bonds are limited to use for infrastructure and
technology projects and are secured by a promise to levy
property taxes necessary to pay the debt service due each
year. These property tax revenues are distinct from general
property tax collections and are dedicated solely for debt
service.
5)What is the Problem ? The caps on bonded indebtedness and tax
rates affect the amount of revenues that may be generated by a
district because both of the caps are based on the assessed
valuation of taxable properties in the district. As noted in
the analysis of this bill by the Assembly Committee on
Education, when the economy is good and property values are
high, a district is able to sell more bonds. Conversely, when
property values are depressed, the revenues that may be
generated by the bonds decrease. If the assessed valuation of
a district's properties does not meet the applicable
requirements (i.e., too low), bonds approved by voters in one
year may not be issued until years later. Smaller districts
and districts with lower assessed valuations are more likely
to reach the assessed valuation and bonded indebtedness caps
before larger school districts, or districts with higher
assessed valuations.
Although property values California state are finally back on
the rise, declines in assessed valuation during the recession
resulted in many school districts unable to sell bonds in
amounts for which they planned as the tax rate necessary to
meet debt service payments would have exceeded its limit. In
response, many districts issued capital appreciation bonds
(CABs) that defer payment of principal and interest for up to
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20 years<4>, thereby allowing districts to issue more debt
than with conventional bonds, but with significantly higher
interest costs shifted onto future taxpayers who may not have
had a say in the matter.
6)Proposed Solution . This bill proposes to increase the
statutory bonded indebtedness limits from 1.25% to 2% of
taxable property in the district for elementary and high
school districts and from 2.5% to 4% of taxable property in
the district for unified school districts and community
college districts.
7)Increasing Tools for Local Control: Governor's Suggestions .
Governor Brown has indicated his unwillingness to support a
state bond. The 2016-17 Budget Proposal states that a
proposed $9 billion school bond for the November 2016 ballot
makes no changes to the existing school facilities program and
adds an additional $500 million per year in debt service.<5>
Instead, the Administration suggested continuing a dialogue
with the Legislature and education stakeholders to shape a
future state program focused on districts with the greatest
need, while providing substantial new flexibility for
districts to raise the necessary resources for their
facilities' needs. In the 2015-16 Budget Proposal, Governor
Brown identified tools for increasing local control and
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<4> Under a CAB, the district waits up to 20 years to assess the
tax, during which time deferred principal and interest compound,
increasing the ration of debt payments to principal. The
district hopes that assessed valuation will have rebounded
sufficiently to repay bondholders the higher amounts.
<5> Governor's Budget Summary - 2016-17, p. 10. The Summary
states that California needs a new school facilities program
that provides enhanced local flexibility and reflects the major
changes in demographics and lower local bond authorization
thresholds of recent years.
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generating funds locally.<6> In particular, the Governor
suggested increasing the caps on local bonded indebtedness
issued by school districts (with the 55% voter approval) at
minimum by the rate of inflation since 2000. According to the
Assembly Committee on Education, the adjustments proposed by
this bill are consistent with an inflation adjustment from
2000.
8)Increasing Debt Capacity . GO bonds have historically
provided issuers with the lowest borrowing costs because its
broad security pledge yields high bond ratings and wide
investor acceptance. Property taxes securing GO bonds are
levied on all non-exempt property in the school district's
jurisdiction even if the owner of the property does not
directly benefit from the project to be funded by the bond.
As discussed, unified and community college school districts
have a 2.5% bonding capacity, and elementary and high school
districts have a 1.25% bonding capacity, as a percentage of
assessed value of all taxable property. Debt capacity
signifies the amount of debt a local agency<7> can issue
without overextending its ability to pay and enables
government officials to effectively prioritize projects during
the capital planning and budgeting process, as well as
consciously plan for the future. Even though voters may have
chosen to issue a certain amount of indebtedness, a local
agency may not be able to issue bonds if its outstanding debt
is near or exceeds its statutory debt limit. Additionally,
since all local agencies can levy their own GO bonds, each can
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<6> Governor's Budget Summary - 2015-16, p. 23.
<7> General law cities have a 3.75% bonding capacity and
counties generally have a 1.25% bonding capacity, except that
water conservation, flood control, and select county roads
projects have a 3.75% bonding capacity. Charter cities can set
their own limits - for example, the City of San Jose's charter
provides for a 15% GO bond debt limit.
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be within their legal limit while still imposing a combined
increased burden on property owners.
Increasing the debt limit for schools may allow school districts
that are close to their bonding capacity to issue more bonds,
accelerate the issuance of bonds before their assessed
valuation decreases, and avoid other more expensive financing
to complete started projects. However, increasing the debt
limit may also lead to proponents of a capital project
increasing projected costs, de-prioritization of other
spending projects by voters, and affect the school district's
credit rating making other borrowing more difficult. In light
of these potential unintended consequences, the Committee may
wish to consider whether school districts should inform voters
of updated plans if the debt limit is to be increased, or
whether the debt limit should be increased based on regional
inflation instead of statewide inflation.
9)State Board of Education (SBE) Waivers . While existing law
limits the statutory bonded indebtedness to 1.25% and 2.5% for
school districts and community college districts,
respectively, it allows K-12 school districts to seek a waiver
from the SBE. If enacted, this bill would allow districts to
generate revenue up to the new limits for bonds approved by
voters without seeking a SBE waiver. Out of the 58 waiver
requests from 2000 to 2015, 55 requests were approved and
three requests were withdrawn. One entity - the West Contra
Costa Unified School District - made four waiver requests,
which were all approved, asking to exceed the threshold by
almost $1.5 million. According to the California Policy
Center, California law is inadequate in its current
requirements regarding bond indebtedness waivers for school
districts and there should be "serious deliberation about
whether school districts should even have the right to request
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and get waivers from state limits on debt and taxes."<8> The
Committee may wish to consider whether, in light of the 100%
waiver approval rating, this bill is necessary and whether the
SBE is better positioned to make case-by-case decisions
regarding the need to increase caps for local bonded
indebtedness. Alternatively, if the level of bonded
indebtedness is increased by statute on a statewide basis, as
proposed by this bill, the Committee may wish to consider
whether the SBE waiver authority should be limited or
repealed.
10)Limits on Bond Indebtedness in Other States . The majority
of states have constitutional or statutory limitations for
bond indebtedness. For example, the State of Washington has
statutory debt limits set below its constitutional debt limits
to what is currently perceived to be safe and reasonable.
School districts have a 0.375% limit on GO debt that is not
approved by voters and a general 5% limit on total GO debt.
The State of Illinois has a 6.9% debt limit for elementary and
high school districts and a 13.8% limit for unified districts.
The State of North Dakota limits school district debt to 10%.
However, California has a more laissez-faire approach to local
debt issuance than many other states. David Gamage, Professor
of Law at UC Berkeley, and Darien Shanske, Professor of Law at
UC Davis, write that policymakers should be concerned about
local debt issuance because smaller districts lack expertise
in municipal finance, tend to pay higher borrowing costs, and
are more susceptible to the related problem of pay-to-play
arrangements where bond underwriters seeking contracts with
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<8> California Policy Center, Debt and Tax Limits Always Waived
When School Districts Want to Borrow More Money, March 30, 2015.
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local agencies finance bond campaigns<9>. Gamage and Shanske
recommend liberalizing the ability of local governments to
issue debt as local taxpayers have the right incentives to
ensure good use of their tax dollars and that state-level
monitoring of local debt should be increased. For example,
the North Carolina Local Government Commission must approve
all local bond issues, and New York requires the State
Comptroller to approve any local bonds not sold in public
sales. The Committee may wish to consider whether CDIAC or
another state entity should have greater oversight of local
bonds.
11)Double Referral . This bill was double-referred to the
Assembly Committee on Education. This bill passed the
Assembly Committee on Education on a 5 - 2 vote on April 13,
2016. For additional discussion of this bill's provisions,
please refer to that committee's analysis.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file
Opposition
Howard Jarvis Association
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<9> David Gamage and Darien Shanske, "The Case for a State Level
Debt-Financing Authority." State Tax Notes. January 21, 2013.
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California Association of County Treasurers and Tax Collectors
Analysis Prepared by:Oksana Jaffe - Irene Ho / REV. & TAX. /
(916) 319-2098, Irene Ho / REV. & TAX. / (916) 319-2098