BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 114 |Hearing |4/22/15 |
| | |Date: | |
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|Author: |Liu |Tax Levy: |No |
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|Version: |4/7/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
|: | |
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EDUCATION FACILITIES: KINDERGARTEN THROUGH GRADE 12 PUBLIC
EDUCATION FACILITIES BOND ACT OF 2016
Proposes the Kindergarten-University Public Education Facilities
Bond Act of 2016, a $9 billion bond act for the November, 2016,
ballot.
Background and Existing Law
I. Bond Acts. 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. Bonds are usually either
revenue bonds, which repay investors out of revenue generated
from the project the agency buys with bond proceeds, or general
obligation bonds, which the public agency pays out of general
revenues and are guaranteed by its full faith and credit.
Section 1 of Article XVI of the California Constitution and the
state's General Obligation Bond Law guide the issuance of the
state's general obligation debt. The Constitution allows the
Legislature to place general obligation bonds on the ballot for
specific purposes with a two-thirds vote of the Assembly and
Senate. Voters also can place bonds on the ballot by
initiative, as they have for parks, water projects, high-speed
rail, and stem cell research, among others. Either way, general
obligation bonds must be ratified by majority vote of the
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state's electorate. Unlike local general obligation bonds, the
state's electorate doesn't automatically trigger an increased
tax to repay the bonds when they approve a state general
obligation bond. Article XVI of the California Constitution
commits the state to repay investors from general revenues above
all other claims, except payments to public education.
California voters approved $38.4 billion of general obligation
bonds between 1974 and 1999, but approximately $95 billion since
2000. Additionally, the Legislature enacted and voters approved
Proposition 1A, which authorized $7.5 billion in bonds for water
quality and supply infrastructure (AB 1471, Rendon, 2014).
Bond acts have standard provisions that authorize the Treasurer
to sell a specified amount of bonds, and generally include
several uniform provisions that:
Establish the state's obligation to repay them, and
pledge its full faith and credit to repayment,
Set forth issuance procedures, and link the bond act to
the state's General Obligation Bond Law,
Create a finance committee with specified membership,
chaired by the State Treasurer,
Charge the committee to determine whether it is
"necessary or desirable" to issue the bonds,
Add other mechanisms necessary for the Treasurer and the
Department of Finance to implement the bond act, including
allowing the board to re-quest a loan from the Pooled Money
Investment Board to advance funds for bond-funded programs
prior to the bond sale, among others.
In bond acts, the Legislature generally:
Sets forth categories of projects eligible for bond
funds, such as library construction or school facility
modernization,
Chooses an administrative agency to award the funds,
such as the State Librarian or the State Allocation Board,
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Details the criteria to guide the administrative
agency's funding in each category,
Enacts enforcement and audit provisions, and
Provide for an election to approve the bond act.
Should the voters approve the bond act, the Legislature then
appropriates funds to the chosen agencies to fund projects
consistent with the criteria, generally as part of the Budget
Act. The Department of Finance then surveys agencies to
determine need for bond funds based on a project's readiness,
and then asks the Treasurer to sell bonds in a specified amount.
After the bond sale, the Department of Finance determines which
bond acts and agencies receive bond proceeds.
The Legislature generally proposed, and voters enacted one bond
act every two years to finance school construction from
1982-1992. After voters rejected one in 1994, there have been
five school bond acts in the following total amounts:
The Public Education Facilities Bond Act, a $2.065
billion bond (AB 1168, Campbell, 1996),
The Leroy F. Greene School Facilities Construction Act
of 1998, a $9.2 billion bond (SB 50, Greene),
The Kindergarten-University Public Education Facilities
Bond Act of 2002, a $12.15 billion bond, (AB 16,
Hertzberg),
The Kindergarten-University Public Education Facilities
Bond Act of 2004, a $12.3 billion bond (AB 16, Hertzberg),
The Kindergarten-University Public Education Facilities
Bond Act of 2006, a $10.4 billion bond (AB 197, Nunez).
II. K-12 School Construction Finance. School construction in
California often uses the metaphor of the "three legged stool,"
where the state provides bond funds, local government pays with
special taxes, general obligation, Mello-Roos and other bond
proceeds, and the private sector would provide funds through
developer fees.
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The Legislature created the State Allocation Board (SAB) in 1947
to allocate state funds for school construction. The board
consists of:
Two members of the Senate appointed by the Senate Rules
Committee,
Two members of the Assembly appointed by the Speaker of
the Assembly
The Director of the Department of General Services,
The Director of Finance; and
The State Superintendent of Public Instruction.
SAB is responsible for determining the allocation of State
resources used for the construction, modernization and
maintenance of local public school facilities.
SAB is charged with the administration of the State School
Facility Program, and serves as the policy level body for the
programs administered by the Office of Public School
Construction (OPSC).
Constructing or modernizing a school building begins with the
school district, which determines the type and size of the
school building needed using criteria set forth from the
California Department of Education (CDE). Site selection,
approval and acquisition can take longer than a year, during
which time the school district should have passed a local bond
or secured alternative funding for its share of the project.
Without this funding, the school district cannot meet the 50
percent local funding requirement for new construction projects
or the 40 percent local funding requirement for modernization
projects. During this time, CDE reviews and approves the site
selection and construction plans.
Districts then submit an application to the OPSC. While OPSC
determines eligibility, the district can hire an architect to
develop plans and specifications for the school. Once the
architect completes the plans and specifications, the district
sends them to the Division of State Architects DSA for
processing, and districts must obtain DSA's written approval
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prior to signing the project's construction contract to obtain
state funding. The district then applies to OPSC, and must
include a verification of the local 50 or 40 percent share of
the project cost, stamped DSA plans, and approval of the site
and plans by the CDE. OPSC then presents the application to the
SAB for an unfunded approval, which if granted, SAB funds as the
Treasurer sells bonds, assuming bond authorization exists.
In addition to new construction and modernization funding, SAB
also operates the charter school facilities program, which
provides a charter school with funding to construct new
facilities or to rehabilitate existing district-owned facilities
for charter school use. To qualify for funding, a charter must
be deemed financially sound by the California School Finance
Authority and meet the eligibility criteria outlined in law.
Title to the project facilities may be held by the local school
district a local agency, or the charter school itself. A
charter, or school district filing on behalf of a charter under
this program, may receive a reservation of funding by submitting
a preliminary application prior to receiving the necessary
approvals from other State entities. Once those approvals are
received, the preliminary apportionment must be converted to a
final apportionment within four years, with a possible one-year
extension.
The local share of school construction facilities is made up for
with district funds, local bonds, and fees on new home
construction. Like most local agencies, school districts can
levy fees to fund infrastructure, but school district fees can
depend on the amount of state aid for new school construction.
SB 50 allowed school district governing boards that assess Level
I fees, currently $3.20 per square foot, but also allowed
districts to impose Level II fees under specified circumstances.
Additionally, when SAB is no longer approving apportionments
for new construction, districts that have been assessing Level
II fees can assess Level III fees, which are double the Level II
fees. However, the Legislature suspended Level III fees from
January 1, 2013 until January 1, 2015, but the suspension ends
unless the voters enact a new school facilities construction
bond on the November, 2014 ballot (SB 1016, Committee on Budget
and Fiscal Review, 2012).
III. Higher Education Facility Finance. Having historically
relied on General Obligation Bonds, capital funding for higher
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education has been provided since 2008 in the annual Budget Act
through lease revenue bonds, as the bond authority authorized
for higher education in the 2006 bond has long been exhausted.
The Legislature appropriates bond funds in the State Budget Act
in accordance with the segments' five-year capital facility
plans; however, these funds have met less than half of the
segments' capital needs. In April 2014, the University of
California (UC) identified four-year needs of $550 million per
year, the California State University (CSU) has identified a
need of $400-$500 million per year, and the California Community
Colleges (CCC) estimates a need of about $35 billion over the
next 10 years. The CCC Office of the Chancellor estimates that
$19.1 billion of local bond funds remain available, leaving over
$15.9 billion in unmet need, meaning approximately $3.2 billion
is needed from a state bond every two years.
Proposed Law
Senate Bill 114 enacts the Kindergarten-University Public
Education Facilities Bond Act of 2016, which places a bond of an
unspecified amount on the November, 2016, ballot. The Bond
funds K-12 Facilities, Community College Facilities, and
University Facilities in unspecified shares. The measure
incorporates standard provisions in general obligation bond law
either explicitly or by reference.
SB 114 requires a school district as a condition of
participating in the program to:
Comply with existing deferred maintenance provisions,
Certify that it has a long-range school facilities
master plan consistent with the regional sustainable
communities strategy plans established pursuant to
specified Government Code provisions, and
Conduct an inventory of existing facilities and submit
this information to the SAB for purposes of maintaining a
statewide school facilities inventory.
The measure directs the OPSC in consultation with the CDE to
recommend regulations to the SAB that provide school districts
with flexibility in designing instructional facilities. SAB
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must also allow a school district maximum flexibility in design,
new construction, and modernization of school facilities, but
require any successful applicant for grants to ensure that the
project incorporates high performance attributes.
The bill modifies the use of modernization funds to:
Authorize the use of a modernization apportionment for
seismic mitigation purposes including related design,
study, and testing costs.
Expand the definition of modernization to include
"replacement" as well as modification and authorizes the
use of the apportionment to demolish and construct on the
existing site if the total cost of providing a new
building, including land, would not protect the economic
interest of the state and school district.
Make a replacement project eligible for the same grant
amount as that authorized for a new construction project.
Additionally, the bill authorizes SAB to establish any
additional requirements deemed necessary to protect the economic
interests of the state and educational interests of children.
The measure also expands the allowable match for joint use
funding to include operational costs and, if the joint use
agreement specifies the partner will be responsible for 100
percent of the operational costs for the project for a term of
no less than 10 years, eliminates the requirement that the
partner contribute no less than 25 percent of project costs.
SB 114 requires CDE, DSA, OPSC, and the Department of Toxic
Substances Control (DTSC) to develop an interagency plan, by
July 1, 2016, to:
Streamline the school facility construction application,
review and audit processes to reduce time and improve
efficiency, and
Identify a single entity within the CDE as a
full-service agency to assist school districts in
navigating the school facilities construction process.
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The bill contains a statement of legislature's intent for SAB to
review and revise operative regulatory language before July 1,
2016, to reduce duplicative review, approval and audit
processes, and to assign priority for funding to school
districts that demonstrate participation in a community-based
effort to coordinate educational, developmental, family, health,
and other comprehensive services through public and private
partnerships and outlines the criteria that demonstrate such
participation.
The measure also makes technical and conforming changes,
including a severability clause.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author, "Funding for
the School Facilities Program is virtually gone and there is a
backlog in applications for state assistance. At the same time
there have been ongoing complaints about the current program's
complexity and design, as well as questions about whether the
program created in 1998 is aligned to the state's current policy
objectives. In addition, while the state's growing debt service
is of concern, it is unclear whether local districts have the
capacity to generate sufficient revenue at the local level to
meet their specific facility needs. The "winding down" of the
current program, and the Governor's call for change, present an
opportunity to rethink the administrative and programmatic
structure of the State Facilities Program, learn from its
strengths and weaknesses, and better align program design with
the state's policy objectives. SB 114 establishes the K-12
Public Education Facilities Bond Act of 2016 to provide the
issuance of an unspecified amount of general obligation (GO)
bonds for construction and modernization of education
facilities, to take effect if approved by voters in the November
8, 2016 statewide general election. This bill would authorize
an unspecified amount of bond for the purpose of exploring the
appropriate amount and revenue mechanisms necessary to fund
school facilities. Further dialogue should consider the
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following:
1. The context of the state's overall debt service and
infrastructure needs;
2. The amount of debt the state can/should be issuing for
the purpose of constructing and renewing public school
facilities versus other infrastructure needs; and
3. Local fiscal capacities and other revenue sources for
meeting school district facility needs.
SB 114 advances the dialogue envisioned by the Governor and
education stakeholders regarding various programmatic changes
and the future of the state School Facilities Program."
2. Work in progress . SB 114 neither contains specific
authorization amounts for the bond, nor allocations for each of
K-12, UC, CSU, and community colleges. As such, it's difficult
to assess the bill's impact on state debt. However, the
Governor may soon release a proposal to change the state's
school facilities program, and school bond proponents,
Californians for Quality Schools, has also filed an initiative
for a school bond. Advancing SB 114 as a work in progress
maintains the Senate's ability to enact a bond legislatively
that reflects its priorities.
3. Sixteen tons . Debt is an essential part of almost every
government, business, and personal balance sheet, as borrowers
seek funds from lenders in exchange for a future commitment to
repay them. However, evaluating the State's general obligation
debt is difficult; both the State Treasurer and the Legislative
Analyst's Office suggest there's no correct amount. Instead,
experts suggest that states should look at three criteria:
affordability, comparability, and optimality<1>:
California's debt is affordable. The State Treasurer estimates
that the state will spend $6.4 billion in 2014-15, and $6.8
billion in 2015-16. However, these costs reduce the funding
that is available for other priorities. Debt service is one of
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<1> Robert Wassmer and Ronald Fisher "Debt Burdens of California
State and Local Governments: Past, Present and Future." As
requested and supported by the California Debt and Investment
Advisory Commission. July 2011.
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the fastest growing state costs, expected to reach $8.6 billion
in 2017-18 assuming no new authorizations, according to the
Governor's Five-Year Infrastructure Plan. The Plan proposes no
new general obligation bonds, instead relying on more limited
lease-revenue bonds because of this increased debt burden.
California's comparability to other states is less favorable,
but improving. The State Treasurer's 2014 Debt Affordability
Report contains the following chart:
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|Debt Ratios Of 10 Most Populous States, Ranked By Ratio Of Debt |
|To Personal Income |
| |
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|-----------------+------------+---------+---------+------------|
| State | Moody's/ | Debt To |Debt Per |Debt As A % |
| | S&P/ |Personal |Capita(b)| |
| | Fitch(a) |Income(b)| | Of State |
| | | | | GDP(b)(c) |
|-----------------+------------+---------+---------+------------|
|Texas |Aaa/AAA/AAA | 1.5% | $614 | 1.2% |
| | | | | |
|-----------------+------------+---------+---------+------------|
|Michigan |Aa2/AA-/AA | 2.1% | $785 | 1.9% |
|-----------------+------------+---------+---------+------------|
|North Carolina |Aaa/AAA/AAA | 2.1% | $806 | 1.7% |
| | | | | |
|-----------------+------------+---------+---------+------------|
|Florida |Aa1/AAA/AAA | 2.5% | $1,088 | 2.5% |
|-----------------+------------+---------+---------+------------|
|Pennsylvania | Aa3/AA/AA | 2.6% | $1,172 | 2.5% |
|-----------------+------------+---------+---------+------------|
|Ohio |Aa1/AA+/AA+ | 2.7% | $1,087 | 2.5% |
| | | | | |
|-----------------+------------+---------+---------+------------|
|Georgia |Aaa/AAA/AAA | 2.9% | $1,064 | 2.5% |
|-----------------+------------+---------+---------+------------|
|California | Aa3/A/A | 5.3% | $2,465 | 4.7% |
|-----------------+------------+---------+---------+------------|
|Illinois | A3/A-/A- | 5.6% | $2,580 | 4.8% |
|-----------------+------------+---------+---------+------------|
|New York |Aa1/AA+/AA+ | 6.0% | $3,204 | 5.2% |
|-----------------+------------+---------+---------+------------|
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| | | | | |
|-----------------+------------+---------+---------+------------|
|Moody's Median | | 2.6% | $1,054 | 2.4% |
|All States | | | | |
|-----------------+------------+---------+---------+------------|
|Median For The | | 2.7% | $1,076 | 2.5% |
|10 Most Populous | | | | |
|States | | | | |
|-----------------+------------+---------+---------+------------|
| | | | | |
|(a) Moody's, | | | | |
|Standard & | | | | |
|Poor's, and | | | | |
|Fitch Ratings as | | | | |
|of August 2014 | | | | |
| | | | | |
|(b) Figures as | | | | |
|reported by | | | | |
|Moody's in its | | | | |
|2013 State Debt | | | | |
|Medians Report | | | | |
|released May | | | | |
|2014. As of | | | | |
|calendar year | | | | |
|end 2012. | | | | |
| | | | | |
| State GDP | | | | |
|numbers have a | | | | |
|one-year lag. | | | | |
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Determining optimality or whether government is investing in the
quantity and quality of public capital desired by residents, and
financing the appropriate share with debt, is very difficult.
LAO recommends that the Legislature consider the recently
released Five-Year Infrastructure Plan as a starting point to
developing a coordinated approach to infrastructure funding, and
establish a committee to focus on statewide infrastructure.
4. Need . The Senate Committee on Education notes: "According
to the Office of Public School Construction (OPSC), as of
February 2015, approximately $200.7 million remained in bond
authority in the SFP. The majority of this bond authority
exists for the Seismic Mitigation and Charter School programs
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(about $171 million). Bond authority for new construction and
modernizations programs has essentially been depleted,
respectively, since July 2012 and May 2012.
Since 2009, the SAB has been making "unfunded approvals" which
represented approved projects waiting to convert to funding
apportionments when bonds are sold and cash becomes available.
In addition, since November 1, 2012, the State Allocation Board
(SAB) has maintained an "Applications Received Beyond Bond
Authority" list. This list is presented to SAB for
acknowledgement, but not approval. Because the applications are
not fully processed for final grant determination, the project
funding amounts on the list are only estimates. As of January
2015, the list indicated 116 new construction applications
totaling $571 million and 200 modernizations applications of
about $330 million."
5. The good news . Investors ultimately determine a state's
creditworthiness and the interest rate paid on a bond when they
bid to purchase one. However, ratings issued from the three
major ratings agencies often inform investors and the public
regarding the investment risk of purchasing a California general
obligation bond. These ratings change over time in response to
a state's fiscal situation and economy, among other factors.
Last year, ratings agencies Standard and Poor's and Moody's both
raised its ratings, and ratings agency Fitch has increased the
state's rating twice in the last three years. However, the
state still has the second lowest rating in the nation.
6. The bad news . California has a distinct problem: of the $135
billion that voters have authorized, almost $30.4 billion hasn't
been issued yet. The state hasn't issued almost $4.5 billion in
transportation bonds, and $9 billion in high speed rail bonds,
because the projects haven't yet received the needed approvals,
in addition to $7.5 billion from the recent water bond. Should
the voters approve new general obligation debt for school,
community college, and university construction, the state would
either have to sell sufficient debt to fund everything, and
increase debt service costs accordingly, or choose which of
these projects should be funded first. The Treasurer generally
sells about $1 billion in new money bonds twice per year, so
even if the Legislature enacts and the voters approve a school
bond, schools may wait several years for bond funds. However,
school bonds are generally spent in steady amounts over a long
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period of time as projects get the necessary approvals, so SB
114's debt impacts could be less acute than other kinds of
bonds.
7. Local bonds . Former Treasurer Bill Lockyer wrote in his
April 28th, 2014, weekly update that some $30 billion of K-12
bonds approved by local voters that school districts have yet to
sell, questioning the need for a State bond measure. The update
notes that were provided to the Board in January, 2014, placed
the total statewide construction/modernization need through 2021
at $21.03 billion. That's about $9 billion less than the amount
of unused local bonds. Proponents respond by stating that many
districts have seen assessed value declines prevent districts
that prevent them from selling bonds up to currently authorized
amounts given tax limits. Proponents also add that the $30
billion is not evenly distributed: many districts don't have
the political will or tax base to approve a local bond,
necessitating state action.
8. Upstairs, downstairs . The Senate Committee on Education
also notes: "Amid concerns about the complexity and structure of
the current program and the state's increasing debt service
obligations, the Governor has proposed significant changes to
the way school facilities are funded. In order to allow
districts to better meet their facilities needs at the local
level, the Governor's 2015-16 budget proposes to:
Expand revenue generation tools at the local level by
expanding local funding capacity and increasing caps on
local bond indebtedness;
Restructure developer fees to set one level for all
projects at a level between existing Level II and Level III
fees subject to local negotiation; and
Expand allowable uses of Routine Restricted Maintenance
Funding to authorize the pooling of these funds over
multiple years for modernization and new construction
projects.
The Governor has also noted that he is prepared to engage with
the Legislature and education stakeholders to shape a future
state program that is focused on districts with the greatest
need, including communities with low property values and few
borrowing options, as well as overcrowded schools."
Support and
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Opposition (4/17/15)
Support : American Federation of State, County, and Municipal
Employees; California Association of School Business Officials,
Riverside County Superintendent of Schools.
Opposition : Unknown.
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