BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 114 |Hearing |4/22/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Liu |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |4/7/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- 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 SB 114 (Liu) 4/7/15 PageB of? 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, SB 114 (Liu) 4/7/15 PageC of? 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. SB 114 (Liu) 4/7/15 PageD of? 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 SB 114 (Liu) 4/7/15 PageE of? 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 SB 114 (Liu) 4/7/15 PageF of? 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 SB 114 (Liu) 4/7/15 PageG of? 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. SB 114 (Liu) 4/7/15 PageH of? 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 SB 114 (Liu) 4/7/15 PageI of? 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 --------------------------- <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. SB 114 (Liu) 4/7/15 PageJ of? 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: ---------------------------------------------------------------- |Debt Ratios Of 10 Most Populous States, Ranked By Ratio Of Debt | |To Personal Income | | | ---------------------------------------------------------------- |-----------------+------------+---------+---------+------------| | 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% | |-----------------+------------+---------+---------+------------| SB 114 (Liu) 4/7/15 PageK of? | | | | | | |-----------------+------------+---------+---------+------------| |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. | | | | | --------------------------------------------------------------- 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 SB 114 (Liu) 4/7/15 PageL of? (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 SB 114 (Liu) 4/7/15 PageM of? 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 SB 114 (Liu) 4/7/15 PageN of? 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. -- END --