School Bonds

How to Identify a “Good” Bond

December 15, 2016 By Ed Ring 2 Comments

Photo courtesy of kenteegardin, flickr

On November 8th, Californians approved Prop. 51, authorizing $9.0 billion in new borrowing for construction and upgrades of public schools. Also on November 8th, Californians approved 171 local bond measures, authorizing over $22 billion in additional financing for construction and upgrades of public schools.

This new borrowing is only to construct and upgrade K-12 and community college campuses. Total K-12 enrollment in California has been stable at around 6.3 million students for over a decade. Community college enrollment in California is about 2.1 million students. This means that this latest round of borrowing equates to $3,735 per student. And similar sums are thrown at California’s K-12 schools and community colleges for construction and upgrades every two years. What gives?

One of the most obvious problems with voter approved bonds in California is the preference given school bonds. Proposition 39, passed in Nov. 2000, reduced the supermajority needed to pass a bond issue ballot question from 66% to 55%. Meanwhile, all other public construction bonds still need the 66% supermajority. Inevitably, this law has resulted in abundant money flowing into school construction, while neglecting roads and other public infrastructure.

We asked State Senator John Moorlach, the only licensed CPC to hold office in California’s state legislature, and one of the most financially savvy individuals in Sacramento, to comment on what might constitute a “good” bond. Here is his checklist:

(1) Plan: A detailed plan that itemizes what projects will be funded with the bond proceeds is essential. How will bonds be issued and proceeds spent? Most bond measures fall short of providing itemized budgets that clearly explain the use of funds, which magnifies the opportunities for wasteful spending.

(2) Oversight: How will the implementation of the projects funded by a bond be monitored. Who will sit on the oversight board and how will people with conflicts of interest be screened out. What authority will the citizen board have if they uncover misuse of funds? Will they be able to stop work on a project?

(3) Terms: The devil is in the details. A fairly written bond contract will have a ratio of total principal and interest payments to principal of between two-to-one and three-to-one. But bonds still slip through, avoiding informed scrutiny by a financial expert, that can have ratios of total payments to principal amount as high as ten-to-one. Costs of issuance are another area where abuse occurs. A fairly written bond contract will award the underwriters between one and two percent. A small bond, say, under $10 million, may command a fee of around three percent. More than that is unfair to taxpayers.

(4) Reserves: How much cash will be set aside so that district won’t return with more requests for money? Many school districts have new bond measures on the ballot every two years. But the payments on these each of these bonds, not subject to any Prop. 13 restrictions, increase property tax assessments for thirty years or more. With school enrollment in California stable for over ten years, where is this money going?

(5) Maintenance: It is common to see the term “deferred maintenance” listed as one the uses of proceeds for a proposed bond. When new construction is financed with a bond, how much cash will be set aside to maintain these facilities? Equally pertinent, why can’t this maintenance be funded out of operating budgets?

(6) Promotional Funding: Is the campaign supporting a bond paid for by the people who’ll benefit from the bond? There is a clear conflict of interests when the most active participants in the paid political debate over whether or not voters should support a new bond proposal are the underwriters who will collect fees, the construction firms who will do the work, and the teachers unions who will always favor more facilities on their campuses.

(7) Project Labor Agreements: If the bond doesn’t explicitly prohibit cost-boosting Project Labor Agreements, then it is likely they will be incorporated. By excluding non-union shops from the bidding process, project costs are inflated by between 10% and 40%, all of which is borned by taxpayers.

A California Policy Center study released in 2015, “For the Kids” – Comprehensive Review of California School Bonds,” estimated that between 2000 and 2014, California’s voters approved, on average, $10 billion per year on new school bonds. Since then, through November 8th, voters have approved at least another $40 billion of new school bonds. Not including the interest on bonds still outstanding that were issued before 2000, the interest and principal payments on this $180 billion in school bond borrowing costs taxpayers at least $11.7 billion per year.

Adopting these seven criteria to evaluate bonds will go a long way towards ensuring that bond debt is approved by informed voters, and that the proceeds serve the people, especially the students, instead of special interests.

Ed Ring is the vice president of research policy for the California Policy Center.

Filed Under: Top Stories Tagged With: California Policy Center, Ed Ring, John Moorlach, School Bonds

Pay Attention, Taxpayers – Local Officials Are After Your Wallets

August 3, 2016 By Jon Coupal 1 Comment

If public attention is being drawn to national politics and the presidential race, there is a group of local officials who are thrilled. They have plans for the contents of taxpayers’ wallets and they would prefer to fly under the radar. The less voters pay attention, the greater the chance they will be able to pass local school bonds, which raise property taxes. Voters need to be alert. If past general elections are any indication, we will be facing several hundred local school bonds and additional tax measures in November.

August 12 is the deadline for officials to approve local measures for the November ballot. Consultants — usually paid by firms that expect to do business with the school district once a new bond is approved — advise local education officials not to publicize the bond election to the entire community, but to target only their supporters. This means running a stealth campaign, communicating only with administrators, the local teachers union, the PTA, and parents who have children in school. Part of this strategy is waiting until the last possible minute to approve the new bond measure, giving potential opponents less time to organize and respond.

Once a bond measure is approved, critics may have no more than a week to submit an argument in opposition. And this timeline is critical because the number one tool for defeating a bond measure is the argument against that will appear in the ballot pamphlet.

It is somewhat ironic that school boards work so hard to keep voters in the dark when the vast majority of taxpayers are supportive of education and favor students having decent facilities in which to learn. However, ever since a handful of Silicon Valley billionaires got together in 2000 and spent almost $35 million on a successful campaign to pass Proposition 39, which lowered the longstanding requirement of a two-thirds vote to pass school bonds to just 55 percent, the goal of providing good value for taxpayers’ dollars has all but disappeared.

In spite of, and perhaps because of, efforts by the wealthy elite to stack the deck against local taxpayers, these bonds deserve to be carefully evaluated, and if they fall short, opposition is justified. Voters have a right to know that a bond will place a lien against homes for as long as 40 years to guarantee repayment that, once interest is calculated, will cost at least double its face value.

HJTA recommends determining in advance if your school or community college district is considering placing a bond on the ballot by calling school district administrative offices. They should be able to tell you the agenda for upcoming board meetings. Upcoming board agendas should also be posted on the district website.

If you learn that a bond will be considered, alert friends and neighbors to the fact that property taxes may be going up and encourage them to join you in attending the local board meetings at which the bond is discussed. Take advantage of the public comment portion of the meeting to express your concerns and objections.

If your school district decides to place a bond on the ballot, start by contacting the clerk of the school board to obtain the written rules covering requirements for submitting ballot arguments for publication in the voter information pamphlet that will be sent to all voters in the district. This argument should focus on the facts, including the total cost of the bond and the fact that it will raise property taxes for homeowners, and renters are likely to see increases in rents if the measure passes. It is certain that this is information that will go purposely unmentioned by bond promoters.

Once an argument has been submitted, taxpayers can begin work on getting the word out to voters in the community. These measures can be defeated and hard work pays off.

For more information on opposing local bond and tax measures, please visit the Howard Jarvis Taxpayers Association website.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

This piece was originally published by HJTA.org

Filed Under: Top Stories Tagged With: HJTA, Howard Jarvis, Jon Coupal, PTA, School Bonds, taxes, Taxpayers

Attorney General Reins In Shady Bond Practices

February 2, 2016 By Jon Coupal Leave a Comment

It’s not often that taxpayers get good news, especially in tax-happy California. Even more surprising is when the good news is an official opinion from the state’s Attorney General, someone not normally associated with friendly treatment to taxpayers.

Last November, this column noted that local governments, especially school districts, were prone to engage in questionable campaign activity to secure an unfair advantage in bond elections. Although it is illegal for officials to use public resources (including public funds) to urge a vote for or against a political issue, consultants frequently advise tax proponents to wage one-sided “informational” campaigns. This includes sending out material stating all the good things a bond or tax measure will do, but usually they stop just short of violating the law by telling people how to vote. (Howard Jarvis Taxpayers Association has had multiple successes in obtaining court injunctions against school districts that cross the line into advocacy, but by the time the court rules, the political damage has already been done.) And to top it all off, the “consultants” compensated with taxpayer dollars are frequently given financial incentives if they win.

Fortunately, the incestuous behavior of school districts with political consultants and bond salesmen received a long overdue slap down last week. The opinion, in response to several questions proffered by California’s Controller John Chiang, covers many activities taxpayers have been complaining about for years. As noted in the opinion, “Bond elections typically involve a range of pre-election activities, which can include: conducting opinion surveys to evaluate voters’ attitudes toward a bond issue; developing a financial plan; determining appropriate bond issuance size and tax rates; drafting documents needed to place a bond measure on the ballot; conducting a public-information program; training staff to inform the community about funding needs and bond financing; preparing a tax-rate statement for the voter pamphlet; providing information to the election campaign; conducting informational workshops; and preparing the ballot question itself.

“Although district staff may be able to provide some or all of these functions, it is common for districts to contract with private vendors to perform or support them [and a] practice has developed within the municipal financing industry whereby investment bankers, financial consultants, and bond attorneys (collectively referred to here as ‘municipal finance firms’ or ‘firms’) offer to contract with a school district to provide the pre-election services that the district seeks. Under such an arrangement, the firm agrees to provide the pre-election services at no, or reduced, charge to the district in exchange for the district’s promise to select the firm as its contractor to provide post-election bond services, if the bonds are approved by the voters.”

The Attorney General first concluded what should already be obvious: “A school or community college district violates California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign if the pre-election services may be fairly characterized as campaign activity.”

But the A.G. went on to conclude more specifically that “a school or community college district violates prohibitions against using public funds to advocate passage of a bond measure if the district enters into an agreement with a municipal finance firm under which the district obtains pre-election services (of any sort) in return for guaranteeing the firm an exclusive contract to provide bond-sale services if the election is successful, under circumstances where (a) the district enters into the agreement for the purpose (sole or partial) of inducing the firm to support the contemplated bond-election campaign or (b) the firm’s fee for the bond-sale services is inflated to account for the firm’s campaign contributions and the district fails to take reasonable steps to ensure the fee was not inflated.”

Admittedly, there’s a lot to unwrap here. But the upshot is that taxpayers should not be forced to finance a political campaign to raise taxes.

Obviously, there are times when the legitimate capital needs of a school district justify a request to voters to assume debt in the form of a school bond. But the process should be driven by actual educational needs, not the desire of consultants and the bond industry to make a fast buck.

Filed Under: Top Stories Tagged With: Attorney General, HJTA, John Chiang, Jon Coupal, School Bonds

Tough Education Reform, not More Borrowing and Spending, is What Students Need

August 6, 2015 By Ed Ring Leave a Comment

Last week the California Policy Center published a major new study that compiled, in exhaustive detail, both the amount that Californians have borrowed to finance public school construction and upgrades, as well as documented the abuses that have diminished the return on these substantial investments. Californians simply don’t realize how much borrowing is going on.

In 2001, voters passed Prop. 39, which lowered the threshold for passage of a school bond from 66 percent to 55 percent. Prior to the passage of Prop. 39, only 42 percent of school bond proposals would pass – since then, 88 percent of them pass. The scale of this borrowing is amazing: Since 2001, Californians have approved 911 local school bond measures totaling $110.4 billion. In addition to local bonds, voters approved three state measures which added another $38.8 billion.

If the proceeds of these bonds were being spent efficiently, on worthy projects, under repayment terms that were fair and appropriate, there would not be an issue. But they’re not. Thanks to costly project labor agreements, environmentalist lawsuits, and a shocking lack of public oversight, school construction projects – along with all public infrastructure projects – cost far more than they should.

When considering what projects might be considered worthy, at whatever cost, one of the biggest reasons cited for local bond proposals is to fund “deferred maintenance.” For examples of this, view the summary of the 2014 Local Elections provided by CalTax (scroll down to “Bond, School”), and read the “description” column. “Upgrade and repair,” “modernize and upgrade,” “fix leaky roofs,” “make safety repairs,” “repair outdated heating and ventilation systems,” etc., etc. But why can’t maintenance work come out of existing budgets? For that matter, why wasn’t the work done using funds from earlier rounds of local school bond proceeds, instead of deferred?

This is not a rhetorical question. California’s K-12 student population has been stable for nearly 20 years. At 6.2 million students, it has actually declined slightly. Meanwhile, over the past 14 years, $146 billion has been borrowed and spent to maintain and improve schools for these 6.2 million students.

That’s $10.4 billion in construction spending every year, which based on 30 students per classroom, equates to approximately $50,000 per classroom, per year. Could you maintain one classroom and that classroom’s share of common facilities if you had $50,000 to spend, year after year?

How much is enough? Since 2001, construction bond proceeds have poured $700,000 into every K-12 classroom in California. Why do the roofs still leak?

When it comes to the terms of this debt, the story gets even worse, because these bonds are complex financial instruments with ample room for “gotchas” that harm taxpayers. One of the worst examples of this are so-called “capital appreciation bonds,” which don’t require any payments for 10-20 years, then demand massive sums of principal and interest payments, long after the original promoters have retired, and often after the improvements and upgrades have worn out again.

It is relevant to discuss California’s $146 billion in school bond debt in the context of all California’s state and local debt. A few years ago the California Policy Center attempted tabulate it, including unfunded liabilities for pensions and retirement health care for state and local government employees. Those findings, using a 5.5 percent discount rate to estimate pension liabilities, and using our updated amount for school bonds, come in at $976 billion. That’s $76,250 of debt per household. Just interest payments on this debt, at 5 percent per year, come out to $3,812 per household per year.

The topic of school bond debt is vast and complicated, which is one reason why there is rarely meaningful public debate. The California Policy Center’s complete study on California’s school bond debt, including appendices, came in at 361 pages (view PDF), and took a team of researchers lead by policy analyst Kevin Dayton nearly a year to write. Here are key recommendations from that report:

Provide adequate and effective oversight and accountability for bond measures.
Enable voters to make a reasonably informed decision on bond measures.
Eliminate or mitigate conflicts of interest in contracting related to bond measures.
Reduce inappropriate, excessive or unnecessary spending of bond proceeds.
Improve understanding of bond measures through public education campaigns.

And here are a few additional recommendations:

Make construction bond proposals contingent on enforcing the Vergara ruling – making it possible to fire bad teachers, changing layoff and retention criteria from seniority to merit, and extending the time period required to acquire tenure.
Hold teachers accountable for the academic progress of their students, and prohibit construction bond proposals for any school districts in violation of the state’s teacher evaluation law, the Stull Act.
Reduce the number of administrators and support staff, increasing the proportion of public education employees who actually teach in classrooms. This will result in a proportionate reduction in support facilities, at the same time as it frees up budgeted funds to be used to perform deferred maintenance.

The reason Californians have borrowed $146 billion in recent years for school construction is because Californians believe there is nothing more important than educating children. That’s a noble sentiment. It’s why Prop. 39 passed back in 2001, carving out an exception to California’s two-thirds vote requirement for new taxes. And while the process of approving and spending all this money has been riddled with corruption and excess, it would be inaccurate to say all of this money was wasted. But all the money in the world will not improve California’s educational system, if great teachers and principals aren’t given the latitude and incentives to inspire their pupils, and if poor teachers and administrators are not terminated.

Californians should reform their system of K-12 education before borrowing another dime for construction. The return-of-investment is simply far better.

* * *

Ed Ring is the executive director of the California Policy Center.

Filed Under: Top Stories Tagged With: California Policy Center, Ed Ring, education, education reform, Prop. 39, School Bonds

CA’s $12.3 Billion in Proposed School Bonds: Borrowing vs. Reform

October 29, 2014 By Ed Ring 5 Comments

“As the result of California Courts refusing to uphold the language of the High Speed Rail bonds, the opponents of any bond proposal, at either the state or local level, need only point to High-Speed Rail to remind voters that promises in a voter approved bond proposal are meaningless and unenforceable.”

– Jon Coupal, October 26, 2014, HJTA California Commentary

If that isn’t plain enough – here’s a restatement: California’s politicians can ask voters to approve bonds, announcing the funds will be used for a specific purpose, then they can turn around and do anything they want with the money. And while there’s been a lot of coverage and debate over big statewide bond votes, the real money is in the countless local bond issues that collectively now encumber California’s taxpayers with well over $250 billion in debt.

Over the past few weeks we’ve tried to point out that local tax increases – 166 of them on the November 4th ballot at last count, tend to be calibrated to raise an amount of new tax revenue that, in too many cases, are suspiciously equal to the amount that pension contributions are going to be raised over the next few years. For three detailed examples of how local tax increases will roughly equal the impending increases to required pension contributions, read about Stanton, Palo Alto and Watsonville‘s local tax proposals. It is impossible to analyze them all.

As taxes increase, money remains fungible. More money, more options. They can say it’s for anything they want. And apparently, bonds are no better.

At last count, there are 118 local bond measures on the November ballot. And not including three school districts in Fresno County for which the researchers at CalTax are “awaiting more information,” these bonds, collectively, propose $12.4 billion in new debt for California taxpayers. All but six of these bond proposals (representing $112 million) are for schools. Refer to the list from CalTax to read a summary of what each of these bonds are for – “school improvements,” “replace leaky roofs,” “repair restrooms,” “repair gas/sewer lines,” “upgrade wiring,” “renovate classrooms,” “make repairs.”

To be fair, there are plenty of examples of new capital investment, “construct a new high school,” for example, but they represent a small fraction of the stated intents. On November 4th, Californians are being asked to borrow another $12.3 billion to shore up their public school system. They are being asked to pile another $12.3 billion onto over $250 billion of existing local government debt, along with additional hundreds of billions in unfunded retirement obligations for state and local government workers. They are being asked to borrow another $12.3 billion in order to do deferred maintenance. We are borrowing money to fix leaky roofs and repair restrooms and sewers. This is a scandal, because for the past 2-3 decades, California’s educational system has been ran for the benefit of unionized educators and unionized construction contractors who work in league with financial firms whose sales tactics and terms of lending would make sharks on Wall Street blush. These special interests have wasted taxpayers money and wasted the educations of millions of children. Their solution? Ask for more money.

Nobody should suggest that California’s public schools don’t require investment and upgrades. But before borrowing more money on the shoulders of taxpayers, why aren’t alternatives considered? Why aren’t educators clamoring for reforms that would cut back on the ratio of administrators to teachers? Why aren’t they admitting that project labor agreements raise the cost to taxpayers for all capital investments and upgrades, and doing something about it? If their primary motivation is the interests of students, why aren’t they supporting the Vergara ruling that, if enforced, will improve the quality of teachers in the classroom at no additional cost? Why aren’t they embracing charter schools, institutions whose survival is tied to their ability to produce superior educational outcomes for far less money? Why don’t they question more of these “upgrade” projects? Is it absolutely necessary to carpet every field in artificial turf, a solution that is not only expensive but causes far more injuries to student athletes? Is it necessary to spend tens of millions per school on solar power systems? Does every high school really need a new theater, or science lab? Or do they just need fewer administrators, and better teachers?

And to acknowledge the biggest, sickest elephant in the room – that massive, teetering colossus called CalSTRS, should teachers, who only spend 180 days per year actually teaching, really be entitled to pensions that equal 75% of their final salary after only 30 years, in exchange for salary withholding that barely exceeds what private employees pay into Social Security? Thanks to unreformed pensions, how many billions in school maintenance money ended up getting invested by CalSTRS in Mumbai, Shanghai, Jakarta, or other business-friendly regions?

How much money would be saved if all these tough reforms were enacted? More importantly, how much would we improve the ability of our public schools to educate the next generation of Californians? Would we still have to borrow another $12.3 billion?

Here’s an excerpt from an online post promoting one of California’s local school bond measures: “It will help student academic performance, along with ensuring our property values. If you believe that strong schools and strong communities go hand in hand, please vote…”

Unfortunately, such promises are meaningless and unenforceable. The debt is forever.