B.1.3.1 Local General Obligation Bonds
GO bonds have become the primary financing tool used by California school districts to construct or improve school facilities. Local school GO bonds are backed by an obligation to levy ad valorem property taxes in an unlimited amount as needed to pay debt service.187 The agency issuing a GO bond is authorized to levy (via the county treasurer) ad valorem property taxes at the rate necessary to repay the principal and interest of the bonds. The unlimited tax obligation backing of local school GO bonds establishes a fundamental relationship between AV and the tax rates such that increasing AVs generally lead to stable or declining property tax rates and falling AVs lead to higher or increasing tax rates. School districts in California may issue GO bonds under two different statutory schemes, Proposition 46 (1986) and Proposition 39 (2000). See Section 3.3.1 Local Agency General Obligation Bonds.
PROPOSITION 46. In 1986, voters approved Proposition 46, which amended the provisions of Proposition 13 in the California Constitution to restore the authority for cities, counties, school districts and certain other special districts to issue GO bonds with two-thirds voter approval.188 Under Proposition 46 public agencies with taxing authority can exceed the 1% property tax to finance GO bonds if two-thirds of voters approve the measure. The proceeds from bonds authorized under Proposition 46 can be used for “the acquisition or improvement of real property,” which generally has been accepted to mean the acquisition of land, the construction or acquisition of school buildings and facilities, the expansion, restoration, remodeling or improvement of school facilities, and the permanent improvement of school grounds.189 While the Education Code appears to allow a wider scope of project costs that include furniture, equipment, and buses, Proposition 46 prohibits the use of bond proceeds to acquire vehicles, furnishings, or equipment (unless the equipment is affixed to real property and treated as real property for legal purposes).190
While Proposition 46 enabled public agencies to secure additional ad valorem property taxes with voter approval, it did not remove the limit on the total amount of outstanding city, county, or school district debt. This debt limit is based on the AV of the property within the boundaries of the public agency. The GO debt limit for unified school districts and community college districts may not exceed 2.5% of AV and for elementary and high school districts it may not exceed 1.25% of AV.191 Figure B-1 summarizes California statutory debt limits.
Figure B-1
ISSUER TYPE | BONDING CAPACITY (AS PERCENTAGE OF ASSESSED VALUE OF ALL TAXABLE PROPERTY) |
General Law Cities | 3.75% |
Counties | 1.25% |
3.75% for water conservation and flood control projects and the construction of select county roads | |
Unified School Districts, Community College Districts | 2.5% |
Elementary School Districts, High School Districts | 1.25% |
PROPOSITION 39. In November 2000, voters in California approved Proposition 39, the Smaller Classes, Safer Schools and Financial Accountability Act, amending Article XIII, Section 1 and Article XVI, Section 18 of the California Constitution to provide school districts the authority to issue a GO bond with only 55% voter approval. Proceeds from Proposition 39 bonds can be used for “the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition or lease of real property for school facilities” by K–12 school districts and community college districts. In contrast to Proposition 46, bond proceeds authorized under Proposition 39 can be spent on furniture and equipment.192 Pursuant to Proposition 39 companion statutes, Education Code Sections 15268 through 15270, the principal issued under any single bond authorization cannot cause the total debt service for all bonds issued under the authorized bond program to exceed a property tax rate of $30 per $100,000 of AV within an elementary and high school district, $60 per $100,000 of AV within a unified school district, or $25 per $100,000 of AV within a community college district (i.e., 0.03%, 0.06%, or 0.025%, respectively). In addition, under Proposition 39 a district must comply with accountability requirements that include a citizen’s bond oversight committee, annual performance audits, and financial audits on the use of bond proceeds.
The bond measure on which taxpayers cast their ballots sets forth the principal amount of the bonds to be issued and the estimated maximum tax rate at which properties within the district will be taxed. If the bond measure receives the required amount of voter support in the district, it passes; providing the district the authority to issue bonds up to the amount authorized. The vast majority of the California school and community college bond issuance authority is granted by voters through elections under Proposition 39 and, as a result, districts are pledging to issue only the debt that can be serviced within their tax rate limitations.193 Under Proposition 39, simply having the bond authority is not enough justification for a school district to issue the bonds. Districts must establish that they will generate the tax revenues, given the limits, required to service the debt as long as it is outstanding.
At a glance, the unlimited tax obligation at the core of school district GO bonds appears to be in direct conflict with the tax rate limitations imposed by Proposition 39. In reality, there is no conflict. The Proposition 39 tax rate limit applies at the time bonds are sold, based on AV within the district at the time of issuance and a projection of AV growth in the future.194 Once the bonds are issued, however, the unlimited tax pledge means the tax rate will be adjusted regardless of the applicable tax rule limitations based on annual debt service payments and AVs.
The dynamics imposed by Proposition 39 and the unlimited tax obligation pledge are key to understanding the relationship between AV growth and a district’s ability to issue the bonds that voters approve. When a district issues bonds for the first time under a new authorization, it securitizes the tax revenues generated by the chosen tax rate applied against the entire AV (as long as the tax rate applied at issuance does not exceed Proposition 39 limits).
Citizen’s Oversight Committee – After successful passage of a bond initiative under Proposition 39, the school district will be required to establish a citizens’ oversight committee as directed by Education Code Section 15278. The committee is to be established within 60 days of entering the election results in the district’s board minutes. The purpose of the citizen’s oversight committee is to inform the public about the expenditures of bond proceeds and bring some transparency to the bond administration process. The committee is not granted any power to determine how bond funds may be spent but is to ensure that the bonds are spent as stated in the bond measure. To fulfill their purpose, committee members may review the annual, independent financial and performance audits required by Proposition 39, physically inspect school facilities and grounds, review the district’s deferred maintenance plans, and review the district’s cost-saving efforts for design and use of the facilities.195 Pursuant to statute, the district will provide the necessary support for the committee to perform its duties and to publicize its conclusions.
The composition of a citizen’s oversight committee is also guided by statute.196 Committees must have a minimum of seven members, five of which are to represent specific community groups. For example, one member must be active in a bona fide taxpayers’ organization. Committee members serve a 2-year term and cannot serve more than three consecutive terms. Members cannot be district employees or a vendor, contractor, or consultant of the district. There is no limit to the maximum size of the committee. Members are not compensated for their time.