Back to ramshackle schools

As the threat of COVID-19 fades, students and teachers will return to classrooms. In most cases, these places for learning will have been freshly cleaned… but that's it. Old buildings will remain old buildings. Schools facilities age, even when mothballed.

It has been a long time since California invested significantly in school facilities. California was on the cusp of doing something about it before the Pandemic. The legislature asked voters to approve a major statewide bond measure that would have matched local investment in school facilities. The California School and College Facilities Bond measure reached voters just as the dramatic quarantine of the Diamond Princess made America aware of a new threat with the strange name COVID-19. The ill-timed measure, assigned the unlucky number 13, failed.

Schools don't fix themselves. When public confidence confidence returns, it is likely that another state bond measure will be proposed. This post briefly explains how school construction and renovation is paid for in California.

Borrowing it Forward

As in most states, school communities in California rely on a combination of state taxes and local taxes to build and maintain schools. Construction takes time and money. California communities rely on future property taxes to pay back bonds that are sold to finance school construction and maintenance, often with some help from future state taxes.

Population in select US States since 1970. (Source: US Census). Where population has grown quickly, like California, so has the need for school construction.

Compared to most states, California's population has grown quickly, requiring a lot of new classrooms. California's schools have made heavy use of prefabricated "portables" which have displaced open spaces and playgrounds. With maintenance, schools can last a long time, but not all construction is of equal quality, and building codes change. Many of California's older schools have lingering problems with lead contamination, for example, which can be expensive to address. School ventilation systems are of uneven quality.

Periodically, schools need major renovation or outright replacement. School districts maintain their facilities through a combination of regular operating funds (the money that pays for everything from pencils to teacher salaries) and capital funds (the money usually raised from bonds).

School districts tend to spend less than they should on ongoing maintenance. Instead, they defer maintenance costs — kind of like letting the "oil change" light shine and hoping for the best. When it can't wait anymore, they borrow money. They pay it back over time. With interest, of course.

The role of state bonds for schools

Let's back up a little. First, a few big points to understand:

• Most of the burden of school construction and maintenance is borne locally. Local communities vote to authorize local property taxes so their school district can sell school bonds for a specific project or set of projects. Since the passage of Prop 39 in 2000, local school bonds can be passed by a 55% supermajority.
• Historically, the state has contributed to school facilities, too, by selling state school bonds repaid by state taxes. These state bonds usually are structured as matching funds for local school bonds — school districts qualify for the matching money only if local voters pass a local property tax to issue their own local bonds. State school bonds are put on the ballot by the legislature and require majority approval by voters.
• State bond funds have historically supported school construction in more-wealthy districts more than they have in less-wealthy districts.

State and local school bonds often combine support for K-12 facilities and support for college facilities into a single measure. In the rest of this post, all figures relate only to bonds (or the portion of them) for pre-K-12 projects.

How often have voters supported state school bonds?

California voters have passed many state bond measures for school construction and modernization; in the three decades up to 2020 twelve made it to the ballot. Ten passed, paying for facilities for both K-12 schools and higher education. Adjusted for inflation, over the last thirty years state bonds have delivered about $77 billion in funding for K-12 facilities.

Local school bonds

An even bigger portion of the cost of building and modernizing school facilities over the last three decades this period has been carried by school districts. Adjusted for inflation, school districts in California issued local bonds to borrow about $124 billion for local K-12 school facilities projects. Of course, more-wealthy communities tend to be better able to pay than less-wealthy ones. As discussed in Ed100 Lesson 5.1, where you live makes a big difference in California's education system.

What About Interest?

School facility bonds are loans. The size of a school bond (whether state or local) is usually expressed in terms of its principal — the amount of money that it will raise, hopefully soon. But the total long-term cost of a school bond also includes fees and interest.

In the case of a local school bond, the school district asks voters for the authority to issue debt (sell bonds) for school facility repairs and/or construction. If the voters say yes at the polls, the process moves forward. A tax based on the assessed value of property is levied according to the terms of the measure approved by the voters.

During the three decades examined above, average interest rates on local school bonds (NIC in the chart below) fell, which is a very good thing for school districts. Up-front fees (issuance costs) are part of the mix, too.

Who makes money from school facility bonds?

A school facility bond is a contract between the school district and its underwriters — the businesses, banks or investors that commit ahead of time to buy the bonds. A fairly small number of financial firms specialize in the business of underwriting bonds for school districts in California.

How much do the bankers and investors make on these bonds? It depends. If your school district is growing, has adequate reserves and a good credit rating, it can borrow more cheaply than if it has a history of fiscal mismanagement and declining enrollment. You can find details about your school district's credit rating and its current debts through the DebtWatch service on the site of the California State Treasurer.

Making school facilities more equitable

Public school facilities are mainly funded by local bond measures based on local property taxes, which reflect local wealth. Rich communities can afford to tax themselves to build and modernize nice local schools. Poorer communities, on the other hand, have a harder time putting together local money to build or renovate schools. In these school districts, shouldering the cost of school construction and renovation can be hard or even unthinkable.

One way to reduce the inequity in school facilities would be for state funds to play a bigger role. California's Local Control Funding Formula (LCFF) directs extra funding for the operation of schools toward schools where families are lower-income. The same has not been true of funds for school facilities.

In the past, state matching funds disproportionately benefited wealthier school districts, according to research undertaken for the Getting Down to Facts II project. Among other reasons, wealthier school districts tend to have their act together. They can get financial documents completed quickly and correctly. In the past, this was a decisive advantage, because funds were reviewed and granted in the order received.

California's legislature changed many laws to help level the playing field the next time voters approve a state bond for school facilities. For example, state matching fund requests will no longer be processed in the order received. Instead, the priority order will be determined using a point system. For example, projects that involve lead abatement will receive special priority.

The 2020 state bond measure failed at the ballot box, but it succeeded in setting important precedents for the next attempt. For example, it called for districts with a low capacity to issue their own bonds to receive higher priority for state matching funds. It directed state matching funds based on the proportion of students that qualify as high-need under the definition used by the Local Control Funding Formula. To access matching funds, school districts would be required to make public a five-year plan explaining how the funds are to be used, along with "an inventory of existing facilities, sites, and property" and "the school district’s deferred maintenance plan." This is a new level of transparency.

Be ballot-ready

The Pandemic thwarted state investment in school facilities in 2020, but it seems likely there will be a next time. In the past, state school bonds have been implemented as matching funds, which means that they are a limited, "while supplies last" opportunity. Savvy districts will have plans ready ahead of time not only for the construction aspect of the work, but also the public communication aspects. What construction and modernization work is needed in your district, and how will you build local support to tax for it?

More about Proposition 13 (2020).