Parcel Taxes and Bonds Demystified

by Denise Jennison | July 10, 2017 | 0 Comments
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Local Funding for California Schools: Parcel Taxes and Bonds

The State of California continues to struggle to fund education adequately, but there are ways for school districts to take matters into their own hands. Setting aside bake sales, there are basically two options for districts to raise funds locally: Parcel Taxes and Bonds.

Why Do We Need Local Options?

Prior to 1978, local schools were funded locally. If a school district needed more money to run schools, the local school board had the authority to raise the property tax rate. If local voters didn't like it, they had the authority to vote their school board members out of office. Not surprisingly, the notion that the quality of a public education could basically be decided by the wealth and will of voters in your zip code was very unequal. This system created large disparities in school district expenditures per pupil.

In the landmark case Serrano v. Priest, the California Supreme Court ruled that the existing system of funding schools was unconstitutional. Property tax rates and per pupil expenditures had to be equalized through a system of "revenue limits". (You can dig deeper into school funding formulas in other Ed100 articles. For the purposes of understanding parcel taxes and bonds, what you need to know is that as a result of Serrano v. Priest, the State of California began assuming control of the flow of dollars to local schools. )

In 1978, California voters continued that trend by passing Proposition 13. Today, school boards cannot levy property taxes. They can, however, ask voters to support local funding for schools through parcel taxes and bond measures.

Voters can support local funding for schools through parcel taxes and bond measures.

(It is worth mentioning that in addition to bonds and parcel taxes, there are 2 other ways to generate revenue: Mello-Roos taxes and sales taxes, but these are less widely used. As a matter of fact, only one district in California, San Francisco Unified, has passed a sales tax increase to benefit schools.)

What is a School Bond?

A local school bond measure generates funds for repair, construction or replacement of school facilities. In a bond election, voters decide whether to authorize a school district to issue bonds in a specified amount. Investors who buy the bonds are paid back, with interest, by an increase in property taxes.

Prior to 2001, communities could pass a local bond measure only with a 2/3 supermajority of votes. Few districts were able to meet this threshold, so few bond measures passed. Meanwhile, schools in California were falling into a dismal state of disrepair due to lack of funds. In November 2000, voters approved Proposition 39. Prop 39 stipulated requirements, that if met by districts, would reduce the threshold to pass a bond measure from the previous 2/3 supermajority to a 55% supermajority. Prop 39 bond measures require:

  • Annual financial and performance audits
  • That no proceeds be used for salaries or operating expenses
  • That districts make “reasonably equivalent” facilities available to public charter schools upon request
  • Citizens’ oversight committees
  • The bond proposal be placed on the ballot of a statewide primary or general election, a regularly scheduled local election or a statewide special election
  • The tax rates levied do not exceed prescribed maximums

What is a Parcel Tax?

Districts can tax the owners of property within a school district through the use of a parcel tax. A parcel tax is a "non-ad valorem tax", which means it is not based on the value of the property. The tax is most often assessed as a flat fee on each parcel, but it can also be assessed on a per square footage basis. Parcel taxes are used for general district operating expenses as a way to supplement insufficient state funding for programs that are important to a community. Parcel taxes require 2/3 voter approval to pass.

The school board authorizes the district to place the measure on the local ballot. The language in the ballot measure specifies how the proceeds will be used and the duration of the tax. Most parcel taxes are levied for a finite period of time - typically 3-7 years, after which they automatically expire, or "sunset." Some districts have been successful in passing parcel taxes that do not sunset.

Citizen oversight is not a legal stipulation for passing a parcel tax, however many districts include the creation of an oversight committee in the ballot language. This assures taxpayers that the money raised will be spent in accordance with the voter-approved language. With or without citizen oversight, school district Chief Business Officials are required to give a public update to the school board each year on the amount of funds generated by the tax and how the funds are being spent.

What is the Difference Between a Parcel Tax and a Bond?

Both parcel taxes and bonds generate revenue that is controlled by locally elected school boards in accordance with voter-approved ballot language. The State has no control over how the money is spent. Revenue from each tax is used for specific purposes that are very different.

The amount of tax that property owners pay for a bond depends on the current assessed value of the property. The amount of tax that property owners pay for a parcel tax usually depends on the number of parcels they own.

The easiest way to remember the difference between the two is that Parcel taxes are for Programs and People. Bonds are for Buildings.

Parcel taxes are for Programs and People.
Bonds are for Buildings.

Prop 39 Bond

Non-Prop 39 Bond

Parcel Tax

Threshold to Pass

55%

2/3

2/3

Tax Basis

Based on
Property Value

Based on
Property Value

Uniform

Must Be Held
During General Election?

Yes

No

No

Citizen Oversight
Required?

Yes

No

No

Permissible Use

Facilities

Facilities

Programs

Is There a Downside to parcel taxes?

Opponents of local funding measures like parcel taxes and bonds make several arguments against them.

Parcel taxes are, by nature, "regressive." This means that when the tax is applied uniformly, regardless of the size of the property, it tends to disproportionately impact taxpayers that are less able to pay.

As a possible solution, some districts have assessed the tax on a per square footage basis to create greater equity. Per square footage assessment is controversial because large property owners don’t like it and therefore might oppose it. Moreover, per square footage assessment can be confusing to voters. Both are reasons that could cause the tax to fail.

Some districts tried to propose a tax rate that was different for residential and non-residential parcels. Those proposals were overturned in court in the George J. Borikas v. Alameda Unified School District case. In this highly publicized case, the court ruled that the legislation that allows school districts to levy parcel taxes provides that the taxes must apply “uniformly to all taxpayers or all real property”. So, for now at least, different tax rates for different classes of properties is not allowed.

Other arguments against parcel taxes call for increased transparency about the specifics of the tax. School districts do not control how items appear on the tax bill, but they can keep their websites up to date and make this information easily accessible to anyone who seeks it out. Things like how to qualify for exemptions, if available, and when the measure expires could be listed prominently. Exempting small parcels and greater government oversight are other ways that have been proposed to improve the tax.

Is there a downside to bond measures?

Opponents of bond measures sometimes contend that the average voter may not understand that issuing bonds incurs indebtedness. Indeed they do incur debt. Bonds are repaid through property taxes. That’s not so hard to understand.

Where it gets more complicated is in the controversial “pay to play” practices sometimes associated with bond sales. A construction firm, for instance, may make a donation to a campaign to pass a bond because that firm would like to bid on and may ultimately receive work in the district if the bond passes. The same can be applied to bond underwriters who donate to campaigns with the possibility of becoming the underwriter for the sale of the bonds.

An argument in opposition that applies to both bonds and parcel taxes has to do with the use of public funds. The public funds argument boils down to this: School district monies are public funds. California law prohibits the use of public funds or resources for partisan campaigning.  However, and this is where it gets wonky, there are ways that districts can legally participate in informing their community. Polls and other research and analysis can be paid for out of district monies as long as the information is used to impartially inform voters of the facts in order to help them make an informed decision when it is time to vote.

Opponents argue that, though this practice is legal, it is questionable. The information gathered to provide impartial information can also be used by districts to inform the campaign of voter preferences and tolerances that will ultimately determine the specifics of the measure.

Is there an alternative?

Not really. Proposition 13 does not allow taxes to be levied based on the value of a property. Done well, bonds and parcel taxes can be a successful, community-supported tool in a box that has no other tools available.

To Try or Not to Try

So now that you know what you know -- good and bad -- the question remains about whether to try to pass a measure in your community. Keep this in mind as you decide: despite the possible downsides, communities throughout the state place local funding measures on ballots every year. Nobody likes taxes, but paying taxes to support kids and schools is an act of love and commitment. School programs are vital to kids, families, and thriving communities.

As long as parcel taxes and bonds remain the only two realistic options for school districts to generate additional money for schools, school districts must remain mindful of the arguments against and do what they can to build and maintain voter confidence.

In a future post, we will address how to pass a local funding measure. Whether it is a parcel tax or a bond measure, community engagement and approval is key to success. Until then, check out specifics on the most recent passage of local funding measures.

Denise Jennison joined the Ed100 team in 2017 to help readers understand California's school system with particular focus on school boards. Denise has been a member of the school board in the San Ramon Valley Unified School District since 2010. She has served as both the president and treasurer of the Contra Costa County School Boards Association as well as serving four years on the California State PTA Board of Managers. The daughter of two public school educators, Denise attended California public schools from elementary school through the University of California. All four of Denise’s sons attended and graduated from San Ramon Valley Unified School District schools. A credentialed teacher, Denise lives in Danville with her husband, dogs and occasional returning sons.

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