Hitting the wall
School construction and modernization funds are hard to get—but not impossible
By:
Scott LaFee
Spring 2012
For decades, school construction and modernization in California has been a matter of basic necessity. A burgeoning population demanded the constant building and expansion of campuses.
Proof was in the numbers: Enrollment in California’s public schools, kindergarten through high school, exceeds 6.2 million. That’s 1.5 million more than Texas, 3.5 million more than either New York or Florida. It’s equivalent to the entire population of Tennessee, the nation’s 14th largest state, or the entire country of El Salvador.
California students attend almost 1,000 school districts from San Ysidro to Crescent City, ranging in size from almost 700,000 students to fewer than 20, spending their days on nearly 10,000 individual campuses—more than $80 billion in facilities.
By and large, the state’s voters have willingly paid for the construction needed to match past, present and projected enrollment growth. Between 1996 and 2006, for example, they approved almost $100 billion in school construction bonds at the state and local level. Even in recent, tougher times, from January 2008 to December 2010, local voters OK’d 179 of 221 general obligation bonds, an 81 percent passage rate.
But the Great Recession may finally be exerting its full effect. In this case, past is not prologue, at least not for the foreseeable future. To fully understand why—and what districts and school boards can do—requires a little history and context.
After more than a decade of general success in passing bonds, the state hit a wall in 2010 when a proposal to put a $6.1 billion construction and modernization bond on the ballot failed. Three-quarters of the funds would have gone to K-12 schools. State legislators balked for several reasons: They didn’t want to add to the state’s debt service obligations in a time of severe deficits. Funding for a statewide bond campaign—estimated to be as much as $9 million—was in doubt. And while early polling suggested a majority of voters would support a bond, the numbers weren’t deemed large enough to guarantee passage.
In the same year, voters passed 61 local bonds with a total value of $5 billion, but they also rejected 22 other bonds totaling $576 million. That’s a 75 percent approval rate—still good, and a testament to Californians’ commitment to growing the state’s education system—but it was still a significant decline from earlier levels.
More worrisome, though, is what lies ahead. The state’s school-age population continues to grow, albeit not as fast as in the past and more unevenly (many districts are experiencing decline while others grow), but the prospects for funding new school construction and modernization appear more clouded and confounding than ever.
“In the past, there’s been a pretty sizeable bond—$7 [billion] to $11 billion—passed by voters every couple of years,” says Jeffrey M. Vincent, deputy director of the Center for Cities and Schools, a policy research institute at the University of California, Berkeley.
“The question going forward is whether we still have that kind of appetite. Investing in schools is an ongoing affair. You have to keep it up, just like owning a car. The state views construction funding as a shared responsibility with local districts, but because the process is essentially bond-driven, the state’s responsibility really only exists when there’s the political will to push through a bond. It remains to be seen if there will be a new bond any time soon.”
There is talk in Sacramento of putting a new statewide school construction measure on the November 2012 ballot, but no guarantees at the moment it will happen—for many of the same reasons that killed the proposed 2010 bond. Meanwhile, available monies from previously approved bonds are disappearing as the State Allocation Board, a group of government officials and appointees, continues to dispense funds to qualifying districts and projects. Indeed, the SAB has made efforts to accelerate its funding process.
At this writing, just $240 million remains of the $6.7 billion approved by voters in 1998’s Proposition 1A. For Proposition 47, passed in 2002, there’s $795 million left from the original $11.4 billion bond. For Proposition 55, it’s $1.2 billion out of $10 billion approved in 2004. For Proposition 1D, it’s $2.4 billion of $7.3 billion passed in 2006.
Know me the money
For school districts and boards throughout California, the challenge is how to get a piece of this ever-shrinking pie—or how to bake their own solution in the form of a local bond or alternative revenue source.
In a nutshell, school districts have three primary sources for funding for facilities:
First and foremost are the general obligation bonds raised by the state and/or local governments and districts. These are monies based on taxes voters have agreed to impose upon themselves. Statewide bond measures require a simple majority—50 percent plus one—to pass.
Prior to 2001, local efforts needed two-thirds voter approval, which resulted in more than a 40 percent failure rate. But California voters passed Proposition 39 in 2000, which allowed for some school bonds to pass with just a 55 percent majority in exchange for greater accountability requirements and limits on the amount bonded, among other provisions. Local districts can opt for either the two-thirds or 55 percent approval requirement. Since then almost 40 percent of districts—in all but five counties—have passed at least one bond. Not surprisingly, districts using the 55 percent approval standard have been the most successful, with 83 percent of such bonds passing, generating $51.5 billion in facility funds since 2000.
Second, districts can levy fees on developers of residential and commercial projects within their boundaries. These fees are premised on the idea that new construction (that is, new homes) means more students and associated costs for the home district. In order to impose the fees, school officials must substantiate the growth and show how new or increased fees will address it. Rates are determined by the district, and the resulting income can only be used for facilities.
Third, there are “facility districts” created to resolve specific issues in specific areas. Perhaps the best known are Mello-Roos community facility districts, which must be approved by two-thirds of voters. Mello-Roos requires property owners in the targeted area to pay a special tax. Another form is the school facility improvement district, which creates funding through general obligation bonds based on targeted property values within a district. Because they can be created with 55 percent voter approval, they tend to be more common than Mello-Roos.
Parcel taxes are sometimes used as a last-ditch remedy for funding (mostly because they require a two-thirds majority to pass). Between 2001 and 2009, 132 school districts in the state floated parcel taxes, with 83 passing.
But the success ratio is deceptive, say experts. The vast majority of approved parcel tax proposals happened in small districts in wealthy areas. For districts with poor students, parcel tax proposals are more routinely rejected.
Case in point: The 2,600-student Piedmont Unified School District in the San Francisco Bay area has successfully passed seven parcel taxes in the past 25 years. Local homeowners pay more than $2,000 in school parcel taxes annually. Conversely, the 694,000-student Los Angeles Unified School District, which encompasses scores of diverse communities, failed to pass a $100 annual parcel tax in 2010.
The best days of parcel taxes may be behind us, in any event. Lately, voters seem generally disinclined to approve them; of 17 parcel tax elections held around the state in November 2010, just two met the two-thirds threshold requirement.
Are we having funds yet?
Once, in more golden times in the Golden State, the SAB funded projects on an as-requested basis, up to the bond total authorized by California voters. It did so by borrowing from the state’s Pooled Money Investment Account, reimbursing it when new, regularly approved general obligation bonds were sold.
In 2008, however, that funding model changed. Spurred by the state’s chronic budget crises and difficult economic times, the Pooled Money Investment Board stopped disbursing PMIA funds for capital projects, including school construction.
“Consequently, the SAB’s ability to apportion, or reserve, funds is now limited to actual cash on hand from state bond sales,” says Lisa Silverman, executive officer of SAB and the Office of Public School Construction, which implements and administers the state’s School Facility Program.
The SAB continues to approve projects on a monthly basis, placing them on an unfunded list, Silverman reports. “As funds become available [from bond sales], projects with unfunded approvals are granted apportionments,” she adds.
Originally, the apportionments were granted based on a process that allowed schools up to 18 months after approval to request funding. In 2010, the SAB changed regulations to speed access to funds. To qualify for fast-tracked funding, districts must certify that their projects will break ground within 90 days of receiving an apportionment, with full matching funds (usually 50 percent of the total) and at least half of the construction contracts in place. If they fail to do so, they lose their funding and go to the back of the line.
In the School Facility Program’s October 2011 disbursement, the SAB apportioned $923.8 million for 377 fast-tracked projects in 154 school districts across the state. But it also left unfunded a list of “shovel-ready” projects totaling $676 million, with more projects regularly being added. Without a new bond, funding for new school construction is slated to run out in April; for modernization projects, in September.
“It’s difficult to predict when your project may get funded in today’s climate,” observes Joe Dixon, assistant superintendent of facilities and governmental relations for the 56,000-student Santa Ana Unified School District, in something of an understatement.
Dennis Dunston, director of facilities planning and program management for Total School Solutions, a consulting firm, was more blunt when asked about the funding situation: “The word that comes to mind is dismal.”
Construction reduction
Four elemental factors influence school construction costs: state regulations, local politics, prevailing practices and design standards, and regional market conditions.
The recessionary collapse of the housing market has hurt home builders, real estate agents and sellers—and school districts that can no longer afford bonds.
The value of a bond depends upon assessed property values. The greater the value of the real estate in a community, the greater the amount of money a district can raise.
In California these days, values are in decline. Most housing in the state is worth less (on paper at least) than it was just a few years ago. “Districts may have the authority to sell bonds for a certain amount, but they no longer have the assessed value to do it,” Dunston says. “As a result, projects get postponed or cancelled.”
There are associated impacts, as pointed out by Vincent at UC Berkeley’s Center for Cities and Schools: “The school construction system was built on a three-legged stool of funding from the state, local bonds and developer fees. It was a system that made sense, but now with little to no home construction, the third leg [developer fees] is gone.”
Equally concerning is whether voters have lost interest in supporting new bonds and school construction. Research on the subject is sparse, but a recent study at Vanderbilt University found that voters tended to prefer maintenance projects over new construction. The study’s authors speculate that voters consider the former as simply “maintaining” current spending levels while new construction projects mean additional, greater costs.
That’s not necessarily true, but the authors predict many districts will find it increasingly difficult to replace existing buildings with new facilities, however badly needed, if voters think current expenditures are sufficient. If that turns out to be the case, it suggests the importance and need for state and federal funding will only become more vital in coming years.
Size matters
As with most things, when it comes to school construction funding, districts have different needs and different hurdles to overcome. While eligibility for state support is not directly affected by the size and demographics of a particular district, according to Silverman at the SAB, there are real-world delineations in their respective challenges.
“Big districts tend to be stopped by politics or environmental issues,” says Tom Duffy, legislative director for the advocacy group Coalition for Adequate School Housing. “Small districts are stopped by finances.”
Or more precisely, a lack thereof. In the complex world of construction bonding, buying and building, it pays to be rich in funding and know-how.
To help ensure success, Silverman generally recommends that districts contact the state’s Office of Public School Construction early in their planning process for guidance on what funds are available and their eligibility requirements.
“It’s important that districts are familiar with the proper approval processes,” Silverman says. “The district may submit the funding application after the district has received approval by the California Department of Education and the Division of the State Architect of the proposed project and the project site, if applicable. In most cases, the district has determined its eligibility through an eligibility application before applying for funding. However, if the district hasn’t established eligibility for the project previously, it may submit the eligibility package with the funding package.”
If that sounds confusing, that’s because it is.
“By and large, the more money that states contribute, the more accountability they demand and the more hoops that locals have to jump through,” explains Vincent, at UC Berkeley. “Some of those hoops are well-meaning, but districts really vary in their ability to manage construction and process. It’s a real problem, but the state understandably seeks to treat every district the same, more or less. It’s not going to do anything for local districts who don’t first try to help themselves.”
Indeed, every expert contacted for this story said the primary reason school districts fail to achieve funding and completion of proposed construction projects is a lack of adequate planning and effective follow-through.
“That’s the biggest issue,” sums up Dunston, at Total School Solutions. “Not planning in a timely manner, not actually knowing what you need and when you’ll need it. A district’s facilities master plan for new construction and modernization should look out at least 10 years. It should be updated annually. I’ve seen a lot of district master plans that were two or three years old and they needed to be revamped completely due to changes in enrollment, demographics and the economy.”
But Dunston also concedes that this may be more easily said than done.
“Larger districts, suburban or urban, typically have an advantage. They are likely to have paid staff that keeps up with state regulations and laws, people whose jobs specifically include updating master plans. Of course, these are often the people cut first when you have staff reductions due to budget cuts.”
Smaller districts tend to come up short.
“They don’t have experts on staff,” Dunston continues. “They don’t have the internal resources. Instead, they must rely on outside help, such as consultants. One problem is that they often don’t know when they need to bring in a consultant. There’s nobody around to advise when to act.”
County offices of education have traditionally been a resource, sometimes providing the necessary experts and connections, but budgetary shortfalls have reduced COE services across the board.
One novel exception may be an ongoing experiment at the San Diego County Office of Education. After budget cuts effectively eliminated all of the office’s facilities-related services in 2006, the facilities division reinvented and renamed itself as an “enterprise” activity, Mikal Nicholls, senior director of the Educational Facility Solutions Group, says it’s nonprofit, self-sustaining and, as far as he knows, unique: “We’re the only county office of education providing services this way. It’s a risk-reward model. We survive on the funding we receive from districts paying for our services.”
Like many of their commercial competitors, Nicholls says EFSG provides a spectrum of services, from technical consulting to turn-key work, taking a project from concept to completion. To do so, it maintains contracts with more than 70 firms that can provide everything from engineering and architectural advice to inspections.
Local districts can join the San Diego County EFSG for free—and potentially save money through project bundling with other districts involved in concurrent projects. According to Nicholls, his division’s services are competitive, if not always cheapest.
“But one thing we do point to is trust. We’re not here to make a profit on district projects. We’re part of the county office of education, which has been around forever,” Nicholls explains. “People know us, and that’s important, especially for smaller districts where resources and technical knowledge might be limited—where the superintendent, for example, might also be the principal and not really know much about construction bonds or building schools.”
Building a future
Viewed dispassionately, there is no gilding the building scene. It will likely take years for California’s economy to completely recover, particularly in terms of housing and real estate, which means school construction will also lag.
Population growth is no guarantee that a district will be able to build either, as Dixon, the facilities director at Santa Ana Unified, points out: “You still have to find the matching funds, officially close out previous projects, overcome political obstacles and hope that your assessed valuation is sufficient.”
Most observers say programs and proposals to repair, upgrade and modernize existing infrastructure will increasingly be the focus in most districts with facilities shortages. Some modernization will be necessary, of course, just to meet the upgraded technological needs of students learning in the 21st century, but also it might also be a smarter way to deal with the bottom line.
“I think you’ll see more districts address longstanding problems of deferred maintenance. It’s not as dramatic as building a new school, but it’s cheaper,” Vincent advises.
In the near future, at least, the need for new classrooms is likely to be resolved by an old solution, adds Duffy: “Nothing is more permanent in California than a portable school building.”
Scott LaFee is a frequent contributor to California Schools.
CONSTRUCTION TOOLKIT
The following information resources are available free of charge online:
What Types of School Capital Projects Are Voters Willing to Support?
Ron Zimmer, et al.; Vanderbilt University, 2011
The Complex and Multi-faceted Nature of School Construction Costs: Factors Affecting California
Jeffrey Vincent and Deborah McKoy; Center for Cities and Schools, University of California, Berkeley, 2008
Schools of the Future Report
State Superintendent of Public Instruction Schools of the Future Advisory Team; California Department of Education, 2011
An overview of the State School Facility Programs
State Allocation Board, Office of School Construction, 2011
PK-12 Public School Facility Infrastructure Fact Sheet
21st Century School Fund, 2011
And don’t forget: Through CSBA’s Facilities Planning services, the Total School Solutions consulting firm offers comprehensive facilities planning programs, including enrollment projections, facilities master plans, developer fees justification studies, and state eligibility and funding applications.