The 2018-19 Budget

Update on State Funding for
K-12 School Facilities

This post provides an overview of the state’s funding of school facilities, describes the Governor’s school facility bond sales proposal, assesses this proposal, and provides alternatives for the Legislature to consider.

Background—School Facility Financing

School Facilities Program (SFP) Establishes Cost-Sharing Arrangement Between State and Schools. Chapter 407 of 1998 (SB 50, Greene) created the SFP. The underlying tenet of the program is that the state and school districts share the cost of building new school facilities and modernizing old ones. The state generally contributes 50 percent of new construction costs, including the purchase of land, working drawings, and construction of new facilities. The state typically contributes 60 percent of modernization costs for the renovation of facilities at least 25 years old. For both types of projects, the state can contribute up to 100 percent of project costs if districts face challenges in raising their local shares.

Several State Bonds Approved Early On but State Funding Exhausted by 2012. The state funded the SFP with a series of four voter-approved general obligation bonds between 1998 and 2006 that together provided $35 billion. State general obligation bonds require voter approval and are repaid over time through debt service payments from the state’s non-Proposition 98 General Fund. By 2012, the state effectively had exhausted funding from the four earlier bonds for SFP. After running out of funding, the state kept a list of applications that districts had submitted that were awaiting funding. By 2016, this list of projects had grown to $2.4 billion.

New State Bond Approved in 2016. After ten years without approving a state school bond, voters approved Proposition 51 in November 2016. The measure authorizes the state to sell $7 billion in general obligation bonds for K-12 school facilities projects (in addition to $2 billion for community college projects). Figure 1 shows Proposition 51 funding allocated to date and the funding that remains available. As of late April 2018, the state had apportioned less than 10 percent of Proposition 51 school funding. In contrast to other state infrastructure projects that are authorized through the state’s annual budget cycle, Proposition 51 awards K-12 facilities funding through a continuous appropriation, whereby projects are to be funded as the state processes the associated applications. The state appears to use the continuous appropriation approach because it may fund so many school facility projects in any given year that itemizing each project within the state budget would be impractical.

School Districts Raise SFP Matching Funds Primarily Through Sale of Local Bonds. School districts typically raise their share of facilities funding through the sale of local general obligation bonds, which require local voter approval and are repaid through local property taxes. From November 2002 through November 2017, voters approved $99 billion in local general obligation bonds for schools, of which $39 billion remains unspent. In addition to generating funding through local bonds, schools have raised $10 billion from fees charged on residential and commercial development since 1998. Schools also can raise facilities funding using various other methods, including parcel taxes, but they raise substantially less through these other methods.

Background—Office of Public School Construction

The Office of Public School Construction (OPSC) Is One of Several State Agencies Involved in Project Approval Process. To qualify for SFP funding, schools must receive approval from at least three state agencies—(1) the California Department of Education (CDE), which ensures school plans meet state educational standards; (2) the Division of the State Architect (DSA), which ensures that buildings meet state safety standards; and (3) OPSC, which determines eligibility and funding for each project. To ensure that projects comply with an agency’s requirements, agency staff conduct desk reviews of submitted documents and, in some cases, visit facility sites. The SFP requires CDE and DSA to approve a project before OPSC may make a final funding determination.

OPSC Undertakes Several Activities When Reviewing Project Proposals. OPSC staff first review facility applications to ensure that all required components are included. If materials are missing, OPSC staff will send letters to a district requesting the additional documents within a certain timeframe. Once an application is considered complete, OPSC staff analyze whether the project qualifies for funding (per state regulations), ensure that the scope of the project is aligned with the funding request, evaluate whether the project qualifies for special SFP grants (such as for preparing land for construction or if the building is more than one story), and check that the project plans submitted to OPSC are the same as those submitted to CDE and DSA. In addition to application processing, OPSC staff conduct outreach activities, process district appeals of facility determinations, and prepare materials for OPSC’s governing committee. Historically, OPSC also has conducted audits of school projects to ensure they comply with the project proposals OPSC originally approved.

2017‑18 Budget Package Moved Responsibility for Audits From OPSC to Local Level. Last year the state devolved the responsibility for facility audits from OPSC to local independent auditors contracted by districts. Although the state shifted this responsibility away from OPSC, it did not make a corresponding reduction in OPSC’s staffing level.

2017‑18 Budget Package Provided $594 Million in Proposition 51 Funding for SFP. The 2017‑18 budget package also provided $594 million in Proposition 51 funding for school facilities (plus $61 million from unused prior bonds). To process applications for this funding, OPSC currently is using 7 full-time equivalent (FTE) employees. OPSC indicates it will redirect an additional 3 FTE employees in the coming months, such that a total of 10 FTE employees would be processing applications in 2018‑19.

Governor’s Proposal

Proposes to Sell $594 Million in Proposition 51 School Bonds in 2018‑19. In the budget year, the Governor again proposes to provide $594 million in Proposition 51 funding (plus $59 million from unused prior bonds). The administration states that its proposal is based on how many applications it believes OPSC can process (presumably with its 7 currently assigned FTE employees). The administration has no specific breakdown of the proposed $594 million by project type, though it indicates most of the funding would be split between new construction and modernization projects, with $125 million designated for career technical education projects. By the end of 2017‑18, the state will have committed all of the $500 million in charter school funding authorized by Proposition 51.

Assessment

OPSC Dedicates Small Share of Staff to Core Responsibilities. Of OPSC’s 52 FTE positions, it currently allocates 7 positions (13 percent) toward processing SFP applications, with plans to increase this to 10 positions (19 percent) in 2018‑19. OPSC claims that if it were to transition additional staff to processing facility applications, it would divert them from other important activities, such as processing facility appeals or conducting outreach on how to apply for SFP funding. We are concerned, however, with OPSC dedicating such a small share of its staff to processing applications.

OPSC Is Taking a Long Time to Process Applications. In addition to our concerns with how OPSC chooses to allocate staff, we are concerned that OPSC staff take too long on average to process applications. Currently, each OSPC FTE employee reviewing applications processes an average of 1.4 applications per month, equating to approximately 120 hours of work per application. As OPSC’s primary task is to make a funding determination based on certain set rules (with other agencies approving the academic and structural aspects of projects), we believe 120 hours is unreasonably long. Without notably sacrificing the quality of application reviews, we believe OPSC could reduce its processing time considerably.

Due in Part to Slow Processing by OPSC, Backlog of Facility Applications Has Continued to Grow. Despite the state funding some SFP projects over the past year, the backlog of facility requests had grown to $3.6 billion by April 2018. Should the state receive the same volume of applications in 2018‑19 as it has thus far in 2017‑18, we anticipate that the backlog will grow further to $5.2 billion by the end of 2018‑19 under the Governor’s proposed funding level.

Despite OPSC Backlog, Many Schools Have Proceeded With Construction Projects. Although the state has a growing backlog of SFP requests, many districts continue to build facility projects with the expectation that the state will provide reimbursements for a portion of these projects at a later date. The state does not collect data on the number of projects completed while awaiting state funding, though facility representatives tell us that roughly half of the projects in the SFP backlog already have been completed using locally available resources. Though a considerable amount of local general obligation bond authority remains available for school facilities, certain types of local education agencies may have a more challenging time accessing sufficient local funding to build a project with state cash. These agencies tend to be smaller school districts (which tend to have higher per-student facility costs) and county offices of education (which do not have independent authority to issue their own local general obligation bonds).

Alternatives

Severity of Situation Depends on Viewpoint. If the Legislature believes that funding should be allocated as the state receives facility applications in accordance with the continuous appropriation, OPSC’s small amount of application processing staff and long processing times would be of concern. If the Legislature is concerned about this situation, we offer recommendations it could take, discussed below. Alternatively, given that many districts are able to use local resources for construction costs—with the state providing partial reimbursement at a later date, the Legislature may be less concerned about the exact timing of state facility allocations. Under this view of the situation, the Legislature could adopt the Governor’s proposal, also discussed below.

If Concerned With Situation, Three Changes Could Help With Application Processing. If the Legislature is concerned with the facility application backlog, it could adopt provisional budget language that (1) establishes a five-year Proposition 51 expenditure plan requiring OPSC to process $1.5 billion per year over the next four years, with any remaining funding allocated in year five; (2) directs OPSC to task additional existing staff with processing applications; and (3) directs OPSC to identify and implement ways to shorten processing times. Regarding staffing, were OPSC, for example, to dedicate 5 additional FTE positions (for a total of 12 FTE positions) and shorten the average application review from 120 hours to 80 hours, we estimate OPSC could process $1.5 billion in facility applications per year. We believe at least this number of positions could be dedicated to processing applications without substantially affecting OPSC’s other operations. OPSC either could redirect staff who were formally engaged in facility audits (which were transferred to local auditors in 2017‑18) or engage in fewer outreach activities. Moreover, we believe reducing processing time by at least 40 hours per application could be achieved without substantially affecting the quality of the reviews. To streamline its reviews, OPSC could spend less time reviewing facility plans that CDE or DSA already reviewed, or it could seek changes to regulations allowing it to eliminate or expedite the least critical aspects of its existing review procedures.

If Not Concerned About Situation, Adopt the Governor’s Proposal. If the Legislature is not concerned with the pace at which the state is issuing Proposition 51 funding, then we recommend it adopt the Governor’s proposal. Assuming that the pace of funding is unchanged moving forward, we estimate the state would fully allocate Proposition 51 funding within ten years.

Under Either Option, Legislature Could Seek Fall Report on OPSC Staffing. The Legislature could request OPSC to submit a workload report by November 1, 2018 (in time to inform both development of the Governor’s budget and our office’s winter analyses). This report should identify how many FTE employees are dedicated to (1) processing applications, (2) responding to appeals, and (3) completing audits. In each of these three areas, the report should include the number (of applications, appeals, and audits) processed, the average amount of time taken to process each type of workload, and the nature of such workload (for example, the number of appeals relating to disputed funding determinations for land acquisition). Such information could help the incoming administration and Legislature right size the agency next year (depending upon whether the state would like to follow a five- or ten-year Proposition 51 expenditure plan).