Analysis of the 2008-09 Budget Bill: Education

School Facilities

The Governor's budget estimates that $4.4 billion in already approved state general obligation bonds will be allocated for K–12 school facilities in 2008‑09. In addition, as part of his Strategic Growth Plan, the Governor proposes a total of $11.6 billion in new state general obligation bonds for K–12 education facilities to be put before the voters in 2008 and 2010. Below, we provide background on the School Facilities Program (SFP) and discuss the Governor's Strategic Growth Plan. We then highlight several concerns we have with his plan and offer recommendations to address them.

School Facilities Program

The SFP, established in 1998, provides state funding to K–12 school districts to buy land, construct new buildings, and modernize existing buildings. The SFP is funded with general obligation bonds approved by California voters. As shown in Figure 1, voters have approved more than $35 billion in general obligation bonds for K–12 school facilities over the last decade.

The SFP provides funding for various types of projects and schools, including new construction, modernization, overcrowded schools, charter schools, joint–use facilities, and career technical education facilities. To qualify for funds to construct new facilities, school districts generally must show the capacity of their current facilities is insufficient to house all students in the district. To qualify for modernization funds, school districts must have facilities that are over 25 years of age.

The state grants provided to districts from the SFP are only intended to provide a share of total project costs. The state generally covers 50 percent of new construction costs and 60 percent of modernization costs. A district facing difficult financial circumstances can apply for “financial hardship” to have the state cover a greater share of project costs (up to 100 percent). School districts raise most of their matching funds with local general obligation bonds. These can be authorized with approval by 55 percent of voters in the district and are repaid using property tax revenues. Districts also can use other local revenue sources, including developer fees, redevelopment funds, Mello–Roos bonds, and School Facility Improvement District bonds. Although the use of these additional revenue sources varies by district, they generally constitute a small portion of school district matching funds.

Strategic Growth Plan

The Governor proposes an additional $11.6 billion in general obligation bond funds for K–12 education, to be presented to the voters via ballot measures in November 2008 and November 2010. These funds are intended to provide sufficient state resources for school facilities over the next four years (through 2011–12). Figure 2 shows the amount of bond funds proposed by the administration.

Fewer Specific Types of Projects Funded. As shown in the figure, the Governor's 2008 and 2010 bond proposals provide funding for fewer specific types of facility projects than Proposition 1D. Neither the 2008 nor 2010 measures would provide funding for overcrowded schools and environmentally friendly (or “green”) schools. In addition, the proposed ballot measure for 2008 would provide no funding for modernization of school facilities. School districts have been applying for modernization funds at much lower rates than expected, leaving a significant amount of the $3.3 billion provided by Proposition 1D unspent. As of January 30, 2008, only $591 million in modernization funds had been “reserved” by local school districts.

Changes to Charter School Programs. The Governor's bond proposal also includes various changes to the current program for charter school construction, as well as the charter school grant program that provides funding for rent and lease costs. We discuss these issues in more detail later in this write–up.

Creates a Small High School Pilot Program. The Governor proposes a new pilot program to fund the construction of small high schools. The pilot would provide $20 million from prior–year bond funds to districts who are proposing to build a small high school. The pilot program would require districts to cover only 40 percent of project costs. It is intended to fund a group of schools that is representative of the state.

Changes State/Local Share. The Governor also proposes to change the state/local share for new construction projects. Beginning with the 2008 bond allocations, districts would be required to pay 60 percent of new construction projects, compared to the 50 percent that they must currently cover. (Given the bond would not include funding for modernization projects, the district share of those projects—40 percent—would be unchanged.)

Concerns With Governor's Plan

We have a number of concerns with the Governor's Strategic Growth Plan proposal. Specifically, it fails to address underlying data issues and problems with the financial hardship program. In addition, we think it misses opportunities to further improve school facility programs. We discuss these issues below.

Virtually Impossible to Assess Statewide Need For Additional Bonds

The state has more than $8 billion in previously approved bond funds available for K–12 facilities and has no good data to estimate the need for additional school facilities. Without better data, determining an appropriate amount of bond funding for any K–12 facilities program is virtually impossible. If the state is going to maintain its current facilities program, then we recommend it build a school facilities data system that includes information on the age, capacity, and cost of K–12 facilities. This would enable the Legislature to determine the amount of bond funding needed to meet the needs of K–12 schools in the future.

Significant Funds Remain From Prior Bonds. As shown in Figure 3, a significant amount of prior–year bond funds remains unspent. The SFP program has over $8 billion in available funds—funds that have not been set aside for any school district. Over $4 billion of these funds are in the programs the Governor proposes to fund in the 2008 bond—almost $3 billion remains available for new construction, $500 million for career technical education facilities, and $634 million for charter school facilities. An additional $3.9 billion in funds have been approved for specific school district projects but remain unspent because the district has not entered into a construction contract. Given the bulk of this funding is in programs that have struggled to spend all fund reservations, it is quite likely some of this funding will eventually go unused, as districts have their grant awards rescinded.

Virtually None of Proposition 1D Funds Has Been Allocated. As Figure 3 shows, virtually all of the bond funds authorized by Proposition 1D ($7.33 billion) remain unallocated and unspent as of December 2007. Although applications have been submitted for the various programs in Proposition 1D, the State Allocation Board (SAB) has not yet approved them. Given the amount of time required to review and approve projects, it may be premature to approve additional K–12 bonds at this time.

No Good Data on School Facilities…In addition to having substantial funds available from prior bonds, the state has no good data to determine the amount of funding that is needed to meet the facility needs of K–12 schools. Currently, it does not collect comprehensive district data on school capacity, making an estimate of overall statewide facility needs difficult. School districts are required to provide enrollment and capacity data when they apply for new construction funding, but they are not required to update this information in years when they do not apply for new construction grants. Thus, the state has no good measure of overall district capacity. Similarly, districts are required to provide information on the age of their facilities when applying for modernization funding. However, they are not required to provide this information for all facilities, and the information is not updated in future years.

…Or Facility Costs. The state also lacks good data on the cost of constructing K–12 facilities. Data from a recent report by the Macias Consulting Group for the SAB contains some information on construction costs, but it does not provide district–specific information on the planning costs, such as architectural and design costs. The Office of Public School Construction (OPSC) does conduct close–out audits for all school projects that receive state funding. However, the purpose of these audits is to ensure that schools have complied with the rules and regulations of the SFP. Because the audit process can be very time–consuming, districts often provide only enough information to show that they have complied with program requirements.

Build New Data Set. If the state is going to maintain its current facilities program, we recommend the Legislature authorize the creation of a statewide database that includes information on the capacity, age, and cost of facilities for school districts. The OPSC would develop and maintain the database, using bond funds to cover associated costs, as it now does for other administrative activities. To encourage widespread participation, the Legislature could require school districts to provide this needed facility data as a condition of receiving funds through the state’s Deferred Maintenance Program (almost all school districts participate in this program). However, to help ensure data is collected only when likely to be needed for making state bond decisions, we recommend requiring reporting only every odd–numbered year. With the new facility data, the state would have better information to project future needs and determine reasonable estimates for the amount of future general obligation bonds.

Different Approach Needed for Financial Hardship Program

A recent study highlighted several fundamental problems with the state’s financial hardship program. We recommend the state consider an alternative approach to assessing financial hardship that focuses on the local revenue sources available to the district.

Approximately 15 percent of funds provided by the SFP for new construction and modernization projects are through the state’s financial hardship program, which provides funding for school districts that are determined unable to provide their matching share of project costs. Since the inception of the SFP (1998), the state has provided on average almost $300 million a year for the financial hardship program. A recent study (conducted by the Macias Consulting Group for the SAB) found that many school districts that applied for financial hardship for new construction and modernization projects were taking on short–term debt and temporarily transferring funds out of their capital outlay accounts to appear financially needy. Such action allowed them to qualify for additional state funding and reduce or eliminate their local share. Any funding provided to school districts for financial hardship cannot be provided for additional facility projects. The Governor, however, does not propose any changes to address these issues.

Focus on Revenue Sources Rather Than Account Balances. Given these problems, we recommend the Legislature take a new approach to determining financial hardship. Specifically, we recommend the Legislature set reasonable expectations of what a district should contribute, without looking at specific account balances. This approach would look at two indicators of district resources—the assessed value of property within the district and the amount of revenues from developer fees—to determine an expected district contribution. The state would provide hardship funding if the costs of construction projects exceeded the expected district contribution. This approach would be more equitable—expecting all districts to contribute but linking their contribution to objective measures of their property values. Such an approach also would reduce incentives for school districts to incur short–term debt merely to appear needy. In addition, it would neither penalize financially needy districts that have good reasons for saving up capital outlay resources, nor create incentives for clever accounting practices that advantage some districts at the expense of other districts.

Charter School Facilities

Charter schools are publicly funded K–12 schools that adopt local education contracts in exchange for flexibility from many laws relating to specific education programs. This flexibility is designed to allow charter schools to develop innovative education practices. For a charter school to operate and receive state funding, it must be authorized by a district school board, county board of education, or the State Board of Education. Charter schools are funded primarily through a base grant and a categorical block grant. Both grants can be used for general school operations. Charter schools also are eligible to apply and receive funding for certain categorical programs. Most charter schools do not receive specific funding for leasing or operating classroom facilities. Instead, they use general purpose funds to cover these costs.

Proposition 39 Intended to Address Facility Issues. Proposition 39, approved by the voters in 1998, requires school districts to provide charter schools with facilities that are similar in quality to those of other district school facilities. If the district incurs costs for providing the facilities, the district can charge the charter school for the cost of operating the facilities. The district, however, is not required to use its own general purpose monies to operate the facilities. Charter schools must submit a timely request to the district with estimates of the number of students that will need to be housed.

Proposition 39 Not Working as Well as Intended. Although no data exists on the number of charter schools that are housed in district facilities, these arrangements are not common. This is because the facilities offered by the district often do not suit the needs of the charter school given their location or capacity. Other times districts and charter schools cannot come to an agreement on the amount that the charter school will pay for using district facilities. These issues have caused considerable conflict among charter schools and school districts throughout the state. Indeed, several charter schools have sued their local school districts over failing to provide equivalent facilities.

Grant Programs for Charter School Facilities

Although most charter schools do not receive funding for facilities, charter schools located in low–income areas currently can receive funding from two grant programs. One program is state funded and operated by the California Department of Education. The other is federally funded and operated by the State Treasurer’s Office (STO). These two programs are discussed below.

Charter School Facility Grant Program. This program was established in 2001 through Chapter 892, Statutes of 2001 (SB 740, O’Connell), and is commonly referred to as the SB 740 program. To qualify for the program, charter schools must have enrolled or be located in the attendance area of an elementary school where at least 70 percent of students qualify for free or reduced–price meals. Qualifying schools can receive grants of up to $750 per unit of average daily attendance (ADA), but their allocation cannot exceed 75 percent of their annual lease costs. If funding is insufficient to meet demand, grant awards are prorated so that all qualified applicants can receive an award. In 2006–07, the grants were prorated such that each school received 57 percent of its eligible grant award. For 2007–08, $18 million was provided, which is expected to fully fund all 134 qualifying schools. Since its inception, the number of ADA funded by the program has increased from 10,930 in 2002–03 to 32,072 in 2006–07. Funding is provided on a reimbursement basis at the end of the school year. Schools must establish eligibility every year.

State Charter School Incentive Grants. In addition to the SB 740 program, the state operates the State Charter School Facilities Incentive Grants program. For these incentive grants, the state was awarded an annual federal grant of $9.9 million for four years, beginning in 2004–05. A total of 86 charter schools have received incentive grants. Like the SB 740 program, schools receive $750 per pupil, not to exceed 75 percent of lease costs, but the annual grant amount is capped at $250,000. The incentives grant program differs from the SB 740 program in that schools can use funds not only to cover lease costs but also to cover mortgages and debt obligations related to facilities. In addition, schools can use grants to pay for construction costs or purchase property for a new facility. Schools who use the grant for construction costs can receive up to $1,000 per pupil, not to exceed 75 percent of eligible costs and no more than $500,000 per year. Incentive grants are provided through a competitive process. Schools are given preference if they serve low–income students, are located in the attendance area of an overcrowded district, are operated by a nonprofit entity, and have met their Academic Performance Index growth targets. Grant recipients are eligible to receive their award for three years. Current law prohibits charter schools from receiving funding through both the SB 740 and incentive grants program.

Bond Programs for Charter School Facilities

In addition to providing funding for charter school facilities through per–pupil grants, the state provides funding for the construction of new charter school facilities. In 2002, through Proposition 47, the Charter School Facility Program (CSFP) was established. The measure provided $100 million in general obligation bond funds for the construction of charter school facilities or the rehabilitation of existing facilities. Additional funds were provided for the CSFP through Proposition 55 ($300 million) and Proposition 1D ($500 million).

Application Process. To qualify for funding, charter schools must submit applications to the Office of Public School Construction and be considered financially sound by the STO. Charter schools are given preference if they serve low–income students, are located in the attendance area of an overcrowded district, are operated by a nonprofit entity, or are renovating existing facilities. The program is designed to provide 50 percent of project costs—charter schools must provide the other 50 percent of costs. Charter schools typically use low–interest state loans to cover their costs. Schools that are selected are given a “preliminary apportionment,” which means that the funds are reserved for the school by the state for their specific project. Schools have four years after being awarded a preliminary apportionment to enter into a construction contract and move forward with the project. At this point, the project receives a “final apportionment” and funding is released to the charter school. The school can apply for a one–year extension if they are unable to enter into a construction contract after four years.

After Five Years, Little Progress. Although the state has provided far more funding for the CSFP than its existing grant program, charter schools have struggled to use the funds. Through Propositions 47 and 55, the state provided funding for 34 charter school projects. At this time, no charter school projects have been completed from CSFP funding. Although three schools have converted their awards to final apportionment and are beginning construction, six charter schools have had their awards rescinded because they were unable to meet the requirements of the program. Last July, the SAB provided one–year extensions to three schools that received funding through Proposition 47. In addition, there are 20 schools funded through Proposition 55 funds that remain in the program. At this point it is uncertain if these schools will be able to find an appropriate site and enter into a construction contract before their apportionments expire. Considering the difficulties that other charter schools have faced trying to build a new school, it is likely that many of these applicants will be unable to construct a new school and will have their grants rescinded.

Proposition 1D Funds Yet to Be Awarded. Grant awards for Proposition 1D funding are expected to be awarded to schools in March 2008. Much like previous funds, it is expected that all available funds will be awarded to charter schools. However, given the difficulties that charter schools have faced in previous years, it is likely that a substantial number of schools will be unable to construct a new school with Proposition 1D funds.

Charter Schools Face Many Roadblocks to Constructing Facilities

Most of the problems charter schools have had in moving forward on construction projects are due to charter school’s unique characteristics. Although charter schools benefit from being exempt from many state laws and regulations, they also are hindered by being unable to take advantage of many powers that school districts possess. We discuss problems with the current approach to funding charter school facilities below.

Cannot Use Eminent Domain. The process of finding and purchasing an appropriate school site can be very difficult for charter schools. School districts are able to use the power of eminent domain, which allows them to take private property for public use (even if an owner is disinclined to sell the property) as long as the current owner is compensated fairly. Often the threat of using eminent domain powers is enough to convince private property owners to come to an agreement with the school district. Charter schools, however, do not have the power of eminent domain. This makes finding an appropriate school site very difficult, particularly in large urban areas where the majority of land has been developed.

Must Comply With Zoning Restrictions. In addition, charter schools must comply with local zoning laws that restrict the types of buildings that can be built in certain neighborhoods. School districts are exempt from these zoning restrictions, but charter schools must comply or request that local agencies make changes to these restrictions to accommodate the school.

Tension With Districts. Current facility laws and regulations often place school districts and charter schools in competition with one another. Current law requires the local school district to own title to a charter school facility constructed through the CSFP. To receive state construction funding, charter schools must submit a memorandum of understanding (MOU) signed by the charter school and the local school district that gives title of the property to the school district. (The MOU must also be signed by the state if the charter school is taking out a loan from the state for its 50 percent match.) By signing the MOU, the school district is liable for any problems that occur on the site. If the school were to lose its charter or go bankrupt, the district would take possession of the land. School districts are typically hesitant to enter into this type of agreement. They are generally not interested in owning the particular site and are concerned about the liability issues in the school. Under current law, a school district is not required to sign the MOU, effectively giving it the power to veto a charter school project.

Charter Schools Cannot Raise Local Revenue. Charter schools typically take out a loan from the state to pay for their local match requirements. The loan is paid off using general purpose revenues. Unlike school districts, they are not able to initiate local general obligation bond measures. Proposition 39 allowed school districts to use proceeds from local general obligation bonds to provide funding for charter schools located within the district but did not explicitly require it.

Charter Schools Face More Risk. Given charter schools do not have identified attendance areas like school districts, they are more vulnerable to fluctuations in student enrollment. A drop in enrollment would reduce the school’s state revenue and make raising funds to pay the 50 percent matching share of construction costs more difficult. In addition, building an appropriately sized school when enrollment levels are unstable involves greater risk. Unlike school districts, charter schools also must face the risk of having their charter revoked by their authorizer. Since charter schools are up for renewal every five years, they may be less willing to incur long–term debt to construct a new school. These risks likely would make creditors less willing to provide loans to charter schools to construct a school outside of the state program.

Governor's Charter School Proposals Moving in Right Direction

As part of his 2008 bond proposal, the Governor proposes several changes to existing law regarding the CSFP and the SB 740 grant program. These changes will likely make charter schools more successful in completing construction projects and will provide more flexibility through the SB 740 program.

Additional Options With Regards to Holding Title. The Governor's proposal would allow another local government entity besides a school district—such as a city, county, or county board of education—to own title of a charter school facility. In addition, if a charter school is unable to find a local government agency to agree to hold title to the facility, the charter school may hold title. In such cases, the state would be able to recover the property if the school’s charter was revoked or if the charter school was unable to pay back its loan from the state. This eliminates one of the significant obstacles that charter schools face in constructing a new school.

Gives Preference to Low–Performing Districts. Under the current CSFP, charter schools are given priority if they are in an overcrowded district, a low–income area, are operated by a nonprofit group, or utilize existing school district facilities. The Governor proposes to eliminate the preference for schools in overcrowded districts and would instead include a preference for charter schools in low–performing school districts.

More Flexibility for SB 740 Program. The Governor proposes to apply some of the flexibility of the federal incentive grant program to the SB 740 program. In addition to using funds for lease costs, charter schools would be able to use the funds for debt service or mortgage payments related to construction of new facilities.

Further Improvements Could Be Made for Funding Charter School Facilities

While the Governor's proposals would make significant improvements to the system, additional changes could be made to further improve facilities programs for charter schools. In addition to approving many of the Governor's proposals, we recommend the Legislature explore three other options: (1) providing more resources to per–pupil grant programs rather than increasing bond funds; (2) expanding eligibility for the SB 740 program; and (3) as a condition of participating in the state facility program, requiring local school districts to provide charter schools with proceeds from local bonds.

The Governor's proposal makes many changes that would help improve the system of funding for charter schools facilities. Schools, for example, should be better able to construct their own facilities if they are able to hold title. In addition, the flexibility provided in the SB 740 program would provide another avenue for schools to build new facilities outside of the CSFP, while still providing support to schools who are renting and leasing facilities. The Legislature, however, could make additional changes to further improve charter school facilities programs. We discuss these additional changes below.

Provide Ongoing Per–Pupil Grants Rather Than Additional Bond Funding. Because of the high risks that charter schools face, leasing facilities is generally a more attractive option than building a new school. As a result, we recommend the Legislature consider providing additional funding for per–pupil grants rather than authorize additional bond funds for new construction. For example, rather than providing $1 billion in bond funds for new charter school facilities (as proposed by the Governor for the 2008 bond), the Legislature could provide an equivalent annual amount in per–pupil grants. Paying off debt service for $1 billion in general obligation bonds typically requires annual payments of approximately $65 million per year for the next 30 years. The state could provide this funding through the SB 740 program, with the flexibility proposed by the Governor to allow schools to use SB 740 funds for new facilities. This funding could be provided using the annual budget process.

Allow More Charter Schools to Participate. With an increase in ongoing funds for the SB 740 program, the Legislature could expand eligibility to charter schools that are not located in low–income areas. The state could allow all charter schools not housed in district facilities to be eligible for the program, with priority given to charter schools located in low–income areas, low–performing or overcrowded districts, and schools undertaking renovation projects. The Legislature would need to amend current law to change the eligibility criteria.

Require Districts to Provide Charter Schools With Local Bond Funds. In order to improve the ability of charter schools to raise funds for construction projects, the state could amend current law and require school districts to set aside a share of local general obligation bonds for K–12 facilities that is equivalent to the share of students living in the district who attend charter schools. Charter schools could use their local share to participate in the CSFP. This also would enable charter schools to have an available source of revenue to pay for site acquisition and design costs prior to receiving state funds. (If a charter school was not interested in constructing a new facility, it could choose to turn down the funds, thereby freeing up the funds for other school district facility purposes.)