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2013

Other Budget Issues

Further Detail

Background

State Law Establishes Procedures for School Districts to Sell or Lease Surplus Property. If a school district has surplus property, the local governing board can vote to sell or lease the property through a competitive bidding process. Before using this process, however, the district must offer to sell or lease the property to certain types of entities, including agencies interested in sponsoring low-income housing, local parks and recreation districts, and city and county governments. In most cases, the school district may sell or lease the property to these entities at current market value.

In 2012-13, Charter Schools Have First Call on School Surplus Property. The 2012-13 budget package added a new requirement that school districts offer charter schools the option to purchase or lease surplus property designed for instruction or instructional support prior to offering the property to other agencies or soliciting competitive bids. As described below, the price of the sale or lease is subject to certain caps and can be significantly below market value.

• If the property is sold, the sale price cannot exceed the price paid by the district to acquire the property, adjusted for inflation and the cost of any construction that has occurred. This price, however, must be at least 25 percent of the property’s current market value.
• If the property is leased, the annual lease rate cannot exceed 5 percent of the price that would apply if the property were purchased.

Under either a sale or lease agreement, the charter school must use the property exclusively for instructional activities or support for at least five years. After five years, the law provides no further restrictions on the usage or sale of the property. These sale and lease provisions are operative only from July 1, 2012 through June 30, 2013.

Proceeds From Sales of Surplus Property Are Restricted, With Exceptions . . . Regardless of which entity purchases or leases surplus property, a school district can use the proceeds of the transaction only for certain purposes. State law generally requires that school districts deposit the proceeds in a restricted capital outlay or maintenance fund. Surplus property proceeds can be used for one-time general operating expenses, however, under certain conditions. Specifically, if a school district and the State Allocation Board agree that the district (1) has no major deferred maintenance requirements and (2) does not anticipate new construction within the next ten years, then the district may use surplus property proceeds for any one-time general operating expense. In this case, the district forfeits its eligibility for new construction and modernization funding through the School Facility Program (SFP) for at least five years.

. . . Though Other Exceptions Apply if the Property Was Purchased Entirely With Local Funds. In 2009, the Legislature reduced the consequences in cases where the property was originally purchased entirely with local funds. In those cases, school districts are allowed to use the proceeds from the sale of the property for one-time general operating expenses without forfeiting eligibility for new construction and modernization funds through the SFP. Instead, districts forfeit any future hardship funding through the SFP up to the amount of the proceeds used for one-time general operating expenses. In addition, districts forfeit eligibility for hardship funds awarded through the state’s Deferred Maintenance Program (DMP) for five years. These exceptions regarding property purchased with local funds are scheduled to expire on January 1, 2014.

Proposal

Extends Requirement to Offer Surplus Property to Charter Schools for Five Years. The Governor proposes to extend for an additional five years the requirement that school districts give charter schools first call on surplus property. Under the proposal, this requirement would sunset on June 30, 2018.

Permanently Extends Exceptions for Use of Proceeds From Locally Purchased Property Sales. The Governor proposes to eliminate the January 1, 2014 expiration date on the rules pertaining to the sale of surplus property financed entirely with local funds. This means districts would continue to be able to use proceeds from the sale of these properties for one-time operating expenses without forfeiting eligibility for new construction or modernization funding through the SFP. Districts instead would continue to forfeit eligibility for hardship funding through the SFP and DMP.

Assessment

Increases Likelihood That Instructional Property Remains in Use for Educational Purposes. The Governor’s proposal requiring school districts to first offer surplus property to charter schools increases the likelihood that school facilities will continue to be used for educational purposes. The proposal also offers a way to help charter schools meet their facility needs, as charter schools rarely receive funding from voter-approved local bonds to meet these needs. In addition, the proposal reduces the likelihood that the charter school will apply for state facility funding or request other facility space from the school district.

Provides No Guidelines for Subsequent Disposal of Property by Charter Schools. We are concerned, however, that the Governor’s proposal provides no guidelines for how a charter school may use the property once the required period of instructional use has elapsed. Under the Governor’s proposal, five years after purchasing surplus property, a charter school could sell the property to any buyer at any price, undermining the goal of retaining the property for public benefit. Given that the charter school may have purchased the surplus property below market value, this also could result in charter schools benefiting from the sale of the property at the expense of the school district. The proposal also does not specify how the property would be treated if the charter school subsequently closed. It is unclear to us why the existing restrictions for school districts should not also apply to charter schools.

Does Not Require Charter Schools to Maintain Compliance With Field Act, Could Make Space Unusable for Districts. We also are concerned that charter schools are not required to maintain compliance with the Field Act if they choose to make significant renovations to a classroom building or build additional classroom space on a property originally obtained from a school district. In this case, if a charter school did not follow the Field Act requirements, its classrooms could not subsequently be used for instructional purposes by any school district. (Adopted in 1933, the Field Act establishes a set of seismic standards and inspection requirements designed to mitigate the risk of earthquake damage to a school facility. Current law requires all school district classrooms be compliant with the provisions of the Field Act. Charter schools are exempt from this requirement unless they receive construction or renovation funding from the SFP.)

Allows Districts to Sell Surplus Property and Still Qualify for State Facility Funds. The Governor’s proposal regarding proceeds from the sale of locally funded surplus property would permanently reduce the consequences for districts choosing to use these proceeds for nonfacility purposes. Though districts still would forfeit their eligibility for hardship funding, many districts likely would never have qualified for hardship funding. Hardship funding through DMP is limited only to districts having less than 2,501 pupils and hardship funding through SFP is available only to districts unable to raise or access adequate local resources. Thus, some districts choosing to use proceeds for nonfacility purposes would face limited or no consequences in terms of their future state maintenance or facility funding. A district could sell a facility, use the proceeds for one-time operating expenses, and then later apply for and receive the same amount of state facility funding for which it otherwise would have qualified. We do not see a compelling rationale for allowing districts to use facility-related proceeds for nonfacility purposes and then seek state funding for facility costs. Even if the property originally had been purchased entirely with local funds, the state currently makes significant contributions to school districts’ new or modernized facilities. (We also are concerned that the state currently has very limited ability to verify whether a property was built entirely with local funds, with OPSC indicating that districts self-report this information.)

Recommendation

Modify Proposal to Provide Charter Schools First Call on Surplus Property. We recommend the Legislature adopt the Governor’s proposal to provide charter schools first call on surplus property, but with some key modifications. Specifically, we recommend the state:

• Require the charter school to use the purchased or leased property for instructional activities or support.
• Require that before the property may be sold or used for any other purpose, it must be offered for sale or lease to the school district that provided the property, followed by any interested charter schools. Require that if one of these interested charter schools obtains the property, it is likewise bound by these terms. (If the school district and other charter schools decline the offer to purchase or lease, the property could be sold or leased to another entity or used for any purpose.)
• Limit the price paid by a school district to reacquire property it provided to a charter school to the price paid by the charter school, adjusted for inflation and the cost of any construction that has occurred (or 5 percent of this amount for an annual lease). Establish similar limits if the property is sold or leased to another charter school.
• Require charter schools to use proceeds from the sale or lease of surplus property for capital outlay or maintenance costs (with the same exceptions as provided to school districts).
• Require charter schools to maintain Field Act compliance for all buildings obtained from a school district that are compliant on the date the charter school takes possession.

Reject Governor’s Proposal to Make Permanent Certain Exceptions for Use of Proceeds From Surplus Property Sales. We recommend the Legislature reject the Governor’s proposal to make permanent certain rules regarding the use of proceeds from the sale of surplus property purchased entirely with local funds. Districts still would be allowed, under existing law, to sell surplus property and use the proceeds for one-time general purposes. Districts would have to consider this option carefully, however, since they would forfeit their eligibility for state construction and modernization funds for at least five years. In our view, this higher stakes trade-off better protects the state from providing future facility funding to a school district that has recently sold property and used the proceeds for nonfacility purposes.