Leading up to the March 5, 2024 Presidential Primary Election, you may have heard discussions regarding bond measures on the ballot for your local school or community college district. But what exactly is a bond measure? A bond measure is a request by a California school or community college district to its voters for the authorization to issue general obligation bonds for the construction or renovation of its facilities and infrastructure. In this article, Chet Wang of Keygent LLC dives into the history of general obligation bond elections in California and what to expect when placing a bond measure on a ballot.
In California, there are over 900 school districts and over 70 community college districts. These districts face significant challenges in securing funding for the construction, modernization and maintenance of their school facilities. California’s rapidly growing population, coupled with aging infrastructure, have intensified the need to modernize and construct additional facilities. However, as funding for districts comes primarily from state allocations, they often do not have access to enough capital to meet the financial requirements of all of these needs. As a result, districts regularly turn to issuing municipal bonds to finance their capital projects. However, to issue municipal bonds, California school and community college districts must first receive approval from voters within their boundaries.
A Brief History of California School Bond Elections
The ability for local agency, including school and community college districts, was added to the California constitution in 1879 and required two-thirds voter approval. However, in 1978, Proposition 13 was approved by voters which restricted property taxes for homeowners to 1% of assessed value. Property taxes could only exceed 1% to repay existing general obligation bonds. Proposition 13 language was unclear if the same exception could be applied to new bonds issued following the passage of the proposition. During the June 1986 election, California voters approved Proposition 46 which allowed property tax rates to exceed 1% of assessed value to repay new general obligation bonds issued by local agencies. Districts were now able to seek voter approval to issue bonds by placing a general obligation bond measure on a ballot. Bond elections under Proposition 46 require two-thirds majority to pass. Data compiled by the California Debt and Investment Advisory Commission, also known as CDIAC, shows that from June 1986 to November 2000, there were 193 general obligation bond measures placed on ballots by California school and community college districts, with approximately 57.5% of them passing. Districts had found a potential solution to their funding issues through the issuance of general obligation bonds, but they then faced the challenge of gaining enough voter approval for the authorization to issue these bonds. That would change with the passage of Proposition 39.
Proposition 39, a ballot measure passed by California voters in November 2000, altered the landscape of school and community college district general obligation bond elections in California. The proposition addressed the challenges districts faced with the approval threshold for local school and community college district general obligation bonds. Proposition 39 lowered the voter approval threshold for general obligation bond elections from two-thirds majority to 55%. This change was significant in providing school districts with a more attainable threshold for passing bond measures. CDIAC data shows that following the passage of Proposition 39, there were over 1,740 bond measures placed on ballots by California school and community college districts, with approximately 80.2% of them passing. This was a significant in increase in voter approval for bond measures, providing districts with the necessary capital for the construction or modernization of their facilities. Since 1986, there have been 2,044 Proposition 46 and Proposition 39 bond elections placed on ballots with a combined passage rate of 76.5%.
Proposition 46 Versus Proposition 39 Bond Election
How are Proposition 46 bond elections different from Proposition 39 bond elections? Chet Wang of Keygent LLC explains, “Besides the difference in voter approval threshold, a primary difference between the two is a limitation on tax rates required to repay the general obligation bonds.” General obligation bond elections under Proposition 46 do not have a cap on the maximum tax rate levied to repay the bonds. Under a Proposition 39 bond election, there are maximum tax rates allowed depending on the type of district. For California unified school districts, the maximum tax rate allowed is $60 per $100,000 of assessed value, for elementary and high school districts the maximum tax rate is $30 per $100,000 of assessed value, and for community college districts the maximum is $25 per $100,000 of assessed value. It is important to note that in California general obligation bonds are repaid through ad valorem tax, which is a tax based on the assessed value of properties within a district’s boundaries. Counties will annually set the tax rate necessary to generate enough revenue to repay outstanding general obligation bonds, even if it exceeds the aforementioned tax rate limits.
Along with lowering the approval threshold and setting a maximum tax rate, Proposition 39 also introduced accountability and transparency measures for bond elections. Under a Proposition 39 general obligation bond election, school and community college districts are required to establish independent citizens’ oversight committees to ensure that bond funds are used responsibly and in accordance with voter-approved plans. This is not a requirement for Proposition 46 bond elections. The increased accountability was included to help build trust among district voters.
General obligation bonds authorized under Proposition 39 can have proceeds used for the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of those facilities. Alternatively, municipal bonds issued under a Proposition 46 cannot spend its proceeds on the furnishing and equipping of district facilities. Bond proceeds under a Proposition 46 election are restricted to brick-and-mortar projects only.
Proposition 39 bond measures must be placed on a ballot for any statewide, primary, general, special, or regularly local elections. Proposition 46 bond elections have more flexibility and can be held on any Tuesday.
When determining between Proposition 39 or Proposition 46 for their bond election, districts’ decisions could be political, projects, financial or timing related. For example, a district may decide that they need to acquire technology or equipment through the issuance of its municipal bonds. In this scenario, they would need to seek voter approval for a bond measure under a Proposition 39 election.
What Should Districts Consider When Seeking Voter-Approval for Bond Measures?
Of the approximately 2,000 general obligation bond measures presented to voters since 1986, approximately 76.5% received the necessary approval from voters. Historically, California school and community college district have been successful but there have been unsuccessful bond measures as well. What should California school and community college districts consider when seeking voter approval for its bond measures? Chet Wang of Keygent LLC explains, “Knowing your community and what they are willing to support is a key component of districts successfully passing their general obligation bond measures.” Before a district can determine what might be supported by its community, they must first identify their needs, timing of potential projects, and the estimated costs attributed to those projects. Once total project costs have been identified, an analysis is completed to determine the necessary tax rate and potential financing terms to generate enough proceeds to finance the projects. The bond measure that is placed on the ballot includes the specific projects to be financed, maximum bond issuance amount, projected tax rates to repay the municipal bonds that are issued, and an estimated total repayment cost for the bond measure. During the course of planning a bond election and placing a bond measure on a ballot, districts should plan for community engagement to educate its community about the specific needs of the district and the benefits of the proposed bond measure. Districts should also highlight past successes and responsible financial management by the district to its voters. Responsible financial management may include maintaining past promised tax rates or issuing general obligation refunding bonds to provide tax rate relief for its taxpayers. Additionally, districts should identify potential concerns or objections its voters may have and develop responses and information to address concerns proactively. Timing and scheduling are also an important consideration for districts. They should consider factors such as local events and other ballot measures that may impact voter turnout. With many factors to consider, some California school and community college districts will work with a municipal advisor, pollster and bond counsel when planning their bond measures.
Professional Services Utilized by California School and Community College Districts
Chet Wang of Keygent noted, “A municipal advisor plays a crucial role in a California school or community college district’s bond measure by providing specialized financial guidance.” A municipal advisor’s primary responsibility is to offer independent and objective advice on various aspects of the bond measure and the issuance process that follows. This includes assisting in the development of a financing plan, evaluating different financing options, and analyzing the potential impacts of changes in the district’s financial environment. As municipal bonds are repaid from property taxes, it is important that bond elections are carefully planned. If overly aggressive assumptions are used when planning a bond election, districts run the risk of being unable to fully access their authorization if assessed value growth assumptions are not met or interest rates increase more than expected. There is also a risk if assessed value growth assumptions were too low or future interest rates do not rise as much as expected resulting in districts not maximizing their authorization amounts. Earlier in the article, it was mentioned that there are tax rate limitations for municipal bonds issued under a Proposition 39 election. In a situation where projected tax rates are expected to exceed the tax rate limit, a district would be unable to issue additional municipal bonds until the projected tax rates fall under the limit. Municipal advisors work closely with districts to go over financing scenarios to help them decide on a bond measure size that meets districts needs while also considering bond program assumptions that limit the risk of the district being unable to fully access its bond authorization. By providing their financial expertise, municipal advisors contribute to informed decision-making and help districts determine a bond measure authorization amount that is achievable while remaining fiscally responsible to its taxpayers.
Polling firms play a vital role in gauging public sentiment and understanding the factors that may influence voter decisions. Their primary responsibility involves conducting surveys and polls within a California school or community college district’s community to assess the level of support for the bond measure. Pollsters design and administer questionnaires to gather insights into voters’ opinions, concerns, and priorities related to the proposed bond, including the maximum tax rate and project list that voters would support. The information obtained helps districts tailor their messaging and outreach strategies to address specific issues that may impact voter perception. By providing valuable insights into voters’ sentiments, a pollster aids the bond measure campaign in refining its messaging and developing a more effective strategy to secure voter approval for the general obligation bond measure.
A bond counsel plays an important role in a general obligation bond election by providing legal expertise and guidance. Their primary responsibility is to ensure that all legal requirements are met, safeguarding the integrity and validity of the bond measure. Bond counsels assist in drafting the necessary legal documents, including the ballot language, ensuring compliance with state and federal regulations. They review the legal aspects of the proposed bond measure. Their expertise contributes to maintaining transparency and legal compliance. Throughout the general obligation bond election, bond counsels play a pivotal role in navigating the legal complexities of a potential bond measure.
The circumstances for the passage or failure of a general obligation bond election are unique to every California school and community college district. It is important for districts to analyze their local community to understand what their voters may or may not support. Community engagement, clear communication, and addressing the concerns of voters are crucial aspects that can contribute to the success of school or community college bond elections. Additionally, utilizing the services of a municipal advisor or pollster can help districts in making an informed decision that may better position them for the passage of their bond measures. By implementing a comprehensive and well-planned strategy, California school and community college districts can potentially gain voter approval for a bond measure to provide a better learning environment for its students.
Keygent LLC is a municipal advisor firm based in El Segundo, California that provides municipal advisory services to California school and community college districts. If you would like to learn more about bond measures or general obligation bond election planning, please visit www.keygentcorp.com to speak with one of their municipal advisors.
