California Schools Stick Taxpayers with $149 Billion in Bond Debt

The California Policy Center has just published an exhaustive study regarding the $149.2 billion Californians have borrowed over the last 14 years to finance public school construction. Despite the sob stories about dilapidated facilities, huge amounts of cash has been siphoned off due to union project labor agreements, environmentalist lawsuits, and inadequate planning and public oversight.

California voters passed Proposition 39 in 2001, which lowered the threshold to pass school bonds from 66 to 55 percent. Before Prop 39, voters only passed 42 percent of school bond proposals. But after Prop 39, 88 percent have been passed. Since Prop 39, 911 local school bond measures totaling $110.4 billion and three statewide measures totaling $38.8 billion have been passed.

“Deferred maintenance” for “upgrade and repair,” “modernize and upgrade,” “fix leaky roofs,” “make safety repairs” and “repair outdated heating and ventilation systems” are the most common “needs” listed, according to a review of 2014 local elections.

The $10.6 billion in annual existing infrastructure repairs is for California’s K-12 student enrollment of 6.2 million students that declined slightly over the last 20 years despite the addition of 1 million children whose parents are illegal residents. The maintenance spending works out to about $50,000 per class room per year. Over the 14 years of Prop 39, $24,193.55 has been spent per student.

Given the spectacularly large amounts of borrowing, it might be expected that school districts would already be bankrupted trying to make the billions of dollars of interest and principal payments each year. But many schools have used “capital appreciation bonds,” which do not require any payments for 10-20 years. These so-called “CAB” bonds accrue interest at very steep rates, and “then demand massive sums of principal and interest payments, long after the original promoters have retired, and often after the improvements and upgrades have worn out again.”

When the California Policy Center added the unfunded liabilities for pensions and retirement health care for state and local government employees “using a 5.5% discount rate to estimate pension liabilities” and school bond debt obligations, it calculated that California taxpayers owe amounts to $976 billion. That’s $76,250 of debt per household. Interest payments at 5% per year come out to $3,812 per household per year.

The 361 page California Policy Center’s study on school construction funding recommends:

• “Provide adequate and effective oversight and accountability for bond measures.
• Enable voters to make a reasonably informed decision on bond measures.
• Eliminate or mitigate conflicts of interest in contracting related to bond measures.
• Reduce inappropriate, excessive or unnecessary spending of bond proceeds.
• Improve understanding of bond measures through public education campaigns.”

Unfortunately, California voters in 2016 will face over 100 school and college districts seeking approval of $9 billion more in school construction. Los Angeles Unified School District leaders claim they need more than $40 billion for additional construction and plan to ask voters to approve borrowing several tranches over the next few elections.