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A New Blueprint for California School Facility Finance
By the Legislative Analyst's Office

About one in three California students attends an overcrowded school or one needing modernization. Statewide, the cost to correct these problems exceeds $30 billion.

This report describes how the state of California helps school districts build educational facilities - and identifies shortcomings in this approach. To address these problems, we offer a conceptually different method - a new "blueprint" - for financing school construction.

How California Pays For School Construction
In California, the cost of building and modernizing schools is met through a partnership between the state and school districts. Figure 1 shows how these costs - about $2 billion per year - have been shared over time. In today's dollars, these expenditures equate to annual spending of less than $450 per student.

As Figure 1 indicates, school districts have paid about 60 percent of the cost of school improvements, primarily through property tax overrides and developer fees. The state has used general obligation bonds to pay the remaining 40 percent.

While elements of the state's programs to finance school construction have varied over the years, the approach has stayed consistent. Specifically, the state's current program is similar to previous programs in that it:

• Determines funding district eligibility based on measures of facility capacity, enrollment, and age.
• Allocates funds to specific projects, largely on a first-come, first-served basis.
• Generally requires a local match.
• Finances the program with state general obligation bonds.
   

How Well Does This System Work?
While the state's school construction programs have played a key role in helping districts build and remodel schools, the state's financing approach has significant shortcomings.

This report was prepared by 
Marianne O'Malley, Chris Guyer and 
Erik Skinner. 
The Legislative Analyst's Office is a nonpartisan office that provides fiscal and policy information and advice to the California Legislature. The full report is available on the LAO's Internet site at www.lao.ca.gov, or by calling (916) 445-2375.

Never Sure When State Money Will Be Available
Although school districts typically incur capital outlay expenses every year - refurbishing or constructing facilities, acquiring land, or developing architectural plans - the state offers aid on an unpredictable basis. Districts are never sure when state bond funds will be available, how much money will be available, or what rules will govern eligibility for funding. This uncertainty hinders district ability to implement capital outlay plans - and poses risk to districts considering spending local funds in anticipation of future state funding.

Determining the "Neediest" Is Difficult
Regardless of the amount of school bonds approved by state voters, school districts inevitably exhaust the bond's proceeds before all needed projects have been funded. Thus, the state continually faces the need to "ration" bond funds.

Until recently, the state generally offered funding on a first-come, first-served basis. While this policy maximized aid to districts with construction-ready projects, it did not necessarily assist districts with the greatest need. Over the last year, this state funding policy has been ensnared in litigation.

Regardless of the disposition of the lawsuits, the practical reality is that fashioning a state policy to allocate project-specific aid is exceedingly difficult in a state as large and diverse as California. With more than 1,000 school districts and county offices of education, more than 8,000 schools, and nearly six million students, any centralized method for allocating aid to specific projects will be imprecise and controversial.

Responsibilities Obscured
Since 1986, state and local voters have approved over $30 billion in bonds and developers have paid about $4 billion in developer fees. Despite this funding, many students attend overcrowded schools or schools needing modernization. Which level of government should parents, local residents, and businesses hold accountable?

Under the current system, districts blame the state for not providing money for all school projects. The state, in turn, blames districts for failing to submit applications quickly, or failing to raise local funds.

Assigning responsibility for facility conditions is difficult under the current financial arrangement because the rules of the partnership are not clear. This blurred responsibility was demonstrated in recent lawsuits in which educational advocates sued the state for its failure to provide adequate facilities, and the state responded, in part, by suing 18 districts for their failure to provide adequate facilities.

Developing a New Blueprint
To address these problems, we recommend the Legislature develop a new blueprint for school facilities finance. In our view, this new blueprint should provide three changes. First, the Legislature should create an ongoing revenue stream for school facilities to replace its existing system of bond financing. Second, the Legislature should redirect the state's focus away from funding specific projects, and in its place, establish a program oriented toward helping all districts provide facilities for children. Last, the state should clarify the state's and districts' responsibilities regarding school facilities.

Below, we sketch a model program that would be consistent with this blueprint.

Providing Ongoing Revenues
Our model program begins by calculating the dollar amount that - if provided as an annual revenue stream - should be sufficient to pay for districts' long-term capital outlay needs. Specifically, our goal is to identify the annual per-pupil amount necessary to allow districts to acquire land and build, modernize, or lease school facilities as needed. This annual sum serves as the basis for our school facility funding model, which we refer to as the California Annual School Allotment - or "CASA."

We estimate that the average annual facility expense for a child in a unified school district is about $550. This annual, per-pupil sum should be sufficient to pay for the district's full capital outlay program, largely on a pay-as-you-go basis.

Under this program, districts would have wide flexibility over use of CASA funds. In one year, a district might use all CASA revenues to build a high school. In other years, the district might save these revenues to buy land for future elementary schools.

To address these problems, we recommend the Legislature develop a new blueprint for school facilities finance.

Sharing the Cost of CASA
There is no "right" percentage split between the state and school districts for CASA. For simplicity, we assume the cost of CASA would be split evenly between the state and districts - the same way new schools currently are funded.

Under this assumption, how much would CASA cost the state? Given the state's current enrollment of 5.9 million students, an estimate of CASA of $550 per pupil, and a 50 percent sharing relationship, the cost would be about $1.6 billion annually. Modifying these assumptions, of course, alters the fiscal estimate.

Ability-to-Pay Adjustment Program
The CASA program divides the cost of school facilities between the state and school districts. For such a program to work, districts must have the financial wherewithal to support their share of the program. Because some districts have limited access to revenues, our model includes an Ability-to-Pay Adjustment that provides additional state resources to districts with the least ability to raise revenues from local property taxes and developer fees.

Promoting Accountability
The annual revenue stream represents a major investment and commitment to quality schools in California - and a significant increase in discretion for school districts.

To maximize the likelihood of success, our model includes an accountability program that requires school boards to clarify the long-term direction they are taking to provide and maintain facilities - and provide information regarding facilities to local communities.

Transition Funding
Because of the shortcomings in California's system of school facility finance, many districts have backlogs of needed projects. The funding provided under CASA should be sufficient to allow districts to complete these projects within a reasonable time frame. CASA funding would not be sufficient, however, for those districts with very large backlogs of facility projects. Specifically, we estimate that districts with new construction or modernization needs exceeding 20 percent of their enrollments might experience difficulties implementing their capital outlay program from CASA funding alone.

For this reason, we recommend the Legislature target the allocation of funds from the next state school bond to districts with large unmet facility needs. This transition bond would bring districts' facility conditions to more comparable "starting points" and allow a successful transition to the CASA program. Under the proposed blueprint, this transition bond could be the last school bond the state places before California voters.

Taking the First Steps
Major changes inevitability pose implementation challenges. The program proposed in this report would not be an exception. Of all the challenges associated with providing annual school facilities support, the most difficult would be the demand for resources. Specifically, funding CASA would increase state costs over the near term because the state would be supporting school facilities on a "pay-as-you-go" basis at the same time it was making debt payments on bonds issued to finance programs in the past.

Conversely, should the state continue to finance school construction as we have in the past - by issuing bonds on a sporadic basis - we are unlikely to ever develop and maintain the stock of facilities we need to educate our youth.

For these reasons, we recommend that the next state school bond not

be used to finance a program that is "more of the same." Instead, we recommend the bond be used to help California transition to a new school facilities program that:

• Acknowledges long-term facility costs and provides funds annually.
• Assists poorer communities.
• Provides local control.