Class Size Reduction Kindergarten-University Public Education Facilities Bond Act of 1998.
	Analysis by the Legislative Analyst

Background

Public education in California consists of two distinct systems. One system includes local school districts that provide elementary and secondary (kindergarten through twelfth grade, or K-12) education to about 5.7 million students. The other system (commonly referred to as "higher education") includes local community colleges, the California State Universities, the University of California, and the Hastings College of the Law. The higher education system provides a wide range of education programs beyond the twelfth grade to about 1.9 million students.

K-12 Schools

School Facilities. The state, through the State School Building Lease-Purchase Program, has provided much of the money for school districts to buy land and to construct, reconstruct, or modernize school buildings in the K-12 system. In order to receive money under this program, school districts must meet certain requirements. Districts receive a higher priority for state funding of a project if they provide 50 percent of the project cost with local funds.

Since 1986, the voters have approved $8.8 billion in state general obligation bonds to fund K-12 school construction and renovation. As of July 1998, there was about $70 million remaining from these funds.

In addition to obtaining money from the state, local school districts raise funds for school buildings in three main ways:

• Local General Obligation Bonds. School districts are authorized to sell bonds to finance school construction projects, with the approval of two-thirds of the voters in the district. In these cases, the bonds are paid off by taxes that are levied on property located within the school district.
• Special Local Bonds (Known as "Mello-Roos" Bonds). School districts are authorized to form special districts in order to sell these bonds for school construction projects, with approval of two-thirds of the voters in the special district. (The special districts generally do not encompass the entire school district.) The bonds are paid off by charges assessed to property owners in the special district.
• Developer Fees. State law authorizes school districts to impose developer fees on new construction. As of January 1998, the maximum allowable fee under state law is $1.93 per square foot on residential buildings and 31 cents per square foot on commercial or industrial buildings. These fees may be used only for construction and reconstruction of school buildings. In addition to these fees imposed by school districts, decisions by the courts have allowed cities and counties, when approving new residential and commercial development, to impose additional developer fees for new school construction.

K-12 School Building Needs. There is no district-by-district estimate on the future demand for school facilities. The State Department of Finance estimates that the number of students attending K-12 schools statewide will increase by about 300,000 over the next five years. Given this projected growth, several billions of dollars will be needed statewide for new schools over the next five years. Additional billions of dollars will be needed for reconstruction or modernization of existing schools.

As of July 1998, applications submitted by school districts for state funding of land and new school buildings totaled approximately $2.9 billion. In addition, applications for state funding to reconstruct or modernize school buildings also totaled $2.9 billion.

Class Size Reduction. In 1996, the Legislature and the Governor enacted the Class Size Reduction Program, which made funds available to school districts to reduce kindergarten through third grade classes throughout the state to no more than 20 students. Districts implemented this program by purchasing or renting portable classrooms, making use of vacant space in schools, and converting into classrooms space that had been used for other purposes (such as libraries, child care facilities, and teacher lounges).

In 1996 and 1997, the state provided about $530 million for grants to districts to pay for facilities-related costs associated with reducing class size. A majority of these funds have been used to purchase portable classrooms. It is estimated that the program could result in added facilities costs (including the restoration of space that had been displaced to provide additional classrooms) of between $500 million and $700 million.

Higher Education

California's system of public higher education includes 139 campuses serving about 1.9 million students:

• The University of California has nine campuses, with a total enrollment of about 166,000 students. This system offers bachelor, master, and doctoral degrees, and is the primary state-supported agency for research.
• The California State University system has 22 campuses, with an enrollment of about 350,000 students. The system grants bachelor and master degrees.
• The California Community Colleges provide instruction to about 1.4 million students at 107 campuses operated by 71 locally governed districts throughout the state. The community colleges grant associate degrees and also offer a variety of vocational skill courses.
• The Hastings College of the Law is governed by its own board of directors and has an enrollment of about 1,300 students.

The state provides money to support these institutions of public higher education. This support covers both ongoing operating and capital improvement costs. In addition to state funds, these institutions also receive nonstate funds for both operations and capital improvements.

Since 1986, the voters have approved nearly $3.3 billion in general obligation bonds for capital improvements at public higher education campuses. As of July 1998, there was about $28 million remaining from these funds. In addition, since 1986 the Governor and the Legislature have provided about $2.4 billion for public higher education facilities from lease-payment bonds.

Higher Education Building Needs. Each year the institutions of higher education prepare five-year capital outlay plans, in which they identify projects that they believe should be funded over the next five years. The most recent five-year plans identify a total of $6.5 billion in projects for the period 1998-99 through 2002-03.

Proposal

This measure authorizes the state to sell $9.2 billion in general obligation bonds for K-12 schools ($6.7 billion) and higher education facilities ($2.5 billion).

General obligation bonds are backed by the state, meaning that the state is obligated to pay the principal and interest costs on these bonds. General Fund revenues would be used to pay these costs. These revenues come primarily from state personal and corporate income taxes and sales taxes.

K-12 School Facilities

The $6.7 billion would be used to fund school construction over the next four years as follows:

• At least $2.9 billion to buy land and construct new school buildings. Districts would be required to pay for one-half of eligible project costs with local resources.
• At least $2.1 billion for reconstruction or modernization of existing school buildings. Districts would be required to pay for 20 percent of eligible project costs with local resources.
• Up to $700 million for facilities costs related to the Class Size Reduction Program.
• Up to $1 billion for projects where the state determines that a district either (1) is unable for financial reasons to provide sufficient local matching funds or (2) will incur excessive school construction costs that are beyond the control of the district.

The above distribution of funds could be altered with the approval of two-thirds of the Legislature and the Governor.

Developer Fees. The legislation that placed this bond measure on the ballot also makes changes related to developer fees. These changes would take effect only if this bond measure is approved by the voters.

• School Districts. Districts would still be authorized to charge $1.93 per square foot on residential buildings and 31 cents per square foot on commercial or industrial buildings. They could, however, exceed these limits if they meet certain conditions regarding capacity problems and local bonding efforts. In these cases, districts could increase developer fees to fund the 50 percent matching requirement for new school construction. If there were no state funds available for new school construction, districts could increase developer fees to fund 100 percent of a school project. If a district subsequently receives funds from the state, these funds (up to 50 percent of the project cost) could be reimbursed to the parties that originally paid the fee.
• Cities and Counties. In addition, between November 1998 and the primary election of 2006, cities and counties could not require additional fees for school construction as a condition of approving new developments. (Cities and counties could, however, designate land under their jurisdictions for school sites.) At the end of that period, cities and counties could require additional developer fees if any statewide school bond measure is rejected by the voters. They could continue to assess the fees until a subsequent statewide school bond measure was approved by the voters. The amount of fees that cities or counties could assess would be limited to (1) 50 percent of the cost of new school projects if state funds are also available for this purpose or (2) 100 percent of project costs if no state funds are available.

Homebuyer and Renter Assistance. The legislation placing this bond measure on the ballot also provides state funds to offset all or part of the cost of some developer fees. These funds would be available to:

• Homebuyers in areas with high unemployment.
• Buyers of homes costing less than $110,000.
• Low or very low-income first-time homebuyers.
• Developers of rental housing for very low-income tenants.

A total of $160 million in state funds would be available for these programs over a four-year period.

Higher Education Facilities

The measure includes $2.5 billion to construct new buildings, alter existing buildings, and purchase equipment for use in these buildings for California's public higher education system. Of this total, $165 million would be allocated specifically for (1) new campuses of the University of California and (2) new campuses, campuses with enrollments of less than 5,000 full-time equivalent students, and off-campus centers at the California State University and the California Community Colleges. The Governor and the Legislature would decide the specific projects to be funded by the bond monies.

Fiscal Effect

Bond Costs. For general obligation bonds, the state makes principal and interest payments from the state's General Fund typically over a period of about 25 years. If the $9.2 billion in bonds authorized by this proposition are sold at an interest rate of 5 percent, the cost over the period would be about $15.2 billion to pay off both the principal ($9.2 billion) and interest ($6 billion). The average payment for principal and interest would be about $600 million per year.

Homebuyer and Renter Assistance. There would also be a state cost of $160 million ($40 million a year for four years) for these programs.