Jim de Bree | Californians, Beware of the ‘New’ Prop. 13

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The March 3 ballot contains only one statewide initiative — Proposition 13. No it’s not that Proposition 13 (the one that was passed in 1978). This Proposition 13 seeks voter approval for the state of California to issue $15 billion of bonds to fund the construction and renovation of school and college facilities.

Back in 2016, a former Signal publisher expressed concerns about potential school bond abuses and asked if I would look into the situation and present him with a white paper. The white paper discussed school bonds generally, but focused on bonds issued by local Santa Clarita Valley school districts.

When school districts construct or improve school facilities, they finance the construction through a combination of state funding, developer fees and bonds issued by the school districts themselves. 

Over the past 15 years, the average household’s property tax payments for SCV school bonds have increased at a seemingly logarithmic pace. Unfortunately, because of the way many existing school bonds are structured, that trend is likely to escalate in the coming decade when deferred payments associated with many existing school district debt instruments become due.

School boards are frequently ill-suited to evaluate bond issuances because they lack the requisite financial expertise. This is not a criticism of school boards because members are elected principally for their educational acumen. Consequently, Wall Street investment bankers concoct complex financial instruments that are reminiscent of the sub-prime lending practices that led to the Great Recession. Unfortunately, many of the bonds issued (particularly the capital appreciation debt instruments with deferred interest costs) are expensive when compared to conventional financing. 

Financing school construction frequently costs up to three times as much as financing private sector construction. Those additional interest costs translate into higher property taxes.

Conversely, the state finances its portion of the expenses by issuing conventional bonds. Because the state has economies of scale and a lower borrowing cost, it is more cost-effective for taxpayers when the state finances a larger portion of school construction and renovation. 

That’s where Proposition 13 comes in. The state cannot issue bonds without voter approval and the state presently needs to issue additional school bonds. Approving additional bonds is a usually a good thing for taxpayers because those bonds generally represent a more efficient form of financing. Regrettably, Proposition 13 is not a routine bond measure.

The summary of the ballot measure explains how the bond proceeds will be spent, but glosses over the remainder of the measure’s contents. The details omitted from the summary include some unusual provisions. 

The overall permissible amount of bonds that a school district can issue is limited to a percentage of the assessed value of all properties in the district. School districts currently are limited to 1.25% of the assessed value unless the district is a unified school district or a community college district subject to a 2% limit. Proposition 13 would increase those limits to 2% and 4%, respectively. That means that the limitations on voter-approved bonds will be 60% higher than under current law.

Even more concerning, Proposition 13 restricts school districts from assessing developers’ fees in certain circumstances and reduces such fees in other situations. The mechanics are complicated, creating a loophole for developers. 

While this is an obvious attempt to reduce housing costs, it means that school districts will become more reliant on school bonds, which are the least efficient form of financing. According to the legislative analyst’s office, up to 50% of some projects’ construction cost is funded by developer fees. Rapidly growing communities likely place a greater reliance on developer fees.

Unlike other bonds requiring a two-thirds voter majority, school bonds only require a 55% favorable vote. Since the threshold was lowered, approximately 95% of school bond measures have been approved by the voters. The proposed changes to the assessed property limit will facilitate, on a longer-term basis, a significant expansion of the level of school bond indebtedness. When coupled with the relatively inefficient financing undertaken by many districts, this hidden provision is a recipe for a multitude of additional property taxes.

Increased levels of new local housing construction will inevitably exert substantial pressure on local SCV school districts to build new schools or to expand existing facilities. Developers currently fund a portion of those costs. However, if Proposition 13 is enacted, the school districts will undoubtedly be forced to place a greater reliance on bonds because of the reduction in permissible development fees. 

Historically, voters have been reluctant to defeat school bond measures, so a new Proposition 13 regime provides a favorable environment for substantial local property tax increases.

Instead of the state assuming a leading role in efficiently financing school construction, Proposition 13 opens the door for significantly higher property taxes and a greater overall tax burden without encouraging fiscal constraint by school districts. 

Please join me in voting no on Proposition 13.

Jim de Bree, a semi-retired CPA, resides in Valencia.

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