- The majority of the cost of school construction and maintenance is borne by the community. Local communities must vote to approve local property taxes in order for their school system to sell school bonds for a single project or series of projects. Local school bonds have required a 55 percent supermajority since the adoption of Proposition 39 in 2000.
- The state has also contributed to school facilities in the past by selling state school bonds that were repaid with state taxes. These state bonds are typically structured as matching funds for local school bonds, with school districts only being eligible for the matching funds if local voters approve a local property tax to fund the issuance of their own local bonds. The legislature places state school bonds on the ballot, and voters must approve them with a majority vote.
- State bond funds have historically favored more affluent districts over less affluent districts when it comes to school development.
Support for K-12 and college facilities is sometimes combined into a single package by state and local school bonds. All statistics in the rest of this piece are for bonds (or portions of bonds) for pre-K-12 projects.
How often have voters supported state school bonds?
Many state bond proposals for school building and refurbishment have been approved by California voters; twelve have been on the ballot in the three decades leading up to 2020. Ten of them passed, funding both K-12 and higher education buildings. State bonds have provided nearly $77 billion in funding for K-12 facilities over the previous thirty years, adjusted for inflation.
Local school bonds
School districts have borne an even greater share of the cost of building and updating school facilities over the last three decades. California school districts issued local bonds to borrow nearly $124 billion for local K-12 school building improvements, adjusted for inflation. Of course, wealthier areas are better able to pay than poorer communities. In California’s education system, where you live makes a major effect, as detailed in Ed100 Lesson 5.1.
What About Interest?
Bonds for school facilities are loans. A school bond’s principal the amount of money it will raise, presumably soon is usually described in terms of its size (whether state or local). However, fees and interest are included in the total long-term cost of a school bond.
The school district requests voters for permission to issue debt (sell bonds) for school facility repairs and/or construction in the case of a local school bond. The procedure proceeds forward if the voters say yes at the polls. According to the conditions of the initiative adopted by the voters, a tax based on the assessed value of property is charged.
Average interest rates on local school bonds (NIC in the chart below) dropped during the three decades examined above, which is great news for school districts. Up-front expenses (issuance costs) are also included in the equation.
Who makes money from school facility bonds?
A school facility bond is a contract between the school district and its underwriters, which are companies, banks, or investors who agree to acquire the bonds ahead of time. In California, there are just a few financial firms that specialize in underwriting bonds for school districts.
What is the profit margin on these bonds for the bankers and investors? It is debatable. Your school district can borrow more cheaply if it is growing, has enough reserves, and a solid credit rating than if it has a history of fiscal mismanagement and declining enrollment. The DebtWatch program on the California State Treasurer’s website can provide information about your school district’s credit rating and existing indebtedness.
Making school facilities more equitable
Local bond measures based on local property taxes, which represent local affluence, are mostly used to pay public school facilities. Rich communities can afford to levy taxes to fund the construction and modernization of attractive local schools. Poorer communities, on the other hand, have a more difficult time raising funds to construct or remodel schools. In certain districts, bearing the cost of school construction and refurbishment can be difficult, if not impossible.
State money playing a larger role in school buildings would be one method to eliminate inequalities in school infrastructure. The Local Control Funds Formula (LCFF) in California allocates additional funding for school operations to schools with lower-income households. The same cannot be said about cash allocated to school infrastructures.
According to studies conducted for the Getting Down to Facts II project, state matching money disproportionately favored wealthier school districts in the past. Wealthier school districts, for example, are more likely to have their act together. They are capable of completing financial records in a timely and accurate manner. This used to be a significant benefit because monies were reviewed and provided in the order they were received.
Many regulations have been altered in California’s legislature to assist level the playing field when voters approve a state bond for school buildings in the future. State matching grant requests, for example, will no longer be processed in the order in which they are received. Instead, a point system will be used to decide the priority order. Projects involving lead abatement, for example, will be given special consideration.
The state bond initiative of 2020 was defeated at the polls, but it did set crucial precedents for the future effort. For example, it provided for low-capacity districts to be given higher priority for state matching funding if they issued their own bonds. It allocated state matching money based on the proportion of kids who meet the Local Control Funding Formula’s criterion of high-need students. To be eligible for matching funds, school districts must publish a five-year plan outlining how the money will be used, as well as “an inventory of existing facilities, sites, and property” and “the school district’s deferred maintenance plan.” This is a whole new level of openness.
Be ballot-ready
The Pandemic prevented the state from investing in school facilities in 2020, but it appears that there may be another opportunity. State school bonds have previously been used as matching funds, meaning they are a limited-time, “while supplies last” opportunity. Savvy districts will have strategies in place ahead of time for both the construction and public communication sides of the project. What repair and modernization work is required in your area, and how will you garner local support for levying taxes to fund it?
What is the procedure for paying school bonds?
You can decide, just like at home, that you need to build a new garage or rebuild the kitchen. The problem is figuring out how to pay for it. You might either pay with cash from your savings or take out a loan.
School districts confront similar challenges and have similar solutions. They may desire a new school or require renovations to an existing structure.
A common option for a school district to borrow money is to issue a bond, which functions similarly to a loan, and ask taxpayers for a Bond Levy, or a tax increase. The extra tax revenue is used to repay lenders or bondholders, as well as to pay interest on the loan.
Most of these levy requests must be approved by the state, especially if the state gives matching funds or contributes. The bond will be sold and administered by a bank or financial institution.
Voters provide their approval for a school district to raise taxes to pay for a loan or a bond.
The bonds, also known as IOUs, are sold by a financial institution and the proceeds are given to the school system.
The bond and interest are paid back to the bondholders by the tax money over a period of years.
Is it a good idea to form school bonds?
School bonds have a significant benefit over other forms of bonds in that they are free from federal and, in some cases, state taxes. The IRS normally assesses a 15 percent capital gains tax on bond income, so the exemption makes school bonds an especially appealing investment.
What are the purposes of school bonds?
A school bond election is a bond issue held by a public school district to fund a construction or other capital project. District school boards place these proposals on the ballot for approval or rejection by the general public.
State regulations require ballot propositions to be phrased as specific to the point, therefore school bond issues differ from other regions of the election ballot.
School bond measures are not as well-known as candidate elections or state-wide ballot measures, but they are an important avenue for residents to influence school policy.
Bond issues must be approved by voters in 40 states, and voters in seven additional states can petition to have bond issues placed on the ballot. One of the remaining three states, Indiana, employs the so-called remonstrance-petition process.
What is the role of bonds in education?
Education bonds are money that have been approved by the voters and can only be used for school construction. The money is raised by levying a tax on property owners based on the assessed value of their homes. The local bond is a loan, comparable to a home equity line of credit, but for the school system.
Is a bond a tax increase?
Putting “no tax increase” in front of “bonds” is designed to dampen opposition to increased taxes, as it is with many political words. But, to be clear, there is no category of bonds issued by school districts that does not result in an increase in your taxes. Bonds with no tax increase raise your taxes.
How? Bonds are frequently issued by school districts to fund capital projects such as the construction of new facilities or the renovation of existing infrastructure. The bonds are paid off over time by the taxpayers, usually through an increase in their property taxes. Bonds are issued for a set period of time, and when they are paid off, the tax payments of the taxpayers are reduced.
What is the procedure for submitting a bond proposal?
When a bond proposal is approved by voters, the school district sells bonds in the permitted amount and utilizes the profits to fund the projects in the plan. Bonds are typically repaid in 20 to 30 years.
What is the most dangerous investment?
All investments involve some level of risk, and a variety of factors influence how well they perform. Bond investors, for example, are more vulnerable to inflation than stock investors. Stocks, on the other hand, have a higher liquidity risk than money market and short-term bond investments (the risk of an investment’s lack of marketability, which means it can’t be bought or sold quickly enough to avoid or minimize a loss). The following is a ranking of the three major investment classes:
Certificates of deposit, Treasury bills, money market funds, and other similar products are examples of cash equivalents. They normally yield smaller returns than stocks or bonds, but they pose very minimal danger to your capital. In the case of a stock or bond market slump, cash equivalents may help you mitigate your losses. Keep in mind that, while money market funds are safe and conservative, they are not insured by the Federal Deposit Insurance Corporation like certificates of deposit are.
Bonds and bond mutual funds are examples of fixed income investments. They’re riskier than cash equivalents, but they’re usually safer for your money than stocks. In addition, they often provide lesser returns than equities.
Stocks and stock mutual funds are examples of equity investments. These investments are the riskiest of the three major asset groups, but they also have the best chance of producing big profits.
How do school bonds get created?
School bond elections in California are local ballot proposals that urge voters to decide whether the school district supporting the item should be authorized to issue bonds and incur the additional debt that bonds entail.
In California, all public school districts are entitled to put bond measures on the local ballot.
California also has a statewide school construction program called the School Facilities Fund, which is funded by statewide bond votes like Proposition 51 in 2016. A simple majority is required to pass statewide bond proposals.
Local school districts can also issue school building bonds and impose property taxes to pay for them if their voters consent.
Prior to 2001, passing local general obligation bond bills required a two-thirds supermajority vote. More than 40% of local school bond referendums were defeated. California voters approved Proposition 39 in November of 2000. The supermajority required to approve a bond issue ballot question was reduced from 66.67 percent to 55 percent under Proposition 39. Proposition 39 also set limits on the amount of bond that may be issued and contained accountability measures. Since Proposition 39’s adoption, districts have had the option of seeking a two-thirds supermajority approval or complying with extra constraints to meet the 55 percent approval criteria.
What is the procedure for repaying bonds?
A bond is just a debt that a firm takes out. Rather than going to a bank, the company obtains funds from investors who purchase its bonds. The corporation pays an interest coupon in exchange for the capital, which is the annual interest rate paid on a bond stated as a percentage of the face value. The interest is paid at preset periods (typically annually or semiannually) and the principal is returned on the maturity date, bringing the loan to a close.