News Article 1

The State budget crunch seems to get worse on a daily basis. Moreover, no one is claiming the problem will lessen over the next two years! Still, districts have children to educate and, in some cases, scheduled payments to make on long-term debt.

Regardless of the outcome of the budget battle, school officials may still need to look at ways to minimize the impact to the General Fund of existing leases, certificates of participation or direct facility and operating costs. After all, a penny saved on debt service for facilities may be an additional penny available to stave off cuts to operating budgets. Districts should be well advised to explore ways to best cope with long term debt during the current budget crisis; particularly should a sudden need arise.

One approach is to look at ways districts can increase local revenues through parcel taxes directly or by transferring ongoing capital outlays to the tax base via a general obligation bond. Another approach is to look at ways to consolidate existing leases to lower payments and preserve flexibility. Alternative ways to restructure long-term COP debt should also be reviewed with an eye to minimizing the cash flow impact to the General Fund; especially over the next three years of anticipated budget crisis

Some of these strategies are available for implementation immediately. Others are available as measures to be implemented over the next 6 to 9 months. Some require a trip to the ballot box for approval, while others can be implemented by a resolution of the Board. Yet, for most districts a combination of these activities may be best.

Pursuant to State law, a school district may levy and collect a general purpose special tax for a specified purpose. The proceeds of the tax may be used for equipment, supplies, facilities and operations, including teacher and administrative salaries and benefits. Generally, a special tax is levied on all parcels within the boundaries of a school district in a similar manner and amount. However, a school district may grant exemptions to the parcel tax, including exemptions for property owners over 65 years of age and for contiguous parcels held under identical ownership.

A two-thirds voter approval is required for enactment of a parcel tax. Parcel taxes are normally collected in the same manner as ad valorem property taxes for a period of 5-15 years. In order to proceed with the implementation of a parcel tax, a school district must hold a noticed public hearing and adopt a resolution calling for the election and establishing the amount and use of the special tax proceeds.

Parcel taxes are a clear way to increase district revenues for program enhancements or to offset budget cuts. In certain cases, parcel taxes also allow districts greater flexibility in accommodating existing or additional General Fund debt by alleviating the cash constraints to the General Fund.

As of November 2002, approximately 269 parcel tax election efforts had been undertaken by school districts in California. Of those, 138 have been successful or approximately 51 percent of the total. However, the 138 successful parcel tax elections were attempted by only 57 school districts. This indicates that once successful, most districts go back to the electorate for subsequent reauthorizations which tend to be granted by voters.

Likewise, school districts may issue general obligation bonds by imposing an ad valorem tax rate on all parcels within the boundaries of the district. General obligation bonds, however, may only be used to finance capital improvements and, in some cases, lease payments, but under no circumstances administrative or teacher salaries. Bonds are typically issued for a period of 25 years. No exemptions may be granted for individuals, but under certain circumstances, specific geographic areas may be deleted from taxation.

Under Proposition 39, a 55 percent rate of voter approval is required. Specific requirements limit the dates of possible elections and the inclusion of added taxpayer safeguards, including detailed project lists, a maximum tax rate and a citizen’s oversight committee of expenditures.

Proposition 39 bonds can provide direct relief to the General fund by absorbing all or a portion of a school district's capital expenditure obligations. With good prior election planning, districts may also be allowed to pay for existing lease payments, if the bond measure clearly demonstrated such intent. When carefully structured, bond measures may also allow for the acquisition of assets previously financed by COPs which may consequently allow for their early retirement. G.O. bond proceeds, in certain cases, may also reimburse the General Fund for prior outlays in support of the capital program, including architectural and engineering fees.

For those districts that have existing debt and can not wait for a lengthy election process for immediate relief, refinancing or restructuring existing debt may be best. After all, interest rates continue to be at historical lows. For public agencies that have outstanding long term debt, there may be no better time than now to refinance debt. The overwhelming benefit is obvious. Either investors who bought the district’s original bonds continue to receive above market rates of interest from the district or a district elects to refinance its debt to today’s lower rate and have the General Fund or taxpayer enjoy the benefit.

As a general rule, a district should consider a refunding for economic purposes if the combined debt service savings on a net present value basis are at least equal to three percent. That three percent should be net of all expenses, including the refinancing costs. In most all cases, establishing the feasibility of an economic refunding is provided at no cost or obligation to the district, completed on a contingent basis and fully funded from the gross savings of the refunding bonds.

Bonds may also be refunded, under certain cases, to better restructure a district’s existing debt, particularly if there is a need to alleviate annual debt payments. For example, a district may wish to lower annual debt payments for a fixed number of years and increasing them once the current crisis is over. Or a district may wish to lower payments in each year by extending the term of the existing bonds. Districts may also wish to change from a fixed rate of interest to a current lower and more variable rate, provided necessary safeguards are in place. In most cases, bonds may be refunded for these purposes with the entire refunding process taking on average sixty days to complete.

Perhaps the best thing to keep in mind is that options exist for dealing with your current long term debt. We invite you to share a review of specific cases you may have at no obligation. If you need further help, thereafter, in developing and evaluating an effective strategy to deal with the current budget crisis, just give us a call. We are here to answer all your questions during these difficult times on subjects like parcel taxes, general obligation bonds, certificates of participation and refunding or restructuring of existing debt. So give us a call!

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